Updated: Sep 28, 2022
What Does A Breach Of Contract Mean For Your Business in Los Angeles, California?
If someone breaches a contract or accuses you of violating the terms of an agreement, a Los Angeles Business Attorney is ready to assess your situation and take strong action to preserve your rights.
Contractual relationships are developed every day with business partners and associates, clients, consumers, vendors, service providers, product manufacturers and distributors, and a plethora of other people and businesses. Most, if not all, organizations rely significantly on a critical basic building block: a contract. When a breach of contract occurs in this building block, the entire corporate structure suffers, resulting in major financial consequences.
The formal elements of a contract have been established in California for a long time. California Civil Code 1550 was passed by the State Legislature in 1872. The following are the basic parts of a contract, according to Section 1550:
Those who are legally able to enter into a contract (legal capacity)
The parties have agreed to form a contract (there is an offer and an acceptance of that offer)
There is a "lawful object" to the contract (a legal purpose)
There is enough thought put into it.
Capacity to Contract Means
Parties must have the "legal ability" to engage in a contractual agreement in order to form a legitimate and enforceable contract. The idea of "capacity" refers to whether or not a person has the ability to comprehend and accept the conditions of a contract, as well as whether or not the person is legally permitted to do so. In general, children, persons of "unsound mind," and organizations that are not in "good standing" will be judged to lack legal capacity for contract formation purposes. Without the help of a Business Attorney in Los Angeles, matters surrounding legal capacity can get complicated.
Based on California Civil Code 1556, it is well-established that children are not "capable of contracting." Anyone under the age of 18 is considered a minor. A minor lacks the legal competence to enter into a contract and be bound by it. This regulation is justified by the fact that minors are incapable of comprehending contractual agreements, as well as their rights and obligations under those conditions.
Contracts involving minors are considered "voidable." Even if a juvenile's parent or guardian signs it, the contract isn't binding on the minor. This is a "one-way regulation" in terms of the ability to enforce contracts with minors. In other words, a minor retains the perfect right to sue the other party and enforce the contract's terms.
There are only a few exceptions to this rule, and the majority of them are found in California Family Code Sections 6700 et seq. Contracts with minors, for example, are not voidable simply because one of the parties was a minor at the time of the contract's formation:
If the court approves the deal with a juvenile. California Family Code 6751
If the contract's goal is to pay for things that are required to support the minor or the minor's family. California Family Code 6712.
People who have an "unsound mind"
Individuals of "unsound mind," including minors, are unable to enter into a binding contract under California Civil Code 1556. The basis for this law is that people who are mentally or intellectually disabled are unable to comprehend contractual words, rights, or duties.
The California Civil Code 39(b) establishes a rebuttable presumption that an individual is of "unsound mind" if that individual is unable to:
Organize your financial resources
Defend yourself against fraud.
Refuse to be swayed by outside forces.
However, a person's participation in a few "isolated occurrences" of lack of foresight or reckless behavior isn't enough to trigger the "unsound mind" inference. According to California Civil Code 38, someone who is "completely without understanding" does not have the legal authority to engage in a contract. Nonetheless, under section 39, the person "without understanding" is nevertheless accountable for paying for the "fair value" of those things provided for this person's or his or her family's maintenance.
Corporations That are Not in "Good Standing"
When a corporation's status is suspended, it loses its ability to enter into legally binding and enforceable contracts. If a corporation fails to pay taxes owed to the California Franchise Tax Board, its "corporate powers, rights, and privileges" may be suspended [if the company is based in California] or even fully forfeited [if the company is based elsewhere]. 23301. Revenue and Taxation Code of California Any contract entered into by a company during the suspension or forfeiture of its rights, powers, or privileges is "voidable" at the request of the other party to the contract. 23304.1 of the California Revenue and Taxation Code (a).
The conditions of a contract must be agreed upon by both parties. There must be both an "offer" and an "acceptance" of that offer.
The following are the components of a good "offer":
The party making the offer (the "offeror") must notify the "offeree") of the offeror's readiness to enter into a contract under specific conditions.
Specific, distinct, and explicit terms must be included in the proposed contract. The condition of "mutual consent" for the formation of an enforceable contract is well-established. In other words, the contracting parties must agree on the same item, and the agreed-upon "thing" must have the same meaning for all parties.
The offeree may have reasonably concluded, based on the provided facts, that accepting the offer with the proposed terms would result in a contract.
