Breach of contract lawsuits arise in a variety of business and professional settings, from disputes between investors or partners in a business, to disputes between businesses – professional and everyday service providers, contractors, developers, suppliers and more. Breach of contract lawsuits also frequently arise between a seller and purchaser of an asset, such as real estate, or shares in a business. A breach of contract occurs when one party fails to fulfill its promises according to the requirements of the agreement between the parties.
I. What is an Enforceable Contract?
A contract is legally binding and enforceable when there is an offer and acceptance, consideration, an intent to be bound, and mutual assent to the material terms of the agreement. In practical terms, a contract is formed when two or more parties agree – in writing or orally – to exchange services or goods, or to undertake a business venture. Parties cannot form a legally enforceable contract to undertake an illegal act.
For a contract to be binding there must be a “meeting of the minds”. Courts will look to whether the basic elements of offer and acceptance were satisfied in order to determine whether an enforceable agreement exists. Additionally, the agreement must be supported by some form of consideration. Consideration is something of value exchanged for a promise or service. Courts will generally refrain from enforcing a promise that is gratuitous, or in other words, something given or done free of charge. Importantly, an “agreement-to-agree”, which is preliminary and does not embody the material terms of a contract, will generally be unenforceable.
If, however, the parties have agreed to the material terms of a contract and have demonstrated that they intend to be bound, the Court will generally enforce it and may fill in missing terms. Courts may examine the parties’ actions and intent, prior dealings, and industry standards to impute reasonable terms where non-material details are omitted.
II. How is a Contract Interpreted by a Court or Arbitrator?
The threshold question in contract interpretation is whether a term is ambiguous. If a contract term is clear and unambiguous, New York courts will strictly enforce the contract based on its plain. Evidence outside of the four corners of the contract, known as parol evidence, will only be considered if the contract is ambiguous and does not represent a complete integration of the parties’ prior negotiations, as is often signified through an integration or merger clause.
When a contract is ambiguous, the Court will consider evidence of what the parties intended the ambiguous terms to mean. Courts will examine evidence such as drafts exchanged by the parties, communications between them, the course of dealing between the parties, and common definitions or industry-specific usage. One party’s subjective intent that was not communicated to the other party will not be considered. Ambiguous terms may be construed in favor of the non-drafting party. Provisions which were specifically negotiated will often be given greater weight if they conflict with boilerplate, which is otherwise enforceable. In the absence of a conflict, even boilerplate will generally be enforced as it is written regardless of whether a party read the entire contract or consulted counsel.
III. Must all Contracts be Written?
While Courts will enforce many types of oral contracts, certain agreements must be written under New York law in order to be valid and binding. The rule, known as the Statute of Frauds, codified under New York General Obligations Law Sec. 5-701. Contracts which must be in writing to be enforceable include:
A promise made in connection with marriage – i.e. a pre or post-nuptial agreement
Agreements that cannot be completed within a year
Any contract dealing with the purchase or sale of real property
A promise to pay the debt of another – i.e. a loan guaranty
IV. The Uniform Commercial Code and Sale of Goods
The Uniform Commercial Code, commonly referred to as the UCC governs the sale and lease of goods, secured transactions, and certain other commercial transactions and sales. The UCC provides its own rules for contract formation, enforcement, and the types of damages available to a litigant. While these rules generally align with New York case law governing services contracts and other transactions not governed by the UCC, there are important difference.
UCC Sec. 2-201 provides that a contract for the sale of goods for the price of $500 or more is not enforceable unless it is written. Certain exceptions apply, such as specially manufactured goods that are not suitable for sale to others. A writing is also not required where the party against whom the agreement is sought to be enforced admits that a contract was made. Finally, no writing is required for a contract of sale where payment is made, or where the buyer received and accepted the goods.
V. When is a Party in Breach of a Contract?
Under New York law, to assert a cause of action for breach of contract, a litigant must allege that: 1) there existed a valid, binding contract between the parties; 2) the party asserting the cause of action performed all of its obligations under the contract; 3) the other party was in breach or failed to perform; and 4) damages resulted. The statute of limitations for breach of contract in New York, provided in CPLR 213, is six years from the date of the alleged breach.
