4 Critical “Breach of Contract” Killers

By Sarita Smithee

The most important part of a breach of contract suit is the contract itself.  The first thing a court is going to look at when it judges your claim is what the contract says.  For that reason, both drafting the contract and drafting the breach of contract lawsuit regarding the contract language are critically important to a breach of contract claim’s success.  There are four critical issues that can kill a breach of contract claim, and some simple things you can do to keep them from complicating your lawsuit.

Misrepresentations or Non-Disclosures

If fraud or misrepresentation occurs during the negotiation process, any resulting contract may be unenforceable. The policy behind this is to encourage honesty and good-faith bargaining. Misrepresentations commonly occur when a party says something false (such as telling a general contractor that all your employees have been approved to work on a project, but the majority of them are not eligible) or, in some other way, concealing or misrepresenting a state of affairs (such saying that you have never been disbarred from doing federal contracts by changing your company’s name).  A nondisclosure is essentially misrepresentation through silence—when someone neglects to disclose an important fact he had a duty to disclose about the deal.  Standard protections against misrepresentation and nondisclosure claims consist of including specific contract terms to address prior representations; however, these must be extremely carefully drafted to have any legal effect.

Violations of Public Policy

Contracts can be found unenforceable on grounds of public policy not only to protect one of the parties involved, but also because what the contract represents could pose a threat to society as a whole.  For example, a court will never enforce a contract promoting something already against state or federal law or an agreement that offends the “public sensibilities.”  Any contract that would permit a party to perform a service that he is not statutorily licensed to do would also be unenforceable.  If a court does find the contract unenforceable, and the contract permits it, the court may choose just to rewrite the unenforceable term.

Impossibility or Impracticability

In some cases, a contract is deemed unenforceable because it would be impossible or impracticable to carry out its terms.  These are usually cases when some unforeseen event, such as a natural disaster, occurs before the contract is carried out and makes performing the contract much more difficult or expensive than the parties originally anticipated.  Standard protections against an impossibility claim involve removing the “unforeseen” nature of the claim and assigning that risk to the other party to the contract.  For example, many contracts specifically state whether acts of God or interference by third parties are a defense for non-performance.

Failure to Include Material Terms

If the contract doesn’t contain the terms you’re suing on, the court can’t write them in for you.   The best way to protect yourself against breaches of contract and to put yourself in the best position if you ever do have to sue is to have solid contract terms.  In a standard business contract, the following terms should be clearly spelled out:

• Payment Obligations – Specify who pays whom, when the payments must be made, and the conditions for making payments.  Money is almost always a contentious issue, so this part should be very detailed, and it should include the specific circumstances that constitute a breach of the contract. If you’re going to pay in installments or only when work is completed to your satisfaction, say so and list dates, times, and requirements.  Include the method of payment as well.  While some people might be okay with a business check or business charge card, others might want a cashier’s check or a wire transfer.
• What happens when a breach occurs?  When certain breaches occur, the other party has the option to terminate the contract without being on the hook legally for his own breach.  In other situations, if the breach is not so serious, the other party can recover his damages from the breach, but he can’t terminate the contract. The court can sort out these circumstances if a lawsuit ensues, but it makes more sense to set these out in the contract so that the parties know the consequences of their behavior ahead of time.  For example, serious breaches that give the other party the right to terminate the contract might be missing a certain number of payments or failing to make a critical delivery.

• Anticipation of changed circumstances.  The contract should assign the risk of any anticipated circumstances that might affect the contract.  These might include the destruction of the property that is the subject of the contract, bankruptcy of a party, interference by third parties, and even acts of God.  The contract should state who bears the loss caused by these circumstances in the event they occur, and whether the occurrence of these excuses performance of the contract.

• Resolving disputes.  If you want to receive written notice of a breach and have time to correct it before the other party files a lawsuit, specify those terms in the contract.  Or, if you want to handle any disputes through arbitration or mediation instead of going to court, specify those terms as well.  The contract should also state what state’s laws apply, and what county any lawsuit must be filed in should a dispute arise.

Sarita Smithee is an associate with The Beckham Group in Dallas, Texas.  The Beckham Group has extensive experience with, and specializes in, business litigation both as a Plaintiff and a Defendant.  The firm drafts and prosecutes/defends civil cases involving numerous types of contracts, and has just about seen it all.

Vince Fudzie– the blogger’s Reality Bite:  This is some basic contract information but it is imperative that you understand it, whether you are a subcontractor or general contractor. After all, we are in the contracting business, which means there will be many contracts you will have to enter into if you are successful.

The issues that Sarita brings up about misrepresentation and non-disclosure can be extremely detrimental to subcontractors as well as adversely affecting general contractors.  Recently, we had a subcontractor with a $1.5 million contract who made significant misrepresentation that allowed us to terminate his subcontract and legally not pay him for work that he thought he had performed.

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