In California, a party's "acceptance" of an offer must meet the following criteria in order for the contract to be enforceable:
The individual who receives an offer must agree to all of the proposed offer's terms. All suggested terms must be accepted precisely, exactly, and unequivocally in order for an acceptance to be acceptable.
It is not a genuine "acceptance" if the offeree accepted only a few of the offer's terms or if the offeree requested new or additional terms. The original offer is terminated, and a "counteroffer" is created as a result of such a "qualified acceptance."
The offeree's agreement to accept all of the contract's proposed terms must be notified to the offeror.
The offeror has the legal right to revoke an offer at any moment before it is accepted. To put it another way, the person who made the offer has the right to say, "I've changed my mind, and the offer is no longer valid." An offer, on the other hand, can only be canceled before it is accepted. If the offeror accepts the conditions of the offer, an enforceable contract is formed, and the offeror is obligated by the contract's terms. It is too late to revoke the offer in these instances.
This act automatically terminates the offer if the person that received the offer [offeree] communicates that the offer is rejected. In other words, an offer that has been refused cannot be accepted at a later date.
A legal purpose for a contract is required
Another crucial feature of any contract is that it must have a "lawful object," which is another way of stating "legal purpose." It indicates that the subject matter of a contract must be legal in order for it to be enforceable. A contract entered into to engage in criminal behavior (for example, fraudulent activities) will not be enforceable in court.
Mutual "consideration" is one of the most important aspects of a contract. A contract cannot be enforced if there is no consideration. To put it another way, each party to a contract must give up something valuable in return for something else valuable.
A valid consideration can be presented in a variety of ways, including:
Money (cash, credit card payments, bank transfers, etc.)
Personal property (collectibles, automobiles, motorcycles, boats, furniture, etc.)
Real estate (residential and commercial real estate)
Services (e.g., car repair or gardening service)
A commitment to refrain from doing something that a party has the legal authority to do.
Contracting parties have a lot of flexibility when it comes to negotiating. Although a reciprocal consideration does not have to involve an exact or equal exchange of value, it must be of "reasonable value."
The courts will recognize and enforce a person's willingness to sell an asset for less than its market value. Courts, on the other hand, are wary of wholly "one-sided" agreements. Consideration of such insignificant value that it has no value at all is unlikely to result in a legally enforceable contract.
A lack of attention can occur in a variety of situations, in addition to nominal consideration:
transfers that are both gratuitous and voluntary (gifts)
established legal responsibilities
moral obligation and past performance
promises that aren't fulfilled
For any confusion on the matter, you can consult a Los Angeles Business Lawyer for more of specific details.
Different Types of Contracts
All contracts are divided into two categories: express contracts and implied contracts. The parties' actual words, whether spoken or written, indicate the existence of express contracts. As a result, both oral and written contracts might be classified as explicit contracts.
Implied contracts are formed when the parties' conduct and activities are evaluated in the context of the surrounding circumstances and do not entail any vocal or written agreements.
Oral contracts in California can be legally legitimate and enforceable. Oral contracts must meet all of the above-mentioned elements, including legal ability, offer and acceptance, a legal purpose, and consideration, in order to be enforceable.
Parties can, in theory, enter into oral contracts to engage in a variety of commercial and business transactions. Verbal agreements, in actuality, are laden with dangers and complications. The conditions of the agreement will never become a "problem" if everything goes well and the parties do not have any conflicts or arguments.
However, without a formal agreement, it is extremely difficult to show the terms of an oral contract, or even that the oral contract occurred in the first place, in the event of a dispute between the parties.
As a result, the ideal practice is to always memorialize the terms of an agreement in writing and avoid "handshake deals" as much as possible, particularly in business partnerships and agreements involving large sums of money as well as valuable items and services. Furthermore, as explained below, some agreements are subject to the "statute of frauds" and are not enforceable unless they are in writing.
The doctrine of the "statute of frauds" is a specific regulation that requires specified contracts to be in writing in order to be enforceable. Even if you're represented by a California Business Law Attorney who specializes in contractual issues, it's difficult to prove what the parties agreed on without written documentation. The purpose of the statute of frauds rule is to avoid fraud and disagreements over "who said what" about the terms of the contract, which frequently occur in disputes concerning oral transactions.
The statute of fraud is codified in California Civil Code 1624. The following forms of contracts must be in writing, according to § 1624(a):
A contract that cannot be completed within one year due to its own stipulations.
Miscarriage, or a promise to pay for someone else's default, debt, or other financial commitment.
