When Should I Sue for Breach of Contract?

A contract is a legally binding agreement between two or more parties. Contracts are the backbone of everyday business. Sales contracts allow people to purchase land, goods, and services. Other contracts govern matters like employment.

Ideally, all parties uphold their contractual obligations. But as we all know, things do not always go as planned. When a party fails to perform its obligations under an agreement, it’s in breach of contract.

This article will explain when to sue for breach of contract. Once you know the general factors for when to sue someone for breaching a contract, you should speak with a contract lawyer for legal advice.  

What Is a Contract? 

A contract is an agreement between parties “regarding terms of their own choosing,” says New York business attorney Sarah Gold. Contracts can be about anything, from buying a car to ordering a shipment of goods to hiring a kitchen remodeler. 

Contract law is primarily a matter of state and common law. It can vary widely depending on the jurisdiction, though the Uniform Commercial Code (UCC) is a law adopted by all fifty states that sets standard rules governing the sale of goods and other matters. UCC provisions typically come up in business contracts regarding transactions between businesses or between a business and its customers. 

A valid contract obligates the parties to perform certain actions. For example, a contractual agreement could say one party will supply a certain number of T-shirts to another party by a specified date in exchange for a certain amount of money. The supplier is thereby obligated to provide the correct number of shirts by the correct date, while the buyer must pay the correct amount of money. 

When making a contract, “It’s a lovely idea that everybody can just do a handshake deal and be done with it,” says Gold The problem is that not all agreements are so straightforward. Sometimes, agreements go bad when one party fails to perform its contractual obligations. This failure to perform is a breach of contract. 

When a breach of contract happens, the non-breaching party may suffer significant financial losses. A breach of contract lawsuit is sometimes the only realistic option to recover damages. 

What Makes a Contract Legally Binding?

Before you take any sort of legal action, you will first need to prove that a valid contract existed in the first place.

“If someone comes to me with a potential breach of contract claim, the first thing I do is determine, ‘How enforceable is this?'” says Emilee Boyle Gehling, who advises businesses at Gehling Osborn Law Firm in Sioux City, Iowa. To have a legally binding contract, several key elements must be present: 

• Capacity. The parties to the contract must have the legal capacity to enter into a contract. Parties who lack capacity include minors, individuals with mental disabilities, and individuals who were coerced into the agreement. 
• Agreement. The parties must mutually agree to the terms of the contract and understand what they agree to. 
• Exchange. The parties must exchange things of value in a process of offer and acceptance. For example, a seller offers an item for a certain price, and a buyer either accepts the offer, rejects it, or makes a counteroffer. Before a buyer accepts, the seller can revoke the offer if they wish. If the buyer makes a counteroffer, the seller must accept it to finalize the agreement. This process of bargaining can go through multiple steps. 

Some Contracts Must Be in Writing

Many contracts are based on an oral agreement or don’t involve a formal legal document. However, some contracts must be in writing. Laws known as statutes of fraud set the requirements for what kind of contracts must be in writing. For example, any contract for real estate must be in writing, as must contracts for goods over $500 or taking longer than a year to complete. 

Even when a written contract isn’t required, it’s a good idea to have one to avoid disputes and misunderstandings.

“When people think of contracts, they tend to think of multi-page documents with all this arcane legal language in it. But they don’t have to be that way,” says Gold. “For most business owners, a simple contract is a great way to handle things. You could have an effective one-page document that sets out what the parties are going to do. Have both parties sign off on it, and you’re good to go,” she says.  

What Is a Breach of Contract Claim? 

A breach of contract is when one party fails to perform their contractual obligations entirely, doesn’t follow the mutually agreed-upon terms of the contract, or doesn’t perform in the timeframe set by the contract.

In evaluating the strength of your breach of contract claim, consider these key issues: 

• Was there a contract in the first place? Analyze the factors discussed above that are required to make a valid contract. 
• What did the contract require? To know if there was a breach, you need to understand what the contract required each party to do or not to do. You may have thought the contract required something, but on closer inspection, you realize it didn’t. If you have a lawyer draw up a contract, they will ensure nothing forgotten or unclear in the contract terms. 
• What was the alleged breach material or immaterial? Finally, you need to assess whether the breach was a material breach or an immaterial breach. Material breaches ruin the contract and leave the non-breaching party in a bad position. Immaterial breaches, on the other hand, are a minor delay or deviation from the terms of the contract. 

It’s also essential to consider what defenses the breaching party might raise and address them. Contract law is complex, and a lawsuit can be costly. To build the strongest case possible, it’s best to speak with an attorney. 

