Contract Cancellation Due to Breach of Contract

CERTIFICATE OF AUTHORSHIP: I certify that I am the author. I have cited all sources from which I used data, ideas, or words, either quoted directly or paraphrased. I also certify that this paper was prepared by me specifically for this course. ______________________________________________ Signature Date 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 FormationWhile 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 ContractA 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 contract is a trivial breach that does not kill the contract, (Bennett, 2007). An immaterial breach occurs when the non-breaching party is not entitled to an order of performance, but only to collect the amount of any damages, (Trevelline, 2003). For example, Company A contracted to buy 10 off-brand computers. However, Company B received a discount on IBM computers and provided them instead. Although Company B has breached the literal terms of the contract, Company A received 10 computers and would only receive damages if something was wrong with one of the computers.

Examples of the type of violations that may cause a breach of contract include, but are not limited to, non-delivery or late delivery of goods; supplying goods that do not meet the specifications of the contract; not providing the goods in the right quantity; charging prices or imposing terms different from those agreed upon; failing to pay for goods; seller unable to maintain or to provide parts and repair services, or to honor warranty on equipment or products sold; the disclosure of collusion or price-fixing involving the successful bidder, after the contract has been awarded; and violations of state statutes(e.g. , failure to supply information concerning hazardous materials or substances), (Nonperformance, 2005).

In determining whether a failure to render or to offer performance is material, the Restatement of Contracts lists the following circumstances as significant: (a) the extent to which the injured party will be deprived of the benefit which he reasonably expected; (b) the extent to which the injured party can be adequately compensated for the part of that benefit of which he will be deprived; (c) the extent to which the party failing to perform or to offer to perform will suffer forfeiture; (d) the likelihood that the party failing to perform or to offer to perform will cure his failure, taking account of all the circumstances including any reasonable assurances; (e) the extent to which the behavior of the party failing to perform or to offer to perform comports with standards of good faith and fair dealing, (Breach, 2007).

CancellationIn legal terms, cancellation occurs when either party ends a contract for breach by the other. When this occurs, the non-breaching party retains any remedy for breach of the whole contract or any unperformed balance. The entire contract may be rolled back; payments previously made may be refunded; and any remaining obligations are immediately ended, (Trevelline, 2003). Generally speaking, there are two legal types of contract cancellations: canceling for cause and canceling for an anticipated breach. Canceling for cause is when an actual breach occurs because of the failure of one of the parties to perform at the time and in the manner required by the terms and conditions of the contract.

Canceling for an anticipated breach is a situation where there has not yet been a failure of performance; but there is a strong reason to believe that one of the parties to the contract will not be fulfilling their obligations. In an anticipatory breach, the canceling party must show convincing evidence of the anticipated breach and must prove why they had to go elsewhere to seek performance. If any damages are involved, usually they are limited to the costs in excess of the contract price, when alternate procurement is necessary, (Bennett, 2007). Three-Day Right of Rescission Contrary to what many people believe, there is no automatic right to cancel a valid contract.

Only certain types of contracts come with a three-day right of rescission, such as health club contracts or some sales of goods or services made at your home. When one wishes to cancel such a contract, he or she must give written notice of cancellation to the seller within three business days of signing the contract, (Trevelline, 2003). A consumer can cancel these types of contracts for any reason or no reason at all. Generally, the buyer’s notice of cancellation is effective when it is deposited in the mail with the proper address and postage. However, the buyer should note the exact date, time, and place of mailing on the retained copy in case of any disputes, (Consumer Transactions, 1999).

Oral versus Written ContractsWhile many contracts are enforceable when made orally (especially in situations where one party has performed their obligations), the absence of a detailed contract is more likely to give rise to disputes or litigation than when the terms and conditions are spelled out. Oral contracts present tremendous proof problems if they need to be enforced in court – reliance on memory is often unpredictable and not everyone is honest, (Binder, 2001). For that reason, it is always best to write down the terms and conditions of the contract in simple, plain English (contracts over $500 are required by law to be in writing in order to be enforceable). However, even written contracts can contain ambiguous terms which can give rise to dispute, so before signing a contract, a person should ensure that he or she fully understands all the terms and conditions of the contract. Conclusion.

Each year US citizens lose thousands of dollars because they do not read the fine print and if they do, they don’t understand what they are signing. US citizens also lose money because they don’t understand that their verbal statements can be considered legal, enforceable contracts and because many mistakenly believe they have a right to cancel a contract before three business days. Before signing anything, people should be sure to read the entire contract and ask questions about anything they don’t understand. Because although contracts offer many advantages, especially written ones, once you sign your name on the line, you are bound by the terms and conditions of the contract, even if a term or condition was listed incorrectly.

And legally, the only way you can cancel a contract, and not pay the consequences, is if the other party has already breached it or if that party gives you reason to believe that the contract will be breached ? a concept that is hard to prove. References Bennett, Sherri (2007). Contract Termination. Retrieved 7 May 2007 from http://consumer-law. lawyers. com/Contract-Termination. html. Binder, Perry (2001). Binder on Contracts. Retrieved 27 March 2007 from http://www2. gsu. edu/~rmipzb/contracts. htm. (2000). Binding Contracts and Legal Actions Predicated on Breach of Contract. Retrieved 7 May from http://www. stimmel-law. com/articles/contracts. html (2007).

Breach of Contract. Retrieved 27 March 2007 from http://en. wikipedia. org/wiki /Breach_of_contract. (1999). Consumer Transactions with Statutory Contract Cancellation Rights: Legal Guide K-9. Retrieved 7 May from http://www. dca. ca. gov/legal/k-6. html (2005). Nonperformance & Breach of Contract. Retrieved 27 March 2007 from http://www. lectlaw. com/files/bul08. htm. Radcliffe, Mark and Diane Brinson (1999). Contracts Law. Retrieved 27 March 2007 from http://library. findlaw. com/1999/Jan/1/241463. html. Trevelline, Michael (2003). General Outline of Breach of Contract Law. Retrieved 7 May 2007 from http://www. mjtlegal. com/legal_3_breach_cont. shtml.