Morris & Stone -- Orange County's Premiere Civil Litigation Firm

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Have you suffered a breach of contract, or are you being falsely accused of breaching a contract?  We bring the knowledge and methods necessary to quickly resolve breach of contract matters and any other business litigation disputes throughout Orange County and Southern California.  We are results-oriented, with a constant eye on the bottom line.  Our cutting-edge technology and techniques allow us to bring you the highest quality legal services, usually at a fraction of the cost charged by other firms.  Call now for a no-cost consultation at (714) 954-0700.

What is a Breach of Contract?

Most contract breaches are easily identified and require no definition.  But sometimes you can have a breach of contract that does not result in damages or that is not worth pursuing.  You need to determine whether the breach was material and caused damages.

Say, for example, you hire a contractor to paint the outside of your office building.  The contract provides that the job will be completed by June 1, but does not provide for any penalties for breaching the contract by failing to finish the project by that date (usually called "liquidated damages").  June 1 comes and goes and the job is not completed.  You call the painting company and complain, send a demand letter, and finally the painters show up and the job is finished on June 9.  Clearly there has been a breach of contract, but was it material, and did it cause damages?

In terms of damages, did the eight day delay keep you from renting office space?  Did it prevent you from using any portion of the building?  Did you lose any tenants as a result of the delay?  You may have been frustrated by the delay, but did it really cost you any money?  You see, the fact that there has been a breach of contract does not always mean that you can or should sue. 

The Restatement (Second) of Contracts lists the following criteria to determine whether a specific failure constitutes a breach:

In determining whether a failure to render or to offer performance is material, the following circumstances are significant: (a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; (b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived; (c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing.

American Law Institute, Restatement (Second) of Contracts § 241 (1981).

In fact, the law actually contemplates a "right to breach".  Let's use another hypothetical.  You attend an art auction, and pay a $1,000 deposit for a bidder's number.  The agreement provides that if you bid on any artwork, you will be charged a ten percent deposit and the remainder is due within ten days.  The agreement also provides that if you fail to pick up the artwork and pay the remaining amount due within ten days, you will forfeit the ten percent deposit.

You get caught up in the fever of the auction, and you are the winning bidder on a $10,000 oil painting.  You leave the auction, come back to your senses, and decide that you no longer want the painting, knowing that your decision is going to cost you the $1,000 deposit.  A few weeks later you receive a demand letter from the art gallery's lawyer, demaning the remaining $9,000.  You explain that you are forfeiting the deposit as set forth in the agreement, but the attorney is unconvinced, and argues that if you had not agreed to buy the painting for $10,000, the next higher bidder at $9,500 would have purchased it.  Therefore, the attorney claims that the gallery is out at least $8,500 as a result of your breach, and sues.  What is the result?

This is an actual case (although the numbers were quite different), and the art gallery properly lost.  The bidder had a "right to breach" or, alternatively, was not in breach at all.  The agreement provided what would happen if a bidder failed to perform.  The bidders, therefore, knew the extent of their exposure if they decided to breach.  If the gallery did not want bidders to walk away, the agreement could have simply provided that bidders remained liable for the full amount.   This is another example of how there can be a breach, but that breach may not entitle the plaintiff to all damages suffered as a result.

If the breach of contract was flagrant, can I sue for fraud?

Many have the understanding that a breach of contract action can somehow morph into a fraud action if the breach was intentional or caused great harm.  For example, we often get calls from people who have loaned money to someone, who stops making payments after a few months.  The person is very upset because they were depending on the payments, and now because of the loan they are missing their own payments and suffering late fees and damaged credit.  They proclaim that they want to sue for fraud and punitive damages.  

Breach of contract and fraud are completely different causes of action and normally occur at different times.  To prevail on a breach of contract cause of action, you basically need only prove that you performed under the agreement, but the other side failed to do so.  For fraud, you must show that the defendant (1) made a misrepresentation, (2) knowing it was false, (3) intending that you rely on the misrepresentation, and that (4) you justifiably relied on that misrepresentation, (5) to your detriment.  Thus, if the defendant took the loan fully intending to pay it back, that is not fraud.  Stated another way, fraud must take place before you loan the money, breach of contract occurs when the money is not paid back.  However, the failure to perform an agreement can be evidence that the defendant never intended to perform.  In other words, what occurs after a contract was entered into can be evidence of the defendant's intention at the time of the contract. 

Thus, breach of contract and fraud can both occur from the same transaction.  If the defendant took the money knowing he could not pay it back, that is fraud.  And when he later fails to repay the money, that is still breach of contract.