Breach of Contract Disputes

Contracts are the foundation of most business relationships.  Companies enter into contracts with customers, vendors, employees, partners, investors, lenders, landlords, contractors, and other businesses.  When one party fails to do what it agreed to do, the resulting dispute may give rise to a breach of contract claim.

A breach of contract claim generally involves four basic questions:

1. Was there a valid contract?
2. Did the plaintiff perform its obligations under the contract?
3. Did the defendant breach the contract?
4. Did the breach cause legally recoverable damages?

The answers to those questions often determine whether a breach of contract claim can succeed and what damages may be available.

Key takeaways

• A breach of contract claim turns on four questions: was there a valid contract, did the plaintiff perform, did the defendant breach, and did the breach cause legally recoverable damages.
• A contract can be oral, although certain agreements must be in writing.
• A material breach may excuse the other party from performing. A minor breach may support damages without allowing that party to abandon the agreement.
• Contract damages compensate. Lost profits must be supported by evidence, not speculation.
• Each party ordinarily pays its own attorney’s fees unless a statute, the contract or a recognized exception provides otherwise.

Was There a Valid Contract?

Before a party can sue for breach of contract, it must establish that a legally enforceable contract existed.

A contract may be written or oral.  Businesses sometimes assume that a contract must be signed and written to be enforceable, but that is not generally true.  Many oral agreements are legally binding.  The important question is whether the parties reached an agreement containing sufficiently definite terms and whether the other requirements for contract formation were satisfied.

There are, however, important exceptions.  Certain types of agreements must be in writing under the statute of frauds, including certain agreements involving real estate, guarantees of another person’s debt, and agreements that cannot be performed within one year.  Whether an oral agreement is enforceable therefore can depend on the nature and terms of the particular contract.

What is consideration?

Another basic requirement of a contract is consideration. In simple terms, consideration is what each side gives or promises to give in exchange for what it receives from the other side.

For example, if a business agrees to pay a contractor $50,000 to perform specified work, the contractor’s promise to perform the work is consideration for the business’s promise to pay $50,000, and the business’s promise to pay is consideration for the contractor’s promise to perform.

Consideration does not necessarily have to be money.  A promise to provide services, deliver goods, refrain from taking a particular action, or undertake another legally recognized obligation can constitute consideration.  What matters is that something of legal value was exchanged as part of the bargain.

The existence and adequacy of consideration can become particularly important when one party claims that an agreement was merely a promise, gift, or unenforceable commitment rather than a binding contract.

Did the Plaintiff Perform Its Obligations?

A company generally cannot claim that the other side breached a contract while ignoring its own contractual obligations.  A company therefore ordinarily must establish that it performed its obligations or was excused from performing them.

Did the Defendant Breach the Contract?

A breach occurs when a company fails to perform an obligation required by the contract.  But not every technical violation of a contract necessarily has the same legal consequences.

One of the most frequently litigated questions is whether the alleged breach was material.

A material breach is more than a minor or technical failure to comply with the agreement. Generally speaking, a breach is material when the failure is sufficiently significant that it defeats or substantially undermines an important purpose of the contract.

For example, suppose a company contracts with a vendor to deliver specialized equipment by a particular date.  A minor defect in the packaging might constitute a breach but not necessarily a material breach.  By contrast, failing to deliver the equipment at all—or delivering equipment that cannot perform the essential function for which it was purchased—may constitute a material breach.

The distinction can be important because a material breach may excuse the other party from continuing to perform its own contractual obligations and may permit the non-breaching party to seek broader remedies.  A minor breach, by contrast, may entitle the injured party to damages without allowing it to abandon the entire agreement.

Whether a breach is material is often highly fact-specific.  Courts may examine the importance of the breached obligation, the extent to which the injured party received the benefit of its bargain, whether the breach can be cured, and whether the remaining performance would be substantially different from what the parties originally agreed to.

Did the Breach Cause Legally Recoverable Damages?

Even when a defendant breached a contract, the plaintiff generally must establish that the breach caused an actual, legally recoverable loss.

The principal purpose of contract damages is generally to compensate the injured party for the loss caused by the breach and, to the extent money can do so, place the party in approximately the position it would have occupied had the contract been performed.

Common types of compensatory damages

Depending on the circumstances, recoverable damages may include:

Out-of-pocket losses. These are amounts the company actually spent or lost because of the breach. For example, a business may incur additional costs to hire another contractor to complete work that the defendant failed to perform.

Lost profits. A business may be able to recover profits it would have earned had the contract been performed.  Lost-profit claims, however, generally must be supported by evidence rather than speculation.  The plaintiff ordinarily must establish a reasonable basis for calculating the lost profits and demonstrate that they were caused by the breach and were sufficiently foreseeable.