Legal Remedies for a Breach of Contract  

When you sue for breach of contract, you’re seeking to be made whole for your losses resulting from the breach. The compensation you get in a lawsuit is damages. The amount of damages you get will depend on various factors.

Some of the most common types of damages are: 

• Compensatory damages. Compensation for any losses directly resulting from the contract breach. For example, the money a buyer paid for goods that were never delivered would be covered in compensatory damages. 
• Consequential damages. Compensation for indirect consequences of the breach of contract. For example, if one party loses wages as an indirect result of the breach of contract, they could get compensated for their wage loss. 
• Punitive damages. Compensation that aims to punish the breacher and aim to deter others from engaging in similar conduct. 
• Liquidated damages. Come into play when the amount of damages for a breach of contract is difficult to determine due to the nature of the transaction or changing circumstances. A liquidated damages clause says how much a party will get if there is a breach of contract. Setting the amount ahead of time avoids complications in figuring out how much damages would be. 

Specific performance is another kind of remedy, but instead of financially compensating the non-breaching party for their losses, it is a court order directing the breaching party to do what they originally promised to do in the contract.

Specific performance is often sought in breaches of contracts involving real estate, where the buyer wants the actual property instead of general monetary compensation. 

Lawsuits and Litigation Alternatives for Breach of Contract Claims 

“Often, we may want to start with a cease and desist letter,” says Gehling. “The situation may be that the other party is taking an action that they should not be taking. So, the first thing you want to do is stop that action — especially if the amount of damages would continue to rise. We could also get an injunction against the person to stop their actions or force them to do the action that they’re supposed to be doing.”

“A demand letter can make the breaching party realize you’re serious and [make them] willing to work with you to come to a solution,” says Gold. Regardless of whether you eventually take legal action, “You need to notify the other party that they’re in breach. Depending on the terms of the contract, they may have time to ‘cure,’ meaning they have time to fix the contract before it goes bad.” 

Know the Statute of Limitations for Bringing a Lawsuit

If you pursue a lawsuit, it’s imperative to make sure you know your state’s statute of limitations. This is a law that sets deadlines for when you can bring a lawsuit.

If you miss the deadline, you can no longer take legal action. 

Using Alternative Dispute Resolution for Breach of Contract

There are also ways you can get around a lawsuit using alternative dispute resolution (ADR), Gold says:

• Mediation. A third-party neutral meets with both parties to devise a solution. It can be cheaper than commercial litigation, but not always.
• Arbitration. This differs from mediation in that you hire an arbitrator to hear the case. Many contract clauses have what they call binding arbitration in them, meaning that you must go to arbitration, and you can’t take it to court.

See if Small Claims Court Makes Sense for Your Breach of Contract Case

You should also consider whether small claims court is a good option for your breach of contract claim.

Small claims courts are specialized state courts that handle relatively small amounts of money. In many states, the limit is under $10,000. If the amount of money you’re seeking for a breach of contract is under the cap, small claims court may be the best option.

Small claims court is typically cheaper and faster than traditional civil court.   

How To Prevent a Breach of Contract 

What can you do to try to avoid contract disputes?

Gold tells clients to think about their end game. “What would happen if this contract goes bad? You should at least consult with an attorney to see if there’s a way to try to prevent future issues. Even if you have a contract in place, things can still go bad, and you may still end up in court. Still, it’d be better to be protected and go into court with your head held high and be able to hand the document to the judge and say, ‘This is what went down.'”

But too often, Gold says, “Clients come to me after the ship has already sailed, and now we’re left trying to figure out what to do. A lot of it is creating a contract so that the next time a dispute happens, it doesn’t go down quite the same way.”

Speaking with a lawyer to draw up a strong contract ahead of time is the best way to prevent contract disputes down the road. 

Find a Contract Law Attorney 

Gehling suggests looking for an experienced attorney who understands contract litigation and drafting.

“When you draft contracts, it makes you a better litigation attorney for a breach of contract. And when you litigate breach of contract cases, it makes you a better contract drafter. So, all the things that you’ve seen happen before, you can incorporate that into your thought processes for either matter.”

After you’ve got solid contracts, you still may want periodic advice. “If we have a major change in law, then we would want to work with that client to say, ‘Let’s look at this again and just make sure that we address all the points that this new law is asking us to address,'” Gehling says.

“Otherwise, I think it is a good idea every few years to take a look at your contracts and see, ‘Can this be improved?’ Because oftentimes they can be — different situations arise as time goes by.”

To protect your legal rights and avoid unnecessary litigation, look for a contracts attorney in the Super Lawyers directory for legal help.