Breached Contract in StoneIntroduction

Continuing our discussion on Everything You Wanted to Know About Contracts, this article sets out the remedies which your business litigation attorney may inform you are available in a lawsuit for breach of contract lawsuit in California. The non-breaching party may seek one or more types of remedies, from consequential and incidental damages, to specific performance, which can provide significant incentives to demand settlement. Not all if these remedies may be available in any given case and there are many factors to consider, so it is critical to consult with an experienced litigation lawyer at the outset of any lawsuit.

What is a Breach of Contract?

A breach of contract is the failure of a party to the contract to do what he or she agreed to do under the contract. A party’s breach of contract gives rise to certain remedies in the non-breaching party, in particular (1) an action for money damages, and (2) in certain circumstances, a suit for specific performance of the contract.  In certain other cases, including those in which a breach of contract has not occurred, one or both of the parties may rescind the contract.

In the event one party breaches the contract, the other party may enforce the contract by filing a lawsuit in court against the other party, seeking money “damages” for the other party’s breach. In some instances, a written contract will contain a provision for arbitration of any disputes that arise between the parties. In that instance, the aggrieved party may file a Demand for Arbitration with an arbitral Association, such as the American Arbitration Association, or any other arbitration association specified by the parties in the contract.

The essential elements of a claim for breach of contract are: (1) the existence of a contract, (2) a breach of the contract, (3) performance or excuse from performance by the non-breaching party, and (4) damages resulting to the non-breaching party from the other party’s breach. Reichert v. General Ins. Co. (1968) 68 Cal. 2d 822, 830.  With respect to item (3), the party filing suit must show that he has performed his obligations under the contract, has offered to perform his obligations under the contract, or has been excused from performing his obligations under the contract.

As an example, if the parties agree that seller will sell his car to buyer for $5,000, and seller changes his mind and refuses to give his car to the buyer, the buyer must have either paid the agreed-upon $5,000 for the car, or “tendered” the $5,000 to the seller.  In the first instance, the buyer has performed his obligation under the contract by paying the seller $5,000.  In the second instance, the buyer has not paid the seller, but has tendered $5,000 to the seller, which the seller has refused to accept.  In each instance, the buyer has fulfilled his obligation under the contract, and may sue the seller for breach of contract.

Consider another example:  Landlord and Tenant enter into a one year lease of a house.  Tenant agrees to pay Landlord $1,000 a month.  He does so for six months and then stops paying rent.  The landlord then evicts the tenant, but cannot find another tenant for the remainder of the year.  The landlord is excused from his obligation to provide the house to the tenant based on the tenant’s failure to pay the rent he agreed to pay.   In this instance, the Landlord does not need to fulfill his obligation to provide the premises to the Tenant or to tender the premises to the Tenant.

A party to a contract is excused from performing his obligations under a contract if the other party commits a “material” breach of the contract.   What constitutes a material breach is a question of fact and will depend on the nature of the contract and other variables.  Generally speaking, a “material” breach is one which deprives the non-breaching party of a substantial benefit he was to receive under the contract, as opposed to an incidental benefit which causes little or no harm.  See Whitney Inv. Co. v. Westview Dev. Co. (1969) 273 Cal. App. 2d 594, 602.

If the breach is not material, your business litigation attorney may inform you that the non-breaching party may still be required to continue to perform his obligations under the contract, but may sue the breaching party for the harm his breach has caused. However, if the breach is material, there will typically be a “failure of consideration” (discussed below), which will excuse the non-breaching party from performing his obligations under the contract.

Consequential Damages

The most common type of damages recoverable for breach of contract are general damages, i.e., damages which naturally result from the breach. In the example of the farmer and the grocery chain, the grocery chain’s typical damages resulting from the original farmer’s refusal to comply with his obligations under the contract are the higher price the grocery chain would have to pay the second farmer for the same crops.  In the above example, the typical or “general damages” are $25,000.

“Consequential damages” are damages that do not necessarily occur as a result of a breach, but sometimes occur as a consequence of the breach.  As business litigation attorneys learn in law school, one of the first examples of consequential damages in what is known as the “common law” is the case of the broken wagon wheel. An English merchant brought his wagon to the wheel maker because one of the wheels on his wagon broke.  The merchant paid the wheel maker a certain amount for a replacement wheel.  As soon as the wheel was replaced, the merchant used the wagon to take his goods to market, but the replacement wheel broke.  The merchant had not received the benefit of his bargain – a good wagon wheel – and his general damages (i.e., the extent to which he would typically be damaged by the breach) was the price he had paid for the replacement wheel, and the merchant was entitled to recover that payment from the wheel maker.