A contract concerning real estate in which the property will be:
Leased for a period of more than a year
For a commission or compensation, another person (such as a broker or an agent) is hired or authorized to do the following:
Sell real estate
Buy real estate
Lease real estate for a longer amount of time than a year.
A contract that, by its provisions, cannot be fulfilled during the life of the promisor.
A contract in which a buyer of real estate promises to repay debts backed by a deed of trust or a mortgage.
Any Business Law Attorney in California will tell you that a contract under which a person in the business of extending credit or lending money agrees to extend credit or lend money in excess of $100,000. When credit is secured, or money is borrowed "not primarily" for household, family, or personal purposes, this rule applies.
The following contracts must also be in writing, according to the California Commercial Code:
A contract for the sale of personal property with a value greater than $5,000. 1206 of the California Commercial Code.
A sale agreement in which the value of the products is equal to or greater than $500.
The following elements must be present in an enforceable and legal written contract:
A contract's written agreement or a contract's written "note or memorandum."
The writing must be signed by "the party to be charged" or the agent of that party.
The agreement's subject matter and material terms should be defined in writing.
Exceptions Applicable to the Statute of Frauds
There are a few exceptions to the Frauds Statute. Despite the lack of a formal contract, many agreements are considered legitimate and enforceable under the following exceptions:
Partial Performance. Circumstances in which a party has previously fulfilled (partially or entirely) its duties under an oral contract.
Estoppel by Promissory Obligation. A clear and explicit promise, predictable and reasonable reliance by the party that received the promise, and a serious injury or loss sustained as a result of the reliance on the promise must all be met.
Order of Priority. an oral agreement for the production of unique items in response to a specific order
Confirmation in Writing. A situation in which a written agreement between two merchants is confirmed
Acceptance of the Oral Contract's Validity. It occurs when a party accused of breaking the terms of an agreement concedes that an oral contract existed.
Contracts that must be written in addition to those listed above
These two sorts of contracts must be in writing in order to be enforceable, even though they are not subject to the "statute of frauds" doctrine:
A premarital agreement (sometimes known as a "prenuptial agreement") is required to be written as stated in California Family Code 1611.
A mortgage agreement (a contract in which the borrower agrees to waive his or her claim to the property if the loan is not paid) must be in writing.
Contracts that are implied
Implied contracts, often known as "implied-in-fact contracts," are agreements made without the use of written or spoken language. The actions and behavior of the parties produce implied contracts. Implied contracts have the same legal standing as written or oral contracts. The parties' connection, behavior, and actions are analyzed in light of the general surrounding circumstances when determining whether or not they constituted an implied contract. In general, when the following conditions are met, an implied-in-fact contract is formed:
The parties' conduct is centered on a "intend to promise."
Both parties are aware or should be aware that their actions will be construed as an agreement to form a contract.
Legal Elements of a Breach of Contract Claim
A plaintiff must prove the following in order to win a breach of contract claim:
That a legally binding agreement was reached.
The plaintiff was harmed or damaged as a result of the defendant's breach.
Plaintiff's performance or excused non-performance:
All essential terms of the contract that the plaintiff was required to perform were performed, or substantially performed, by the plaintiff.
The plaintiff was released from the responsibility to fulfill the contract's provisions.
The defendant was in violation of the contract.
If you are in a very specific case, it will be safer to inquire a Los Angeles Business Lawyers for a more extensive explanation that's derived from your actual case.
Material Breach vs. Immaterial Breach
The term "material breach of contract" refers to a breach that is so serious, major, and substantial that the non-breaching party does not get any of the contract's benefits.
When one contractual component or term is materially breached, the laws consider the entire contract to be materially breached. The non-breaching party is relieved of contractual duties owing to the breaching party in the event of a significant breach of contract.
In the following situations, there is an immaterial breach of contract:
When the breaching party fulfilled nearly all, but not entirely, of the contracting party's requirements
When the violating party fulfilled all of the contractual obligations but did so in a manner that differed significantly from what was specified in the contract.
While a party can still litigate for an immaterial breach of contract, the damages that can be recovered will be less than in the circumstances involving major breaches.
Breach of Implied Covenant of Good Faith and Fair Dealing
The implied covenant of good faith and fair dealing extends beyond the "four corners" of a commercial agreement to generate specific rights that aren't clearly stated in the contract. To put it another way, a party does not have to establish that the other party violated an express contractual term or condition in order to get a remedy under this principle. In order to satisfy their contractual responsibilities, the parties must act in an honest, fair, reasonable, and good faith manner with one another.
