What to Do When Someone Breaches a Contract
on May 13, 2014
No matter how thoroughly negotiated the terms of a contract, occasionally a party to a contract cannot live up to those terms. But the best businesses know how to respond to a breach of contract to both preserve their rights and ensure that any damage from that breach is minimized.
First, it needs to be determined whether the breach is material. A material breach is a breach that is so substantial it entirely defeats the purpose of the transaction. In other words, the breach must so pervade the whole of the contract to defeat the object that the parties intended to accomplish. A material breach is a breach of contract so severe that it justifies the non-breaching party to suspend its own performance of the contract. Courts look to the following five factors in determining whether a breach is material:
(1) whether the non-breaching party is deprived of the benefit of the contract;
(2) whether the non-breaching party can be adequately compensated for breach;
(3) whether the breaching party will suffer a forfeiture;
(4) whether the breaching party will cure the breach; and
(5) whether the breaching party’s actions meet general standards of good faith and fair dealing
Second, once it becomes apparent that the contract has been materially breached, the business should gather as much evidence as possible. The original contract should be located and copied. The original contract should be kept in a safe location and the copies used by the business and its employees in gathering the evidence.
Third, all correspondence between the parties leading up to the contract should be gathered. This ensures that the meaning of specific terms can be clarified if the contract terms are vague or ambiguous. After that, correspondence between the parties after the contract was executed and until the breach should be preserved. This valuable evidence can also show whether or not the parties had the same understanding of the terms of the contract.
After this evidence is gathered, the parties should try to work through the breach if possible. Except in very large contracts, it is probably in everyone’s interest to pursue a quick resolution. At this point it is usually a good idea to retain an attorney to help analyze the contract and prepare demand letters or other documents presenting the dispute to the breaching party. Often alternative dispute resolution methods, such as mediation or arbitration, can minimize the damage caused by the breach and allow the parties to continue their business as usual. But sometimes the matter is so serious that money damages will not suffice and you need a skilled attorney to go to court immediately on an emergency basis to obtain relief like an injunction.
Once a breach occurs, both parties should attempt to mitigate their damages. The law imposes a requirement on the non-breaching party to minimize the damage caused by the breach. The business should marshal all of the evidence it has that proves the damages it sustained. Depending on the circumstances, a expert witness, like an accountant, may be needed to testify in more complicated cases in order to prove the amount of damages. Most businesses should retain an experienced attorney to assist them through this process.
Slater, Tenaglia, Fritz & Hunt, P.A. is a full service law firm. Our practice focuses on commercial litigation and personal injury matters. For over 35 years, we have been providing superior legal counseling and representation to institutional clients, including Fortune 500 Corporations and individuals throughout New York, New Jersey, Pennsylvania and nationally. We can be contacted by phone: (201) 820-6001 or (212) 692-0200 and we can also be found on the Internet, LinkedIn, Twitter, Google+, YouTube and on Facebook. We also have a network of local counsel throughout the United States. All initial con