In order to understand a breach of contract it is important to know how a contract in the United States is formed. There are two sources of contract law in the United States:
- the common law – which is based on case rulings
- the statutory law – which is based on federal and state statutes
The UCC Article 2 governs the contracts between merchants for the sale of goods. The Uniform Commercial Code is a complex statutory scheme that also covers the topic of breach of contract. The UCC addresses issues like whether a breach of contract has occurred or not, whether one party can “cure” or correct the breach and whether gap fillers or special rules would apply in a certain situation. UCC may imply certain grounds for breach of contract, or better said provide certain standards that can give rise to a cause of action for breach of contract. For instance, section 2-314 discusses about the implied warranty of merchantability. This provision establishes that the goods sold are suitable and merchantable. Even if a contract between merchants fail to stipulate this, the provision stands between the parties due to the UCC.
Common law governs contracts for services and any other contracts that are not covered under the UCC. For a contract to exist under common law it is necessary to have offer, acceptance and consideration. In other words, a party (promisor or offeror) must make an offer that must be accepted by another party (promisee or offeree) and there must be consideration. Under basic principles of contract law, consideration is the benefit that each part gets or expects to get by entering into the contract. Of course, to be enforceable the contract cannot be for an illegal purpose and the parties must have capacity to enter into the agreement. The three common-law elements of offer, acceptance and consideration must be present for a contract to be validly formed. If one of them does not exist, then the contract may be void or voidable.
A contract is a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty. A promisor or promisee commits a breach of contract when he or she fails to perform without justification a promise due. Simply put, a breach of contract occurs when one or more of the parties to the contract does not honor the agreement by failing to perform of by interfering with the other party’s performance, without having any legal excuse to do so. For example, this includes failure to pay, failure to deliver goods, failure to perform at the standard of the industry, failure to meet the requirements of any express or implied warranty, and many more.
However, it is important to understand that there is a distinction between the nonfulfillment of a condition, which excuses the conditional performance, and the failure to honor a promise, which results in liability for breach of contract. Therefore, a party breaches a contract by failing to execute the promised performance when that performance is due. In order to establish if there is a breach of contract or not, one must first see if the following four conditions are met.
Firstly, one must determine the exact nature and extent of the contractual promise – this involves interpreting the contract. Secondly, one must determine the due date of the promise. Thirdly, if there was however a performance, one has to establish if the said performance complied with the promise – any shortfall from the promised performance is a breach. And, lastly, after establishing that the breach has occurred, one must determine the severity of the breach. Some breaches are serious and fundamental – total and material breaches, and others are less severe – minor or non-material breaches.
In the United States, a lawsuit for breach of contract is a civil action. However, not every breach of contract is equal, and the type of the breach determines the remedies available for the injured party. A breach of contract can be material and non-material (or minor). Further, contract law uses both common law and a set of statutory rules known as the Uniform Commercial Code (UCC).
A breach of contract under a sales agreement is governed by the order of obligation performance between the buyer and the seller. Seller and buyer can stipulate in their contract that they are supposed to perform at the same time, or that they are required to perform the contract in a specific order with buyer performing before the seller or vice versa. Article 2 of the Uniform Commercial Code sets out constructive condition of performance that requires both parties to perform their obligation as per the contract. Depending on the order of the performance, one party to the agreement can only breach the contract when he has a duty to perform and fails to perform his obligations as per the contract.
A breach is material when the breaching party fails to perform the contract in such a manner that the contract is virtually destroyed, and the injured party receives something substantially different from what the contract was. For example, if the contract contemplates the sale of 100 cell phones for $1,000 and the buyer pays the balance due and the seller delivers 100 tablets instead of 100 cell phones, then the breach of contract is material and the injured party is not required to perform and is entitled to all remedies for breach of the entire contract – can file a lawsuit for damages for the total contract.
A breach is non-material or a minor breach when the breaching party fails to perform the contract, but it is not serious enough and the non-breaching party still receives the goods or the services specified in the contract. In the case of a minor breach, the non-breaching party can sue for damages resulting from the breach but is required to perform the contract. For example, a contract provides for the sale of 100 pieces of electronic devices for $1,000 to be delivered within two weeks of the date of contract. The seller delivers the electronic devices not within two weeks but three weeks after the date of contract. The seller’s delay in delivering the electronic goods is a minor breach of contract. As a result, the non-breaching party must pay the price of the goods but can recover damages caused by the delay.
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