When Should I Sue for Breach of Contract?
Assessing when to bring a breach of contract lawsuit
on September 29, 2022
When making a contract, “It’s a lovely idea that everybody can just do a handshake deal and be done with it,” says New York business attorney Sarah Gold.
However, not all agreements are so straightforward.
Sometimes, agreements go bad when one party fails to perform their contractual obligations. This failure to perform is called a breach of contract.
When a breach of contract happens, the non-breaching party may suffer significant financial losses. While there are options other than suing someone, sometimes a lawsuit is the only realistic option to recover.
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 contracts lawyer about your case.
What Is a Contract?
A contract is an agreement between parties “regarding terms of their own choosing,” says Gold.
Contracts can be about anything, from buying a car, ordering a shipment of goods, or hiring a kitchen remodeler.
Contract law is primarily a matter of state and common law and can vary widely depending on the jurisdiction.
Additionally, 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 customers.
A valid contract places contractual obligations on 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 obligated by the contract to provide the correct number of shirts by the correct date and the buyer is obligated to pay the correct amount of money.
To have a legally binding contract, several key elements must be present:
- The parties to the contract must have the legal capacity to enter a contract. Parties who lack capacity include minors, individuals with mental disabilities, and individuals who were coerced into the agreement.
- The parties must mutually agree to the terms of the contract and understand what they agree to.
- 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.
Not all 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 frauds set the requirements for what kind of contracts must be in writing.
For example, any contract for real estate must be in writing, as well as contracts for goods over $500 or take 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
- Doesn’t perform in the timeframe set by the contract
In evaluating the strength of your breach of contract action, 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 realize it didn’t. If you have a lawyer draw up a contract, they will ensure nothing is omitted or unclear in the contract terms.
- What was the alleged breach? Finally, you need to assess whether the breach was a material breach or an immaterial breach:
- Material breach. This is a breach that ruins the contract and leaves the non-breaching party in a bad position. In the T-shirt example, a material breach would occur if the supplier got paid but never sent the shipment of T-shirts as promised. Not sending the shipment goes against the entire agreement. It would also leave the buyer in a worse position than when they entered the agreement.
- Immaterial breach. An immaterial breach is a minor delay or deviance from the terms of the contract. In the T-shirt example, if the supplier sent the shipment, but the shipment arrived a couple of days late, or a few shirts were missing, that would be an immaterial breach. The buyer still got the shipment and could use it, but some minor problems needed to be fixed.
It’s also essential to consider what defenses the breaching party might raise and be prepared to address them.
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 known as “damages.” The amount of damages you get will depend on various factors.
Some of the most common types of damages are:
- Compensatory damages. This is 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. This is 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. These damages punish the breacher and deter others from engaging in similar conduct.
- Liquidated damages. When the amount of damages for a breach of contract is difficult to determine due to the nature of the transaction or changing circumstances, parties will add a liquidated damages clause to a contract. This 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. Instead of financially compensating the non-breaching party for their losses, specific performance 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 contract involving real estate, where the buyer wants the actual property instead of general monetary compensation.
Lawsuits and Other Alternatives for Breach of Contract Claims
“Sending a demand letter is usually the first step” in taking action for breach of contract, says Gold.
“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.”
In any event, “you need to notify the other party that they’re in breach,” says Gold. “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.”
There are also “ways you can get around a lawsuit,” she says.
“You could seek mediation, where you have a third-party neutral meet with both parties and try to devise a solution. It can be cheaper than commercial litigation, but not always.”
“There’s also arbitration, which is not within the court system, although it can be as expensive as court,” she says.
“Arbitration differs from mediation in that you hire an arbitrator to hear the case. A lot of contract clauses now have what they call binding arbitration in them, meaning that you must go to arbitration, and you can’t take it to court,” says Gold.
“So, you need to know your playing field before you start going down this road.”
Sending a demand letter or pursuing mediation or arbitration are “all options that work outside of an actual lawsuit,” she says.
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 are barred from any legal action.
You should also consider if 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. It 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 says she “[tells] my clients all the time to think of the 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.”
However, “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,’” says Gold.
But often, “clients come to me after the ship has already sailed, and now we’re left trying to figure out what to do now,” she says.
“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.
Questions for a Contracts Attorney
If you are considering legal action for a breach of contract, it’s a good idea to speak with a lawyer experienced in contract law or business litigation as soon as possible.
Many lawyers provide free consultations for potential clients. These meetings let you get legal advice and decide if the attorney or law firm meets your needs.
To get the most out of a consultation, ask informed questions such as:
- What are your attorney’s fees and billing options?
- Do I have a good cause of action?
- What kind of damages can I get?
- Is there an alternative to a lawsuit?
- How long will the litigation process take?
Once you have met with a lawyer and gotten your questions answered, you can begin an attorney-client relationship.
Look for a contracts attorney in the Super Lawyers directory for legal help.