When Can A Contract Be Legally Breached Or Broken?
By: Richard E. Korb[1]
In any given year, you may enter into a contract—with a contractor to remodel your home, with a supplier for your business, with a seller or lessor of real estate, or with a caterer for a wedding. Often, people neglect to read the details of the contract or learn our rights. In many cases, they are stuck since a contract by definition is a binding agreement between two parties and ignorance of the law or failure to read a contract before signing it is not a defense. However, there are circumstances in which a contract can be broken:
Impossibility of Performance
Meeting your end of the bargain is known as performance. When you sign a contract, you are agreeing to perform. After signing a contract, things can happen that make performance impossible, at which point a party can break the contract. For instance, a baseball player is contracted to play for the Giants. If he dies during the term of the contract, it can be terminated by the impossibility of performance.
Fraud or Misrepresentation
Fraud and misrepresentation generally consist of intentionally making false statements to another that causes injury or damage. Fraud can also consist of the intentional concealment of material facts that results in one suffering injury or damage. Misrepresentation can be either intentional or negligent. Intentional misrepresentation is when a party to a contract deliberately falsifies the facts—knowing them to be false. An example: if a contractor remodels your house and claims to be insured, although he knows that he is not insured. The corollary to this is intentional concealment. For instance, a potential buyer of a property asks the owner if there are any defects or items to be fixed. With full knowledge that there is a broken pipe causing dry rot, the owner responds that there are no defects or items needing repair.
Negligent misrepresentation is recognized under California law and occurs when a party does not have a reasonable basis for making a statement but does so anyway, resulting in his communicating misleading facts to another that results in injury or damage. An example would be if a property owner has not prudently checked the house for damages but claims there are none nonetheless. Fraud or misrepresentation permits you to cancel a contract. When appropriate, the victim of fraud can also sue for damages.
Mistake
When one or both parties mistakenly assume a statement related to the contract to be true when it is false, this is considered a mistake. A statement can be anything from falsely believing a contractor is insured to assuming that a piece of furniture is vintage. However, not all mistakes will invalidate a contract. A mistake is either unilateral—when one party makes a mistake—or bilateral—when both parties make a mistake. A bilateral mistake generally will invalidate contract, because consent was not reached between the two parties. A unilateral mistake does not necessarily void the contract.
For example, if you are a restaurant owner and you contract with a local farmer to buy five dozens oranges each week for a year. If you assume that the oranges are organic and they are not, that would be considered your mistake or inadvertence and thus the contract remains valid. However, if the farmer led you to that assumption, there would be a legal basis to terminate the contract based on misrepresentation.
Breach of Contract: Material and Immaterial
You can withdraw from a contract if the other party: (1) prevents you from completing your part; (2) refuses to complete their part, thereby allowing you to repudiate the contract; (3) does something outside the contract such as building something not commissioned; or (4) does something in violation of the contract such building something without obtaining proper permits. When the other party prevents you from performing or repudiates the contract, generally the contract will become void. The latter two types of breaches are judged as either material, giving you the right to sue, or immaterial, meaning you do not have the grounds to sue. A material breach is also defined as hitting the ‘heart of the contract.’ The distinction between immaterial and material breaches can very subjective. If you contract someone to build a jacuzzi in your backyard and he or she does not install jets, it could be argued to be a material breach. From the owner’s perspective, he or she may have contracted a jacuzzi for back ailments and thus lack of jets could be seen as a material breach of the contract. From the builder’s viewpoint, the heart of the contract was completed—the building of a jacuzzi. Therefore, the builder may see it as an immaterial breach.
Another way to determine whether the breach is material is to ask whether or not the breach can be resolved with reasonable effort while keeping the contract in effect. So if the the builder can remedy the above situation by simply installing jets, it probably isn’t material unless this is a costly new item (change order) that the owner thought was included. Additionally, a breach is more likely to be considered material when it is discovered at or near commencement–the less time the project has progressed the better. For example, if an owner waits until the end of construction of the jacuzzi to mention that the builder used the wrong type of marble, the breach is less likely to be considered material than if he had mentioned earlier during the construction. Furthermore, a breach is more likely to be material if done intentionally by the breaching party.
Prior Agreement and Rescission
Rescission is when both parties agree that one party has the right to withdraw from a contract. A party may have the right to cancel a contract by law or by prior agreement between the two parties. In some states, a car owner usually has the right to rescind within three business days after signing an agreement to purchase a car (the “lemon” law). Additionally in most states, you must be a legal adult to enter into a contract. So if you enter a contract with a minor, it is usually unenforceable.
Duress
Duress is when you are pressured or coerced into signing a contract against your will, which automatically invalidates the contract. An example is when Luca Brasi holds a gun to the bandleader’s head in the Godfather to sign singer Johnny Fontane to a contract and famously says: “in 10 seconds, either your signature or your brains will be on that piece of paper.”
Statute of Frauds
Some contracts are unenforceable if not evidenced by a written contract. The Statute of Frauds refers to all statutes that specify that a contract must be in writing. Consequently without a written agreement, the contract may be invalid and cannot be enforced if one party repudiates the agreement. Contracts for the sale of goods of valued higher than $500 or agreements to purchase or lease real estate longer than a year are examples of contracts that come under California’ Statute of Frauds and must be in writing.
For more information about contracts and your situation, contact Berkeley-Oakland –Walnut Creek, business attorney, Richard Korb, at 510-524-0903 for a free consultation.
[1] RICHARD E. KORB is a seasoned attorney with 30 years of business, real estate, litigation and transactional experience. Over his legal career, Richard has successfully litigated and resolved over 300 court cases in the fields of contract law, real estate, employment, unfair competition, and general civil law and he has drafted and negotiated over 200 contracts and licenses for large and small companies alike. Richard leverages his experience as a former partner in a 100-person law firm and chief counsel for a public software company to assist individuals and companies, from start-ups to multi-nationals, with a broad spectrum of legal matters. In addition to his legal practice, Richard is a court-approved mediator and serves on the Alternative Dispute Resolution (ADR) panel for both the Alameda and Contra Costs County Superior Courts.
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