The following must be shown when arguing a breach of the implicit promise of good faith and fair dealing:
The plaintiff and defendant have a legally binding contract.
Either the plaintiff performed all (or almost all) of the plaintiff's contractual obligations, or the plaintiff was excused from completing the contractual duties;
The defendant interfered with the plaintiff's right to receive the benefits promised in the contract by acting unfairly and in bad faith.
The plaintiff was harmed as a result of the defendant's actions.
The following are some examples of breaches of the implicit covenant of good faith and fair dealing:
acting in a dishonest or deceptive manner;
performing in an inaccurate or faulty manner on purpose;
acting with indifference;
not putting up a sufficient effort to perform;
Restitution for Unjust Enrichment
Unjust enrichment occurs when one party gains a benefit from another party and keeps it unjustly at the expense of the other. In essence, the idea of unjust enrichment holds that it is just unfair for a person who has gained a benefit to keep it in certain situations.
The person who has been unjustly profited shall repay the benefit or its equivalent as a remedy. A "benefit" can be given not only when one party contributes something of value to another (e.g., money, property, or service) but also when one party avoids incurring an expense or suffering a loss. Typically, the offended person must show that the benefit was supplied and unfairly kept as a result of a request, a mistake, coercion, or fraud. When there is an express contract between two parties, the aggrieved party may claim unjust enrichment and argue that the contract is void or unenforceable.
The courts in California are "split" on whether or not "unjust enrichment" is a viable cause of action. Unjust enrichment has been ruled to be only demand for restitution in some situations, rather than a separate and distinct cause of action. Unjust enrichment is an independent "quasi-contract" claim in which a plaintiff seeks reimbursement from a defendant, according to other courts.
Overall, the terms "unjust enrichment" and "restitution" are considered synonyms, and they are commonly used interchangeably.
Estoppel by Promissory Obligation
The promissory estoppel theory (sometimes known as "detrimental reliance") essentially entails the following: When a promisor makes a promise that is reasonably expected to encourage a third party to modify its position by acting or refraining from acting on a legal right, and the third party does so in adverse reliance on the promise, the promise must be enforced to avoid an injustice. This principle renders a promise enforceable and binding even if there is no consideration if all of the requirements are met.
The promise's reliance must be predictable and fair. The fact that a plaintiff relied on a promisor's declaration due to innocent or poor reasoning does not demonstrate "reasonable reliance" if no reasonable person would have done so.
It also does not qualify as "reasonable reliance" if a plaintiff's behavior was utterly irrational in view of the plaintiff's level of intelligence and accessible facts.
As a result of that reliance, the party that received the promise (and depended on it) must suffer a loss or injury.
Defenses to Contract Breach Claims
A California Business Lawyer assists not only people who have been injured by a breach of contract but also those who need to be defended against such claims. There are a number of defenses that, if demonstrated, can render a breach of contract claim null and void. Some of the most prevalent defenses are as follows:
Unilateral Factual Error
When a defendant shows the following, the "unilateral mistake of fact" defense applies: the plaintiff had information that the defendant had a wrong belief, and the plaintiff unfairly used that incorrect belief to take advantage of the defendant. A material fact, not an inconsequential matter, must be the subject of the defendant's incorrect belief.
The essence of the "bilateral mistake" defense is a defendant's argument that the parties never entered into a valid contract in the first place because both parties had a mistaken belief about a material issue, and the defendant would not have entered into the contract with the plaintiff if the defendant had known about the mistake.
A defendant can potentially invalidate a contract by claiming that the defendant gave his or her agreement to enter into the deal under duress. The defendant must prove the following three criteria in particular:
To compel the defendant to agree to enter into a contract, the plaintiff used a wrongful threat or act.
The defendant was so intimidated or scared by the plaintiff's improper threat or deed that he had no choice but to capitulate and agree to enter into the contract.
The defendant would not have consented to engage in the contract with the plaintiff if the plaintiff had not made a false threat or act.
This affirmative defense allows a defendant to argue that no legitimate contract was ever formed because a plaintiff used undue influence and unjust pressure to get the defendant to sign a contract. To win, the defendant must meet the following two criteria:
To persuade or induce the defendant to engage in a contract
The plaintiff employed one (or more) of the following factors:
the defendant's anguish;
the defendant's needs;
the defendant's mental incapacity;
the plaintiff and defendant have a particular relationship;
The defendant would not have consented to enter into the deal with the plaintiff if not for the pressure.
