Willow Creek Law, LC
8160 S. Highland Drive, Suite 300
Sandy, Utah 84093
801.233.0606

Understanding Contract Disputes

A fair amount of the disputes we handle at Willow Creek Law involve contracts. Often contract litigation involves other legal claims as well, but I want to address the core issues: how contract disputes work.

Breach of Contract. At the core is some violation of a term in the contract itself. For example, if Company Antelope agrees to purchase a product from Company Bison, which agrees to manufacture the product, you have a contractual relationship. If the Company Antelope receives the product on time and in good working condition, but fails to pay as spelled out in the contract, Company Bison might sue for breach of contract. The basis is the violation of the payment term in the contract. Pretty simple, right?

There is certainly a legal right to sue when there’s a breach, but some breaches need to be handled a bit differently. In some instances, the breach is so minor that you’re not going to have a lot of sympathy with a judge or jury. For example, if you contract with a builder to make a home of certain dimensions and the measurements show the house is a slightly different size in reality from the design, that may give rise to a breach, but it also might not gain much sympathy and seem like a technical claim only. In those situations, it may be wise to proceed with an eye toward settlement rather than trial.

Of course, some contracts call for exacting standards. A “time is of the essence” clause, for example, means that deadlines must be treated strictly. If the deadline is March 31 at 5:00 p.m. and the contract says that time is of the essence, then performing on April 2 is likely going to result in a breach. Where there isn’t such a clause, though, reasonable delays may be excused. For example, if the delay is due to bad weather or trouble securing financing, a minor breach of that nature may be excused.

Generally, where there is a breach of contract, the non-breaching party is awarded monetary damages (money) and not anything else.

Specific Performance. In some situations, a court may step beyond breach of contract, which usually brings money as a remedy. A court has the “equitable” power to force a breaching party to perform as required under the contract. There are situations where this can’t be done, but in some instances it is an available remedy to a breach. For example, if a company is hired to install solar panels on someone’s house and stops at a point in the job where it would be difficult to have someone else complete it (say they’re using proprietary technology), a court may be willing to order the company to complete the work rather than award money damages. This option is not always available, but it’s sometimes worth pursuing–the court has wide latitude in awarding it (or not).

Breach of the Implied Covenant of Good Faith and Fair Dealing. That’s a mouthful. But every contract, whether it talks about the parties working in good faith or dealing with each other fairly, or not, has a covenant–a legally binding promise–automatically built in to the contract. That covenant–to deal fairly and in good faith–is implied in every contract. When a party doesn’t deal fairly or in good faith, they have breached that covenant. So often in a breach of contract case, a party bringing a claim for breach of contract will also bring a claim for a breach of the implied covenant of good faith and fair dealing.

What does that breach look like? In essence, it occurs where a party tries to deprive another party of the benefits of the contract. By way of extreme example, if I hire you to paint my house, but every night after you leave I hide your tools and throw out your paint so you have trouble completing it in time, I have interfered with your ability to get the fruits of the contract–pay–and have therefore breached that implied covenant.

A more realistic example might be where a person is persuaded to quit a job to join a new one with the expectation that it’s a long-term arrangement, only to be fired the next day. Even if that employee was hired “at will” and can legally be terminated at any time (and therefore there is no breach of contract), the behavior doesn’t sound like dealing fairly or in good faith. In that case, the employee could bring a claim under that implied covenant.

Mitigation of Damages. Even where there’s a breach, the wronged party needs to mitigate its damages. In other words, the wronged party needs to take reasonable measures to prevent the harm from being too high–to minimize the harm suffered. This may sound counter-intuitive, but an example will show the fairness in the principle. Take a landlord whose tenant breaches the lease by skipping out of the apartment before the end of the term. The landlord (the wronged party) can’t just deliberately keep the apartment vacant until the lease expires.  He or she has to undertake reasonable efforts to fill the vacancy and limit the amount of economic losses he or she has suffered due to a vacancy. If tenants are lined up waiting to move in, keeping the old tenant on the hook is not ok.  The landlord will not be able to recover those rents.

First Breach. The general rule is that the first party to breach the contract is the one at fault and cannot sue the other party for a subsequent breach. Note that the first breach has to be material–no mere technical breach will suffice to invoke this rule.

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There are many other matters that arise in a breach of contract dispute, but these are few common principles and standards that apply.

 


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