A contract represents an agreement between two or more parties. The agreement obligates the parties to adhere to the terms of the document, and those obligations carry the force of law. A breach of contract occurs when someone fails to perform as they had promised to do. Although most business contracts are in writing, courts are still often asked to try and figure out what the parties intended at the time of the agreement. The court is tasked with ruling whether a contract was broken such that one or more parties can be awarded appropriate breach of contract damages, often according to terms in the contract itself.
How to Recognize When a Breach of Contract Occurs
Under Texas law, a breach of contract occurs when the following necessary elements exist:
- A legally enforceable contract
- Performance of contractual obligations by the complaining party
- Failure to perform contractual obligations by the accused party
- Damage to the complaining party as a result of the breach
A contract that is not legally enforceable cannot be breached because the parties are not legally obligated to perform. In order for a valid contract to exist there must be a “meeting of the minds” by all parties as to the essential terms. For purposes of determining whether a legal meeting of the minds occurred, subjective intent is not relevant. Whether a meeting of the minds existed at the time a contract was made is based on what the parties said and did and if those manifestations evidenced agreement.
Furthermore, a court will only recognize a contract as valid if the terms are definite enough so that the court can determine the parties’ obligations. A contract need not be in writing to be enforceable unless specifically required by law but as a practical matter they most often are. Proving what was intended at a previous time without a written record can be difficult and expensive.
Common Reasons Business Contracts Are Breached
When one party to a contract fails to perform as another party expected, it is often because a true meeting of the minds didn’t occur. The following circumstances are frequently to blame for contract breaches.
- Inadequate review of the contract obligations
- Unclear or ambiguous contract terms
- Ineffective communication
- Poor record-keeping or documentation
Breach of Contract Due to Force Majeure
There are occasions when one party to a contract fully understands the expected performance but cannot fulfill the obligation due to an unforeseen event beyond their control. Traditionally, these so-called ‘acts of God’ did not excuse a party from otherwise performing obligations under a contract.
Recognizing the limitations of the human condition, force majeure clauses excuse performance under a contract when performance is deemed impossible. The scope of a force majeure clause is determined by the contract language. Typical language says if the cause is beyond the reasonable control of the non-performing party and was unforeseeable at the time the contract was entered into, a breach of contract will not occur.
Even if a contract does not contain a force majeure clause, Texas law recognizes ‘impossibility of performance’ as a defense to non-performance in breach of contract claims.
Factors That Can Affect Contract Breaches
Contract breaches are not all created equally. Timing and size can be factors. Sometimes, a contract breach occurs before the required time for performance, or the breach may be insignificant to the overall performance of the contract.
Anticipatory Contract Breaches
An anticipatory breach occurs when a party to a contract makes clear before the deadline given in the contract that they will not perform as promised. The elements necessary for an anticipatory breach of contract in Texas are:
- Absolute repudiation (rejection) of contractual obligations
- No justifiable excuse for the repudiation
- Damage to the non-repudiating party or parties
Absolute repudiation is proven when the repudiating party indicates by words or deeds an “unconditional intent” not to perform as agreed.
Material Contract Breaches
With contract breaches, size matters. Some breaches are so significant as to thwart the entire purpose of the contract. Others cause damage but don’t prevent the parties from fulfilling their obligations. When a material contract breach occurs, it discharges the obligations of the non-breaching parties, and no further performance is required.
On the other hand, a non-material breach does not excuse any party from further performance but only gives rise to a cause of action for damages. Whether a breach is material is typically determined from the circumstances surrounding the contract. The Texas Supreme Court has established several factors to be considered in determining if a breach is material:
- The extent to which the non-breaching party will be deprived of benefit
- The extent to which the non-breaching party can be adequately compensated for the breach
- The extent to which the breaching party will suffer forfeiture
- The likelihood that the breach can be cured by the breaching party
- The extent to which the breaching party’s behavior departs from the standards of good faith and fair dealing
Contractual history is also relevant when determining how to evaluate the magnitude of a breach. How parties have dealt in the past can indicate what could be expected and what the parties stand to gain or lose.
Recoverable Damages for Breach of Contract in Texas
The damages available for the aggrieved party when a breach of contract occurs depend on the damage caused by the breaching party’s failure to perform. Many times, financial compensation can replace the loss caused by the breach. However, that may not be true for every contract.
Some contracts contain provisions that specify what the damages will be in the event of a breach. These ‘liquidated damages’ clauses are generally enforceable as long as they provide ‘just compensation’ for the claimed losses. Texas’ damages statutes allow claimants to recover compensation for economic losses and non-economic losses when applicable. Non-economic damages in a breach of contract case might include compensation for inconvenience, mental anguish, or injury to reputation.
If a contract breach was particularly egregious, exemplary or punitive damages may be awarded in addition to compensatory damages. Exemplary damages are intended to punish especially bad behavior and are limited to a maximum amount. However, there can be times when money does not adequately compensate for failure to perform under a contract, and an equitable remedy may be more appropriate.
When Damages Are Not The Solution
Suppose the contract performance is hard to value or the obligation is unique to the non-performing party. In that case, the court may decide the only remedy is to require the breaching party to fulfill the contractual obligations. A court may also conclude that the best way to remedy a contract breach is to rescind the contract and attempt to return the parties to their original positions.
In a breach of contract case, damages may include reasonable attorney fees unless the party breaching the agreement is affiliated with the government or a charitable entity.
The Enforceability of Liquidated Damages Clauses
Contracts may contain provisions specifying the damages that will be awarded in the event of a breach. Liquidated damages clauses put all parties on notice of what to expect if they fail to uphold their end of the agreement. These clauses can provide the parties a way to avoid having to litigate actual damages.
The enforceability of liquidated damages clauses can be challenged. Damages are only intended to provide just compensation to the aggrieved party. Liquidated damages cannot unjustly reward one party while penalizing another.
The Texas Supreme Court has said that a liquidated damages clause will not be enforceable if there is an “unbridgeable discrepancy” between the amount of liquidated damages and the actual damages. The Texas Business and Commerce Code authorizes damages for breach to be liquidated in the contract, but only if the amount is reasonable under the circumstances. An unreasonably large liquidated damages amount will be considered a penalty and unenforceable.
What To Do When Someone Breaches a Contract
When a party to a contract suspects a breach by another party, the first step is to thoroughly review the contract and make sure to understand the obligations of the parties. Contracts may contain provisions that specify what is to be done in the event of a breach. Getting a legal opinion can be helpful in identifying issues and making sure your rights are protected.
Sometimes, communicating with the breaching party can resolve misunderstandings, and the breach can be cured without resorting to legal action. Negotiating a workable solution can preserve a valuable business relationship. If the situation cannot be satisfactorily resolved, a lawsuit may need to be filed.
When To Consider Filing a Lawsuit for Breach of Contract
The greater the potential or actual damage caused by a breach of contract, the sooner you need to get legal advice to minimize the negative impact and protect your business from further loss. Breach of contract lawsuits must generally be filed within four years of the time a breach occurs.
An experienced breach of contract attorney from the Houston law firm of Feldman & Feldman can review your contract, advise you of your legal options, recommend the best course of action, and initiate a lawsuit to recover damages if appropriate.