Material Breaches of Contract & Common Remedies
Why are contracts important?
Contracts are fundamental to a stable society because they facilitate business, protect the parties’ interests (whether they’re individuals or companies), and help accomplish both parties’ goals. Furthermore, well-drafted contracts should also address potential problems that may arise, as well as provide remedies should those problems occur. However, if one party breaks or leaves a contract, both parties suffer consequences.
When is a contract breached?
A contract is breached when one of the parties fails to perform a term of the contract.
Let’s say you are a homeowner and want new windows installed that will last a long time. You contract with Window Company to install new windows in your house. If Window Company fails to install the new windows, they have breached the terms of the contract.
What is a material breach of contract?
There are two types of breaches of contract: (1) material breaches and (2) minor breaches. A material breach defeats the essential purpose of the contract. It is a failure by a party to do something fundamental to the contract. Conversely, a minor breach occurs when one party fails to perform a term of the contract, but that term is somewhat collateral to, or incidental to, the purpose of the contract. A minor breach of contract doesn’t undermine the purpose of the agreement between the parties.
This distinction is important for a few reasons. First, you will generally only have a claim for a breach of contract if the other party materially breaches the contract. In addition, if the other party materially breaches the contract, you do not have to perform your contractual duties; rather, you are discharged from those obligations. However, if the other party minorly breaches the contract, you still have to perform your obligations under the contract.
To illustrate the difference between a material and minor breach, let’s go back to the Window Company example. Let’s say your contract specified that Window Company was to install top-of-the-line windows from Company A. What if Window Company, instead of installing Company A windows, installed windows from Company B. Would this be a material or minor breach of the contract?
It depends. Likely, if the Company B windows were of a comparable quality, then the breach would be minor. This is so because Window Company nevertheless installed top-of-the-line windows. Or, in legal parlance, Window Company “substantially performed” the contract.
In contrast, if the Window Company installed windows from Company C, which were lower quality, this would be a material breach of contract.
However, let’s say that your contract with Window Company did not specify the quality of windows to be installed. If Window Company installed the cheapest windows available, then they would have fulfilled the contract and not breached it in any way. This is because they nevertheless installed new—albeit cheap—windows.
This is why it is critical to be specific about your goals and expectations in the contract as much as possible. Being clear, concise, and specific in your contracts can save you time and money.
How does a court determine if a breach is material or minor?
Let’s say you have now sued Window Company for breach of contract for installing the wrong windows. But before the court will award you breach of contract damages, the court must first find that their breach was material.
The courts determine whether a breach is material or minor breach on a case-by-case basis. The “factfinder” (either a jury or, if a bench trial, the judge), determines whether a breach is material. To determine if a breach is material, the factfinder considers the importance or seriousness of the breach, whether the injured party received substantial benefit from the contract, and the adequacy of compensation in damages.
Determining whether the breach was serious depends on several factors, such as (1) whether Window Company (the breaching party) acted negligently, (2) the amount of the contract that Window Company had performed, as well as (3) the likelihood that Window Company could perform the rest of their contractual obligations. The court will also consider the difficulties the breach caused you.
If the weight of these factors goes towards the breach being important or serious, then the court will rule that the breach was material.
What do I do after the other party breached?
You must “mitigate your damages.” Colorado courts impose a duty on you (the non-breaching party) to mitigate damages. This means that although the other party was wrong in breaching the contract, you still have to do your best to minimize how much that breach damages you. The defense of failure to mitigate damages applies when a plaintiff has failed to exercise reasonable care and diligence to minimize or lessen damages occasioned by defendant’s conduct. A plaintiff’s failure to mitigate damages is excused, however, if mitigation would require inordinate or unreasonable measures or if there were reasonable grounds for the failure to mitigate.
For example, just because Window Company installed the wrong windows, doesn’t mean you can move out of the house or that you have to buy a hotel room. In other words, the court won’t allow you to recover money from the breaching party because you have maximized or capitalized on that damage.
If you don’t mitigate your damages, the court will likely reduce the amount of damages it will award you by the amount that you could’ve saved had you mitigated your damages.
Therefore, you can’t stand idly by and let a contract breach damage you more than necessary.
Revisiting Window Company, assume you walk in one day and notice workers unboxing and installing windows. You see the box clearly indicates the windows come from Company C. If it is early on in the project, you cannot allow the workers to continue installing the Company C windows and expect to collect on the increase of damages.
Or, consider you had just hired a caterer for your child’s graduation party. Assume the caterer calls you the day before to cancel, which is a material breach per the terms of the contract. If you have to go out and find another caterer, and the second caterer costs more than the breaching party was to charge, the damages could include the difference between the two vendors, as well as the cost to find and contract with the second party. However, you would first need to show you attempted to mitigate those damages.
Negotiating with the second caterer for a lower price is one way to mitigate. Taking immediate action to find another alternative is another step the non-breaching party can choose to help mitigate the losses. Mitigation might also include attempts to negotiate a “work around” or other efforts to help the breaching party to fulfill the benefit of the bargain.
What do I get if I win my breach of contract case?
In a breach of contract action, the objective is to place the injured party in the position it would have been in but for the breach, as if the contract had been performed. This is typically done in one of two ways, by ordering (1) money damages or (2) specific performance.
1. Money Damages
Typically, when the court awards you money damages, they are trying to “make you whole” by compensating you for your loss. These “general damages,” in legal parlance, are the damages that “ordinarily flow” from the breach of contract.
In some situations, however, you may win more than just the price of the contract. A court may award you “special damages” if, for example, there were specific circumstances that the breaching party knew about when the contract was made that would occur if they breached the contract. For example, if Window Company knew that not installing the proper windows would result in a delay of your ability to live in the house, then you may get “special damages” for the costs of a hotel room.
In extraordinary circumstances, you may even get “non-economic” damages such as pain and suffering or emotional distress or the court may award punitive damages. In addition, the terms of your contract may provide for liquidated damages, the monetary value of a breach of contract.
2. Specific Performance
In contrast, a court may order specific performance. This is an “equitable” remedy in which the court orders the breaching party to perform the remainder of the contract.
Generally, a court will order specific performance when “legal” remedies are inadequate. The best example of this is money damages in a contract to purchase real estate. The legal remedy of money damages is inadequate because land is considered unique and no amount of money can buy an exact same property elsewhere. This may also be true if the contract is for unique personal services (a painter painting your house is not a unique service, but a revered artist you commissioned to paint your portrait is).
Whether you are an individual or own a company, GLO has worked with a wide variety of individual and commercial clients and counseled them through their contract issues. Whether you have a contract interpretation, enforcement, or defense issue, GLO can help. Fill out an interest form today to see if GLO can help you.
GLO has prepared this blog to provide general information on legal issues that may be of interest. This blog does not provide legal advice for any specific situation and this does not create an attorney-client relationship between any reader and GLO or its attorneys. GLO engages clients only through specific fee arrangements and signed engagement letters. GLO does not guarantee any results.