How To Determine If A Breach of Contract Has Occurred
How To Determine If A Breach of Contract Has Occurred? Pretty Simple - if you had an agreement and the other party did not stick to it, they’ve breached the contract. The hard part is figuring out whether it’s a material breach that’s minor or major.
WHAT’S THE DIFFERENCE BETWEEN A MATERIAL BREACH AND A MINOR BREACH OF CONTRACT?
Whether a breach of contract is material or whether its merely a minor breach can be the deciding factor in whether or not to sue. First, we’ll explore what constitutes a Breach of Contract. Next, we’ll go over whether a Breach of Contract is material, or whether its minor. Finally, we’ll explore how each type of breach affects damages.
What is a Breach of Contract?
A breach of contract occurs when a party to a contract fails to perform what that party promised to perform according to the contract terms. This may include failure to perform in a manner that meets the standards of the industry or the requirements of any express warranty or implied warranty, including the implied warranty of merchantability. For instance, a party may have breached a contract to deliver a thousand bushels of apples if those apples were delivered spoiled and rotten, even though technically a thousand bushels of apples were delivered.
The thought of receiving a thousand bushels of rotten apples may seem comical - unless you’re on the receiving end of those rotten apples. Imagine that you own a fruit distribution company and that as a result of your vendor’s mishap, you are unable to sell fresh apples to the restaurants and markets who are dependent on your apples. In turn, this causes a loss to your income and your business reputation which took years for you to cultivate. Now imagine that, adding insult to injury, you receive a bill from the apple vendor demanding payment for the rotten apples in full.
What options do you have to remedy this situation? One option may be to file a lawsuit for Breach of Contract and Breach of the Implied Warranty of Merchantability (more on the latter in the next blog). If you decide to file a lawsuit, the court will seek answers to the following questions to determine whether there was a breach of contract and whether you are entitled to damages:
Did an actual contract exist?
If so, what did the contract require each of the parties to do?
Did the parties agree to modify the contract at any point?
Did the alleged breach of contract actually occur?
If so, was the breach material to the contract?
Does the breaching party have a legal defense to enforcement of the contract?
What damages were caused by the breach?
Material vs. Minor Breach of Contract
Whether a breach of contract is material or minor affects the severity of remedies for the non-breaching party. A breach is material if the breach goes to the “heart of the contract” such as where the non-breaching party receives something substantially different from what was agreed to as a result of the breaching party’s failure to perform.
A breach is minor if the non-breaching party still receives the benefit of the bargain even though the breaching party failed to perform. For example, unless the contract specifically provides that “time is of the essence” (i.e. deadlines are firm) or gives a specific delivery date of goods, a reasonable delay by one of the parties may be considered only a minor breach. If the breach is minor, the non-breaching party is still required to perform under the contract, but may recover damages resulting from the breach. For example, when a seller’s delay in delivering goods is a minor breach of contract, the buyer must still pay for the goods but may recover damages caused by the delay.
Other factors that a court may consider in determining whether the breach was material are:
How great of a benefit did the non-breaching party receive;
Can the non-breaching party be adequately compensated for their damages;
How much of their obligations did the breaching party perform;
Whether the breaching party acted in a negligent or willful manner; and
The likelihood that the breaching party will perform the remainder of the contract.
In the example above, rotten apples will not properly serve the purpose of being distributed to your restaurant or market clients. Furthermore, California law imputes an Implied Warranty of Merchantability on commercial contracts to ensure that products sold by a merchant are at least fit for the ordinary purposes for which they are used (Cal. Com. Code § 2314(2)(c)). In the above example, the usability and saleability of the apples goes to the heart of the contract; your receiving rotten apples substantially differs from what was impliedly agreed to (saleable apples). Furthermore, following the factors above, you (the non-breaching party) did not receive any benefit of the bargain at all since the apples are rotten and unusable and may possibly not be adequately compensated for your loss of business reputation. The breaching party (your apple vendor, in this case) did not perform their obligations since the apples were delivered in a non-usable condition which further breaches the implied warranty of merchantability. Whether the apple vendor acted in a negligent or willful manner is an issue of fact that will be determined in the lawsuit, but if the apple vendor refuses to timely deliver usable apples to remedy the mistake, it is likely the court will find that this breach is material.
In this example, the vendor’s Breach of Contract is likely material. Therefore, you may no longer be required to perform under the contract, meaning your obligation under the contract to pay for the rotten apples is obviated. Once it is determined that the apple vendor is in material breach, you will have a right to all remedies for breach of the contract, which, in this case, may include consequential damages such as your loss of income and loss of business reputation.
