Contract Cancellation Due To Breach Of Contract

Contract Cancellation due to a Breach of Contract

Submitted by

Victoria Wyatt

Prepared for

Dr. Maverick

Acquisition Law

Spring 07

18 May 2007

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Overview

There are many ways to terminate the obligations of a contract. Most often, parties conclude their contract obligations by performing them. However, sometimes problems arise and parties cannot or will not complete their obligations under the contract. When this occurs, contracts may be terminated by reasons of rescission, breach, or impossibility of performance, (Bennett, 2007). The purpose of this paper is to discuss contract cancellations due to a breach of contract. Definition of a Contract A contract is a legally enforceable agreement between two or more parties which creates a duty for each party to do something (e.g., to provide goods at a certain price according to a specified schedule) or a duty not to do something (e.g., to divulge an employer's trade secrets or financial status to third parties), (Binder, 2001). If one party fails to act as promised, and the other party has fulfilled the duties under the contract, that party is entitled to legal relief. For example, Company A agrees to pay Company B $16,000 for computer equipment. Company B provides the equipment as required in the contract. Company A admits that the equipment meets the contract specifications but fails to pay within a timely manner. Company B can sue for damages. Generally, the non-breaching party's remedy for a breach of contract is money damages that will put the non-breaching party in the position that it would have had if the contract had been performed. However, under special circumstances, a court will order the breaching party to perform its contractual obligations, (Radcliff, 1999).

Contracts Formation While each state in the US has slightly different criteria as to how to create an enforceable agreement, all are essentially identical in their basic requirements. First, the parties must have intended to create a binding obligation - meaning, there must have been an offer and an acceptance. (In the previous scenario the offer was $16,000 for computer equipment; the acceptance was Company A's willingness to pay that amount). Second, the parties must have contracted to perform a legal act. Third, each party must have agreed either to give up something or transfer some benefit to the other party, which is called the "consideration," (in our scenario the $16,000). Fourth, the parties must have had the ability to enter a legal contract (meaning that they must have been of legal age and of a sober and sound mind). And lastly, the basic essential terms of the contract must be agreed upon between the parties. If one of these basic requirements is lacking, an agreement may be unenforceable or "void," (Binding Contracts, 2000). Advantages of Contracts Contracts offer many advantages. First, they give rise to a legally enforceable agreement which will be protected by the court. Second, they offer the advantages of providing certainty, predictability and economic efficiency. Third, properly drafted contracts, which accurately express the intention of the parties, will avoid the expense of a lengthy litigation and the loss of a company's or a person's reputation. And lastly, contracts can serve to deter a breach of contract providing remedies to enforce obligations voluntarily assumed, (Radcliff, 1999). For example, using the first scenario, if after agreeing to accept $16,000 for the computer equipment, Company B is offered considerably more money by Company C for the same equipment; Company B might be tempted to terminate its agreement with Company A. However, because Company A could sue for breach of contract and collect damages from Company B for any amount over $16,000 it had to pay another company for the equipment, Company B would most likely fulfill the terms of the contract. Breach of Contract A breach of contract is a legal concept in which a binding agreement or bargained-for exchange is not honored by one or more of the parties to the contract, (Breach, 2007). A breach of contract can occur when one party does not perform as he or she promised; when one party does something that makes it impossible for the other party to perform the duties under the contract; or when one party makes it clear that he or she does not intend to perform the contract duties, (Bennett, 2007). For example, if Company B terminated its agreement with Company A in order to make a larger profit, that would be a breach of contract. It would also be a breach of contract if Company B fulfilled Company C's order first and was late meeting the terms of its contract with Company A. Another example of a breach of contract would be if Company A was supposed to make a deposit and Company B was planning to use the deposit to purchase the computer equipment, and the check bounced. In that situation, Company A's breach would make it impossible for Company B to perform its contract obligations. As stated previously, if one party fails to act as promised, and the other party has fulfilled the duties under the contract, the non-breaching party is entitled to legal relief. However, not all breaches of contract end up in court. The law distinguishes between material and immaterial breaches of contract. A material breach of contract is any failure to perform that permits the other party to the contract to either compel performance, or collect damages because of the breach, (Breach, 2007). A material breach is a serious breach that essentially kills the heart of the contract, (Bennett, 2007). Using the first scenario, Company A's failure to pay the $16,000 within the time constraints of the contract is a material breach of contract. An immaterial breach of