A party breaches a contract by failing to carry out an obligation. If the breach is material, it relieves the other party of its own obligations. A material breach is generally regarded as a breach that defeats the purpose of the contract or the failure to perform a substantial portion of the contract. If a party fails to perform an obligation, but the breach is not material, the other party may still be required to carry out its obligations. However, if the defective performance is not cured, it will entitle the non-breaching party to monetary damages whether or not the breach was material.
VI. What Kinds of Relief Will a Court or Arbitrator Award for Breach of Contract?
Compensatory Damages; Expectation and Reliance
When a litigant successfully sues for breach of contract, the aim of the law is to compensate the litigant for its loss and make it whole. In most cases, courts will only award monetary damages. Compensatory damages generally consist of expectation damages, which are intended to put the plaintiff in the position it would have been in had the contract not been breached. The measure of expectation damages is the difference between what was given and what was promised. If reasonably foreseeable, the court may award consequential damages which arise indirectly from the breach. Under New York law, each litigant must bear its own litigation costs unless the parties agree in a contract that the prevailing party may recover attorneys’ fees. Courts may also award reliance damages to compensate a litigant. Reliance damages compensate the injured party for expenditures made in preparation for or during the performance of a contract.
Restitution
In some cases, a plaintiff cannot be awarded expectation damages, for example, where a contract is unenforceable, but the plaintiff has conferred a benefit on the defendant. In this case, a plaintiff might be entitled to restitution damages. Restitution damages are awarded under a theory of liability known as “unjust enrichment” and may be measured by the value of work or materials supplied or the increase in the market price of an asset.
Equitable Remedies; Rescission
In rarer instances, a court may order rescission as a remedy. Rescission is an equitable remedy and is primarily awarded when a contract is fraudulently induced. A plaintiff will seek rescission when a defendant deliberately misrepresents or conceals vital information that would have caused the plaintiff not to enter into the contract. A plaintiff seeking rescission must act promptly or they are at risk of waiving the right to rescind by accepting the contract’s benefits.
Injunctive Relief
Often, a plaintiff will sue for a court order restraining the conduct of another party or prohibiting the sale or disposition of a valuable asset such as real estate. Injunctive relief is one of the most powerful remedies a court can award and is available in narrow circumstances. First, the plaintiff must demonstrate that its case has a likelihood of success on the merits. Second, the plaintiff must demonstrate that it will suffer irreparable harm if the defendant’s conduct is not restrained. Finally, the plaintiff must demonstrate that the balance of equities is in its favor, and that a Court’s injunction will not cause undue harm to the defendant. A cause of action for injunctive relief will most often be denied where the plaintiff can demonstrate irreparable harm that cannot be compensated with monetary damages. For example, the law treats real estate as unique and distinct, as is human life or a unique work of art.
Specific Performance
Finally, a court may order a party that is in breach or threatens to breach a Contract to perform his duties under the contract. This remedy is often sought in contracts for the purchase of real property. If a buyer and seller have negotiated and agreed to a contract of sale, and the purchaser fulfills all of its obligations, it can ask the court to order a reluctant seller to complete the sale.
VII. Limitations on Damages
A Court’s award of damages for an alleged breach of contract may be limited in certain circumstances. A litigant’s damages are generally limited to those that are ascertainable and foreseeable. Courts will rarely award punitive damages. Attorneys’ fees and costs are only awarded when a contract expressly allows it.
Liquidated Damages
In some cases, parties may agree in a contract to a provision for liquidated damages. A liquidated damages provision defines the amount of damages that will be awarded if a breach takes place, for example, a certain dollar amount for each day of delay in performing an obligation. A liquidated damages provision will be enforceable if the court finds that the provision is not punitive and was meant to estimate damages that would otherwise be difficult to quantify. However, when a party is allowed to recover liquidated damages, it is prohibited from also recovering its actual damages.
Mitigation
The injured party has a duty to mitigate damages. Under the doctrine of mitigation, a person or business who has suffered an injury or loss must take reasonable action, where possible, to avoid additional injury or loss.
Foreseeability and Speculativeness
Damages that the parties had no reason to foresee when they entered into the contract are generally not recoverable by an injured party. A loss is foreseeable when it follows from the breach in the ordinary course of events or as a result of special circumstances, beyond the ordinary course of events, that the party in breach knew or had reason to know. The doctrine of foreseeability is especially important when a plaintiff seeks to recover so-called “consequential” or “loss of profit” damages. Even when a contract does not expressly prohibit the recovery of such damages, New York law makes it difficult to do so. Recent cases, beginning with Kenford Co. v. County of Erie have held that consequential damages may only be recovered if they were within the contemplation of the parties at the time of contracting, the damages were actually caused by the breach, and the amount of damages can be shown with reasonable certainty. These requirements, particularly lack of causation and certainty, may be applied to limit all types of damages.
VIII. Common Defenses in Breach of Contract Cases
The most common defenses in breach of contract cases include many of the principles discussed already: a lack of the basic requirements of contract formation (offer and acceptance, consideration, mutual assent, etc.), failure to reduce the agreement to writing where required by the Statute of Frauds or UCC, illegality, or a lack of damages or indefiniteness of damages.
Other common defenses include mistake, lack of capacity, fraudulent inducement, unconscionability duress, impossibility and waiver.
Mistake
A contract requires a “meeting of the minds” on all essential terms. If the parties made a mistake regarding a basic assumption on which the contract is based (for example, the authenticity of an item of sale), a Court may order rescission or refrain from enforcement.
Lack of Capacity
Both parties must be legally capable of entering into a contract and agreeing to its terms. If one party was not legally able to agree to the contract for reasons such as mental incapacity or lack of legal age, it may not be enforceable.
Fraudulent Inducement
Both parties must agree to the essential terms of the contract. If one party was deceived regarding an essential term of the contract, that party can argue that she never intended to be bound by the contract had she known the true facts.
Unconscionability
A contract may not be enforced if one party was unfairly pressured into agreeing to its terms or if the terms are grossly unfair to one party. In such a case, one party may argue that the contract is unconscionable and that the other party took advantage of greater bargaining power to attempt to assert a grossly unfair contract term.
Duress
Both parties must willingly agree to enter into a contract. If one party entered into a contract under threat of physical harm, or in some cases, under threat of unlawful economic duress, the contract may not be enforceable.
Impossibility
Circumstances may make carrying out obligations under a contract impossible. The doctrine of impossibility excuses a party’s contract performance when an unforeseen and unanticipated event makes performance objectively impossible. However, New York courts apply the doctrine narrowly and are hesitant to do so when the difficulties that make performance impossible could have been foreseen when the parties entered into the contract.
Waiver
In some cases, a party may have signed an express waiver giving up the right to sue. Express written waivers will generally be enforced as they are contracts themselves. More complicated are implied waivers, where one party argues that the other knowingly relinquished a right and therefore cannot later assert that right. New York courts scrutinize implied waivers carefully and will only apply the doctrine when the party asserting the waiver has met their burden of proving that the other party had knowledge of the right and intentionally relinquished the right.
IX. Final Considerations
New York is a global capital for business and financial transactions. Accordingly, New York has developed a sophisticated but complex body of law governing the interpretation and enforcement of contracts. Before entering into a contract of significant value, it is vitally important to consult an attorney who is familiar with the nuances of the law. Doing so can save you incalculable sums of money down the road by mitigating the threat of unnecessary litigation caused by ambiguous and poorly drafted contracts. If and when it is necessary to sue for breach of contract, or to defend such a lawsuit, it is equally important to have a veteran commercial litigator by your side to maximize the odds of a successful outcome.
About Author
Marwan Faruq Sehwail graduated from the Northwestern University School of Law in 2010. Marwan joined the firm in 2015 and became a partner in 2023. Read more.
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