Modification of Common Law Contract Interpretation in Breach of Contract Actions by Contractual Default Provisions
June 5, 2019
By: Spencer W. Tanner
In a typical breach of contract action, the party asserting breach must prove: 1) the existence of a contract, 2) the existence and nature of the breaching party’s breach, and 3) damages. While seemingly straight-forward, proving a breach can be a tough burden to bear. Further, not every breach entitles the non-breaching party to a remedy. As set forth below, contractual default provisions can help courts accurately interpret the specified “events” that give rise to a breach of contract as well as the type and consequence of the breaches. However, parties should be careful in defining events of default and their consequences.
Breach of Contract Under Common Law
A “contract” is a promise or a set of promises for which the law recognizes a duty of performance and gives a remedy for breach of that duty to perform.[1] A “breach of contract” is a violation of a contractual obligation by failing to perform one’s own promise by either repudiating it or interfering with another party’s performance.[2] Under common law, every breach gives rise to a claim for damages.[3] However, not every breach discharges the non-breaching party’s continued or future obligations under the contract.[4] A party is not automatically excused from the future performance of contract obligations every time the other party commits a breach; if a breach is relatively minor and non-essential, the non-breaching party is still bound by the contract and may not abandon his duty to perform. However, the nonbreaching party is entitled to damages caused by an immaterial breach, although such damages may be nominal in amount.[5]
A non-breaching party is only discharged from further performance, and is entitled to substantial damages, when there is a material breach.[6] A “material breach” is breach of contract that is significant enough to permit the aggrieved party to elect to treat the breach as total (rather than partial), thus excusing that party from further performance and affording it the right to sue for damages.[7] “A material breach is one that goes to the heart of the contract, and whether a breach is material is generally a question of fact to be decided by the trier of fact.”[8]
In determining whether a breach is material, courts will look to the terms of the contract first. If the contract itself provides the standard defining a material breach, then that contractual term will bind the parties.[9] However, if the contract does not define “material breach,” courts will follow the common law standard for materiality, which looks at the following factors:
(a) the extent to which the injured party is deprived of a benefit that he reasonably expected;
(b) the extent to which the injured party can be adequately compensated for the benefit of which he is deprived;
(c) the extent to which the breaching party will suffer forfeiture;[10]
(d) the likelihood that the breaching party will cure his breach, taking account of all the circumstances including any reasonable assurances;
(e) the extent to which the behavior of the breaching party comports with standards of good faith and fair dealing.[11]
The more extreme or severe these factors are, the more likely a court will find a breach to be material.
Contractual Default Provisions
A “default” is the omission or failure to perform a legal or contractual duty.[12] A default is not a stand-alone concept but is a specific form of breach defined by a contract. Most written contracts contain default provisions delineating what “events” constitute a default of the contract, as well as the consequence of an event of default. This is called a “default clause.”[13] While “breach” and “default” are typically synonymous terms, the consequences of the breach may differ significantly from a breach triggering an event of default. “Parties to a contract are free to negotiate and agree upon an alternate, remedial clause,”[14] such as a default provision, and a default provision can trigger consequences as severe as immediate cancellation or termination of the contract.[15]
Effect of Default Provisions
Without a default provision, the nonbreaching party is normally entitled to prove and recover actual damages for such a breach, amongst other remedies.[16] Materiality will be a key issue in determining the extent of the remedy available to the nonbreaching party. However, “[w]here the parties to a contract have agreed to the consequences of a breach, the agreement will control provided the remedy is mutual, unequivocal, and reasonable.”[17] Courts will normally uphold default clauses if they are clear and unambiguous and demonstrate the parties’ intent,[18] and the concept of materiality is irrelevant.[19] Therefore, when drafting written contracts, parties should take care in defining events of default and the consequences of those defaults. In addition to providing a remedy, a default clause may also limit and, in some cases, restrict a non-defaulting parties’ remedy to the remedies expressly contained in the contract.[20]
Author: Spencer W. Tanner, Associate, Commercial Litigation Practice Group
© May 2019 Jackson Kelly PLLC
[1] Restatement (Second) of Contracts § 1 (1981).
[2] Black's Law Dictionary (10th ed. 2014), breach of contract; see also Restatement (Second) of Contracts § 236 Cmt. a (1979) (“A breach may be one by non-performance, or by repudiation, or by both.”).
[3] Winmar, Inc. v. Al Jazeera Intern., 741 F.Supp.2d 165, 179 (D.D.C. 2010).
[4] See Bahiman v. 3407–9–11 29th St., N.W., Inc., 1990 WL 108980, at *4–5 (D.D.C. July 19, 1990) (“if a party's breach of a contract is immaterial, the aggrieved party may not cancel the contract and may only sue to collect damages resulting from the partial breach.”)
[5] 23 Williston on Contracts § 63:3 (4th ed.) (citations omitted).
[6] Id.; for e.g., see True Railroad Assoc., L.P. v. Ames True Temper, Inc., 2016 WL 7212546 (PA. 2016).
[7] See fn. 1.
[8] Steve Silveus Ins., Inc. v. Goshert, 873 N.E.2d 165, 175 (Ind. Ct. App. 2007).
[9] State v. Int’l Bus. Machines Corp., 51 N.E.3d 150 (Ind. 2016), subsequent determination, 2016 WL 3600224 (Ind. 2016).
[10] A “forfeiture” is the “divestiture of property without compensation.” Black's Law Dictionary (10th ed. 2014), forfeiture. Forfeiture clauses provide that “under certain circumstances, one party must forfeit something to the other.” Black's Law Dictionary (10th ed. 2014), forfeiture clause. At times, the party who fails to perform or tender has relied substantially on the expectation of the exchange, as through preparation or performance. The forfeiture factor looks at the extent to which the party failing to perform or to make an offer to perform will suffer forfeiture if the failure is treated as material. Restatement (Second) of Contracts § 241 Cmt. d (1981).
[11] § 241; for e.g., see Ream v. Yankee Park Homeowner's Ass'n, Inc., 915 N.E.2d 536 (Ind. Ct. App. 2009).
[12] Black's Law Dictionary (10th ed. 2014), default.
[13] Black's Law Dictionary (10th ed. 2014), default clause.
[14] Wandler v. Lewis, 567 N.W.2d 377, 382 (S.D. 1997).
[15] See Black's Law Dictionary (10th ed. 2014), cancellation clause (“A contractual provision allowing one or both parties to annul their obligations under certain conditions. — Also termed termination clause.”)
[16] Hackett v. J.R.L. Dev., Inc., 566 So.2d 601, 603 (Fla. Ct. App. 1990).
[17] Glover Distrib. Co., Inc. v. F.T.D.K., Inc., 816 So.2d 1207 (Fla. Ct. App. 2002).
[18] Allen v. Hamilton Trails, LLC, 2012 WL 6951892 at *5 (Ill. Ct. App. May 14, 2012) (upholding the default clause providing for liquidated damages because it was “clear and unambiguous and demonstrated that the parties intended to agree in advance to the settlement of damages that might arise from a breach”).
[19] See JonJame Realty Trust v. Ryan, 2011 WL 1346922 at *3-3 (Mass. Ct. App. February 7, 2011).
[20] In Doyle v. Ortega, the court found the default clause clearly and unambiguously preserved remedies for the seller in the event of buyer’s default. 872 P.2d 721, 724-5 (Idaho 1994). However, because the remedy of specific performance was not contained in the clause, the trial court should not have granted specific performance to seller upon buyer’s default. Id.