Costs of repair or completion. In appropriate circumstances, a plaintiff may recover the reasonable cost of correcting defective work or completing work the defendant failed to perform.

Other consequential losses. Depending on the contract and the circumstances, damages may include additional losses that naturally resulted from the breach or that were reasonably foreseeable when the parties entered into the agreement.

There are important limits on contract damages. In general, a plaintiff cannot recover losses that are too remote, speculative, or unrelated to the breach.  A plaintiff also generally has a duty to take reasonable steps to mitigate its damages, rather than allowing its losses to increase unnecessarily after a breach.

Attorney’s fees and punitive damages

Attorney’s fees incurred in bringing a standard breach of contract lawsuit are typically not recoverable as damages.  Courts generally follow the “American Rule,” under which each party ordinarily pays its own attorneys’ fees unless a statute, the contract itself, or a recognized exception provides otherwise.

Accordingly, a contract should always be reviewed for an attorney’s-fee or fee-shifting provision.  A contractual provision requiring the losing party to pay reasonable attorney’s fees can materially change the economics of a contract dispute.

Punitive damages are also generally unavailable for a pure breach of contract claim.  The purpose of ordinary contract damages is compensation rather than punishment.  A separate claim arising from the same conduct may, in appropriate circumstances, support punitive damages, but a plaintiff ordinarily cannot obtain punitive damages simply by characterizing a breach of contract as intentional, willful, or malicious.

D.C., Maryland, and Virginia Follow the Same General Rules in Breach of Contract Cases

The basic principles of contract law are similar in the District of Columbia, Maryland, and Virginia, but on occasion, one state may use different language than another to describe an issue.

1. The formulation of the elements can be somewhat different.

D.C. and Maryland cases commonly analyze breach-of-contract claims through the familiar concepts of a valid contract, the plaintiff’s performance, the defendant’s breach, and resulting damages.  Virginia cases often state the elements more generally as a legal obligation owed by the defendant, a violation or breach of that obligation, and consequential injury or damage to the plaintiff. The practical issues are nevertheless substantially similar.

2. The effect of a material or first breach can be especially important.

All three jurisdictions recognize doctrines under which a sufficiently substantial or material breach may excuse the other party from further performance.  Virginia, for example, expressly recognizes the rule that a party that commits the first material breach generally cannot enforce the contract against the other party, while Maryland similarly recognizes that a material breach may excuse the other party’s subsequent performance.

3. The rules governing lost profits emphasize causation, foreseeability, and reasonable certainty.

The three jurisdictions generally permit lost profits when they are sufficiently connected to the breach, foreseeable under the circumstances, and capable of being established with reasonable certainty.  Virginia decisions, for example, emphasize that lost profits cannot be based on speculation or conjecture and must have a sufficient factual basis.  D.C. courts likewise require lost profits to be established with reasonable certainty.  Maryland applies similar requirements concerning causation, foreseeability, and reasonable certainty.

4. Attorney’s fees generally are not recoverable unless an exception applies.

D.C., Maryland, and Virginia generally follow the American Rule, meaning that a prevailing party ordinarily cannot recover the attorney’s fees incurred in prosecuting a contract lawsuit unless a contractual provision, statute, or recognized exception permits fee shifting.  This makes the language of an agreement’s attorney’s-fee provision particularly important in commercial contract disputes.

5. Punitive damages generally are unavailable for a pure breach of contract, but the treatment of related tort claims can differ.

None of the three jurisdictions generally permits punitive damages simply because a contractual breach was intentional or malicious. D.C. permits punitive damages in the unusual circumstance in which the breach merges with and assumes the character of a willful tort. Virginia similarly requires an independent willful tort, while Maryland permits punitive damages in appropriate tort claims arising from contractual relationships under its own standards.

Because the governing law can affect the elements of a claim, available remedies, and the evidentiary requirements for proving damages, the choice of law should be evaluated early in a significant commercial contract dispute.

What is the difference between a material breach and a minor breach?

A material breach defeats or substantially undermines an important purpose of the contract. A minor breach is a smaller or technical failure that leaves the main bargain in place. The difference decides whether the other party may stop performing or is limited to damages.

What damages can be recovered for breach of contract?

Contract damages are meant to put the injured party in approximately the position it would have occupied had the contract been performed. Four kinds of loss are commonly claimed, and each has to be caused by the breach and proven with evidence.

Where does Waxman Litigation handle breach of contract disputes?

Waxman Litigation handles breach of contract disputes for owners and companies in Washington, DC, Maryland, Virginia, and New York from its office in Chevy Chase, Maryland.