However, because the merchant was unable to take his goods – perishable items – to market, they spoiled, and he could not sell them.  The merchant had paid a price for those items and expected to sell them at a profit at the market, but was unable to do so.  Since the wheel maker in this example was aware that the merchant needed a replacement wheel so he could take his goods to market, the court also awarded the merchant the price he would have obtained from the sale of those goods had they not perished and become unsalable. The merchant lost the money he would have been paid for his goods “as a consequence” of the breach.

In order for a non-breaching party to recover consequential damages, those damages must be “within the contemplation of the parties” at the time they entered into the contract.  Otherwise, they are not recoverable.  See Martin v. U-Haul Co. of Fresno (1988) 204 Cal. App. 3d 396, 409.  For instance, had the merchant brought the broken wheel to the wheel maker and not informed him that he needed to replace the broken wheel so he could take his perishable items to market and sell them, and the wheel maker was unaware that that was the purpose of the replacement wheel, the merchant would not be entitled to “consequential damages.”  He would only be entitled to the price he paid for the replacement wheel as his general damages.

Incidental Damages

Incidental damages are those that are neither general damages nor consequential damages, but are nevertheless damages suffered by a non-breaching party as an incident of the breach, typically out-of-pocket expenses incurred in preparation and performance in reliance on the contract.  See, e.g., Walpole v. Prefab Mfg. Co. (1951) 103 Cal. App. 2d 472, 489.  Consider the example of the original farmer and the grocery chain, another early favorite of some business litigation attorneys.  Assume that it is common practice for a farmer who enters into a contract to supply crops to a grocery chain to deliver the crops to the grocery chain as part of the contract.  Assume further that, when the original farmer breaches the contract, the grocery chain is required to enter into a contract with the second farmer under which the grocery chain, and not the farmer, is responsible for transporting the crops from the farm to the grocery chain.  The cost of transporting the crops is not a damage the grocery chain will typically suffer as a result of the original farmer’s breach, if in fact, it is customary for the farmer to transport the crops to the grocery chain.  Nor, for the same reason, is it “within the contemplation of the parties” that the grocery chain will be required to arrange and pay for transportation of the crops from the farm to the grocery chain’s stores.  Nevertheless, it is a “damage” the grocery chain has suffered as an incident of the breach, so the grocery chain is entitled to recover the cost of transportation – as well as the difference in price for the crops – from the original farmer as “incidental damages.”

Specific Performance

In some instances, a party harmed by a breach of contract may have the remedy of “specific performance” of the contract.  The remedy of “damages” (i.e., the requirement that the breaching party pay the non-breaching party money to make him whole) is a “legal remedy.”  Specific performance is an “equitable” remedy that compels the breaching party to live up to his obligations to the non-breaching party.  A non-breaching party is always entitled to the “legal remedy” of money damages, whenever he can show he has been damaged in a certain amount.  However, in some instances, a non-breaching party cannot be made whole by an award of money damages.  It is only in such instances that a non-breaching party is entitled to force the breaching party to do what he agreed to do under the contract.  See Wilkison v. Wiederkehr (2002) 101 Cal. App. 4th 822, 833.

The classic example of a suit for specific performance is a suit to require the seller of real property to comply with his obligation to sell the property to the buyer.  See, e.g., Ellis v. Mihelis (1963) 60 Cal. 2d 206.  The reason for this is that every piece of real property is considered by the law to be unique  Since each piece of real property is considered unique, money damages is considered an inadequate remedy.   When damages are considered inadequate, a business litigation attorney will request that the court issue a decree of specific performance, ordering the breaching party to do what he agreed to do under the contract.

Rescission of the Contract

In some instances, a party may rescind a contract he has entered into.  A contract that is rescinded no longer exists.  Consequently, when a contract is rescinded, the parties no longer need comply with their obligations under what has become a non-existent contract.

We will discuss the instances when a contract may be rescinded in our next article. The remedies for a breach of contract can require an extensive analysis, depending on the facts of your case. If you have questions concerning your contract remedies or whether a contract you entered into has been breached, contact our experienced business litigation lawyers for a free evaluation.

Here is a link which provides additional information about remedies for breach of contract in California: