Contract law provides a critical area of the law that governs business and consumer conduct. It forms one of the most critical elements of any legal framework and is an area of law that provides the bedrock of modern economies and forms the basis of most of the today’s transactions. The law of contract, therefore, governs very crucial aspects of people’s daily lives and businesses, and consumers will hum strung without a law of contract to underpin even the most basic transactions like buying food items, getting finance loans and getting services. The terms and conditions in a contract provide the obligations that bind every party to that contract, where such terms and conditions are not adhered to results in a breach of that contract. Contractual terms and conditions could be expressed or implied and are usually formed by the parties to the contract, however, the law can also imply some terms into the contract, where the parties do not have express terms of that contract (Beale, Bishop & Furmston, 2007). There is no specific form in which a contract must appear, and thus, a contract may be in writing, oral or implied form. For instance, an implied contract may occur where a person buys food items in a food store, takes them to the cashier pays for them and walks out. This represents a contract of sale, although, there has been no exchange of verbal or written communication and thus the law provides the terms and conditions of such a contract.
The breach of a contract results where a party to a contract does not perform his side of the agreement. It refers to non-performance or defective performance of a contractual obligation by a party to the contract. Therefore, it occurs when a party to a contract fails to precisely and exactly execute his or her contractual obligation. The breach can either be anticipatory or actual; anticipatory breach occurs when a party to a contract has indicated expressly or impliedly that he or she does not intend to perform the contractual obligation for he or she is bound to by the contract or cannot be in a position to perform the contractual obligation. An actual breach, on the other hand, occurs where one fully refuses to perform his contractual obligation on the due date or performs it incompletely. Actual breach goes to the core of the contract; it is a breach of a condition or a fundamental term, which engenders termination of a contract.
For a contractual to be sustained in a claim of damages, the contract must be enforceable by law. The contract must be legal with clear terms and conditions and must consequently be complete in terms and conditions. The terms and conditions are vague. There will be no binding contract that can sustain a legal claim for damages for breach of contract. Similarly, where the breach is committed without justification, a suit will be sustained in court (Richard, 2009).
Effects of a Breach of Contract
If there is a breach of contract, and the same is proved, then the innocent party may take a number of actions, which will affect the outcome of the breached contract. Ideally, when breach of a contractual obligation has been proved, the innocent party usually entitled to damages. This is the primary remedy to a breach of the contract and compensates the innocent party for the injury suffered. The award of damages does not depend on the innocent party proving the injury suffered, however, where proof is absent, the damages awarded may only be nominal. Under common law, in the absence of a valid liquidated damages clause, the plaintiff is entitled to actual or compensatory damages.
Some states in the US, like Texas and New York, damages are split into two. These are direct and consequential damages. Direct damages occur naturally and usually from the defendant’s wrongful conduct. The breaching party is usually in a position to have predicted these compensations in case of breach. Significant damages on the other hand, effect naturally but not certainly from the wrongful conduct of the defendant. They refer to losses other than benefits provided by a contract, which are suffered by a contract, as a result of the other party’s breach. In New York, consequential damages are available for a breach of a contract if there is a confirmation in order to demonstrate that the parties signing the agreement rationally contemplated that the breaching party will be accountable for such damages. The issue of consequential damages was decided in the case of Bi-Economy market, Inc. v Harleysville Insurance co. of New York. [Slip op., no15 (NY, Feb 19, 2008)]. In this case, the plaintiffs operated a family-owned meat market, which they had insured with an insurance policy bought from the defendants. The meat market was engulfed by fire, which destroyed its food inventory, damaged the building and the equipment. The plaintiffs went to court seeking consequential damages from the defendants alleging delay in fixing the business premises, which led to loss of business by the plaintiffs. The plaintiffs alleged that Harleysville took over a year to pay their full claim for property damage and that the defendants never agreed, during that period to pay their full claim for lost business income (Robin, Joseph, Rachel, & Jared, 2008). By reason of this delay, the meat market was not able to reopen; moreover, this was a breach of contract and bad faith, which caused the collapse. The plaintiffs argued that the loss of business was foreseeable and contemplated by the parties when the policy was drawn. The court held for the claimants awarding the consequential damages.
Similarly, where breach of contract has been proved to exist, the innocent party may be entitled to terminate the performance of the contract. If a breach of contract exists, it is important to ascertain whether the breached duty is critical to the existence of the contract. This can be achieved by the way of identifying the terms, conditions and intermediate terms of the contract. Conditions in a contract form the root of every contractual obligation and it automatically results in the termination of the contract. Therefore, where the breached part forms the condition to the contract, the innocent party can be discharged from the performance of the contract. However, an intermediate term of a contract is a wide contractual term, the breach of which entitles the promise to terminate the performance of the contract only if the breach is sufficiently serious. Thus, a contract may still survive, where the breach of a contractual obligation is not detrimental to its survival. Lastly, a warranty is a contractual term whose breach does not entitle the innocent party to terminate the performance of the contract.
Defenses for Breach of Contract
After a party is found to have breached a contractual obligation, the accused party may raise a number of defenses for the breach. A party can assert defenses such as the non-existence of a contract for lack of an offer, acceptance, consideration, and the mutuality of obligations, lack of capacity due to insanity or age among others. The law of contract recognizes a number of defenses for a breach of contract (Denise, 2000).
This refers to a contract prepared by a party with a stronger bargaining power and signed by a weaker party who has no option of changing the terms and conditions of the contract before signing. Such contracts are usually given by the stringer party on the basis of ‘take-it or leave-it’ presenting an element of duress on the weaker party. However, such contracts are recognized by law as legally binding instruments and they are usually favored by big companies for being cheap and timely. Adhesion contracts do not give time for negotiations between the parties and thus the contract is fully prepared by the stronger party. However, regardless of their legality, adhesion contracts can be rendered void by courts on the basis of unconscionable terms and conditions. This is where the terms and conditions of the contract are so unfair that no person with a rational mind would sign the agreement. The unfair clause of the contract has to be so prejudicial from the start such that it shakes the soul of the court. These are terms that are usually considered to be against public policy and such a person may site such contracts as a defense of breach of contract.
This refers to a statement of fact made by a party to the contract to the other party to the contract, which induces that party into the contract, which is considerably less advantageous to that party. The misrepresentation must be a statement of fact, not an opinion or intention; it must be clear and must induce the party to a contract. This was discusses in the case of Higgins v Disney\ ABC International Television, Inc., [B200885]. In this case, the plaintiffs sued the network, producers and builders alleging misrepresentation where they had been promised a home by the defendants where they could live permanently and they were never told that they had no ownership interest or that they could be evicted. Since the plaintiffs alleged that the home had been built by the network and producers as a result of their plight. The court held that the agreement between the plaintiffs and the defendants could not be construed as extending ownership to non-owners living in the home. It further added that the promises made by the defendants were too vague and indefinite to constitute factual misrepresentation.
Fraud and Duress
Fraud refers to a situation where one party deliberately deceives another one as to the nature and consequence of a contract which results in injury to the deceived party. The courts will therefore render a contract void where the defendant proves that he or she was persuaded to enter into an agreement by fraudulent conduct. In the case of Locker v Warner Brothers, Inc. where the court of appeal held for the plaintiff stating that the defendant had entered into the contract fraudulently with no intention of honoring the agreement. The court stated that where a party holds a discretionary power affecting the rights of another party, it must exercise such power in good faith.
Duress can be used as a defense where it is established that there was substantial use of threats, physical abuse, mental torture and other excessive measures, by a party to the contract against another party to force that party to enter into that contract.