The defendant has the following choices if a plaintiff uses fraudulent or deceptive representations to entice a defendant to enter into a contractual relationship:
Cancel the agreement;
Confirm the contract, keep the benefits received as a result of the plaintiff's deception, and file a legal action to recover damages suffered as a consequence of the plaintiff's fraud;
In a breach of contract lawsuit, use the plaintiff's deception as a partial or whole affirmative defense.
Waiver of charges
In a breach of a contract dispute, a defendant may successfully argue that the plaintiff "waived the breach" provided the following conditions are met:
The plaintiff was aware of the defendant's contract violation - The plaintiff continued to accept the defendant's performance. To put it another way, the plaintiff's acts were inconsistent with a purpose to enforce the contract's rights; therefore, it was reasonable to conclude that these rights had been waived.
Novation - The essence of a defendant's "novation" defense is that the original contract is no longer enforceable since the parties replaced it with a wholly new contract. The defendant must show that all parties agreed to the following:
The initial contract has been canceled.
That the previous contract will be replaced by a new and different contract.
Statute of Limitations
A defendant must show that a plaintiff's case was filed late and hence is barred by the statute of limitations in order to win. In California, there are two different statutes of limitations for oral and written contracts:
Written contracts are for a period of four (4) years.
Oral contracts are for a period of two (2) years.
The doctrine of "agreement and satisfaction" states that one party will accept a lesser consideration than what was originally bargained for. The terms "accord" and "satisfaction" are used interchangeably in this notion, with "accord" referring to an agreement and "satisfaction" referring to performance in accordance with the new agreement. The defendant asserts this defense and claims that there was no breach of contract because the defendant's obligation to the plaintiff has already been fulfilled. It essentially amounts to a settlement agreement. Consider one of our prescreened California Lawyers in your California Attorney Search.
Damages for Contract Breach in California
The nature of damages for breach of contract is defined as follows in the California Code of Civil Procedure 3300: The amount of damages is designed to compensate the aggrieved party for (1) the loss that was "proximately caused" by the breach or (2) the loss that is expected to be caused by the breach in the ordinary course of things. In other words, the basic goal of breach of contract damages, according to statutory law and California court rulings, is to put the plaintiff in the same situation that he or she would have been in if the breach of contract had not occurred.
In general, the plaintiff's damages are calculated to be equivalent to the advantage that the plaintiff received under the contract. According to the California Code of Civil Procedure 3358, a plaintiff's damages for a breach of contract cannot exceed the amount (or benefit) the plaintiff would have gotten if both parties had fully performed the contract.
Damages awarded in breach of contract situations must also be reasonable, according to the California Code of Civil Procedure 3359. Justice requires that recoverable damages be limited to fair damages in cases where contractual obligations provide rights to acquire "grossly oppressive" or "unconscionable" damages.
Finally, there is no way to collect speculative damages. Recoverable damages in breach of contract cases must be clearly ascertainable in terms of their origin and character, according to the California Code of Civil Procedure 3301.
General damages, sometimes known as "direct damages," are a natural and expected result of a contract breach. The emergence of general damages is seen as a foreseen consequence of a breach, which the parties contemplated when they entered into their contractual relationship.
Special damages, sometimes known as "consequential damages" or "incidental damages," are not a natural or anticipated outcome of a contract breach. The ability to recover these types of damages is contingent on the facts of the case. Particular damages can only be recovered if the plaintiff can show that the defendant knew or should have known of the special circumstances that justified the collection of special damages at the time the parties entered into the contract.
According to California law, contracts can include conditions that provide for liquidated damages in the event of a breach. A liquidated damages clause specifies a specified monetary sum that the party who breaches the contract shall pay. Liquidated damages provisions are completely enforceable unless the breaching party can show that they are unreasonable (unusually severe or unduly unfair).
A fair remedy is specific performance. The subject matter of a contract may be unique in some situations, or the real amount of damages may be difficult to determine. In such situations, monetary damages alone will not be enough to put the plaintiff in the same situation that he or she would have been in if the breach had not occurred. The remedy is to order specific performance, which means that the defendant must fulfill all of his or her contractual obligations.
In breach of contract cases, there are no punitive damages.
Punitive damages (sometimes known as "exemplary damages") are not recoverable in California in breach of contract actions. Even if the person who broke the contract behaved with malice, oppression, or fraud, this rule applies. The only time this rule does not apply is when the breach is caused by an intentional tort.
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