This month, we are addressing a common question from clients: “What happens if a business contract is breached?”
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What Constitutes a Contract Breach?
Contracts contain terms and conditions both parties are expected to uphold. If one party fails to fulfill any term without a lawful or justifiable excuse, that party may breach, or break, the contract.
Some examples of a contractual breach include:
- Failure to pay for services provided as agreed upon in a contract.
- Failure to deliver products or services as agreed upon, or failure to deliver on time.
- Engaging in conduct prohibited by a restrictive covenant, such as a non-compete or non-solicitation agreement.
- Failure to disclose information or making false statements that deprive the other party from realizing the benefits of the contract.
What are your options if you suspect a breach? Your ability to take legal action and recover damages will ultimately depend on the prevailing contract and whether it is legally binding.
What Makes a Contract Legally Enforceable in Texas?
Per Texas law, a valid contract must contain these elements:
- An offer;
- An acceptance of the offer;
- A “meeting of the minds” (both parties reach a genuine agreement); and
- Mutual consideration (both parties must give up something of value, such as money for a service).
Even with these elements in place, a contract may still be invalid if the parties who entered into the contract were not competent: Minors, adults with incapacities, or adults under the influence of alcohol or drugs may not enter a legal arrangement.
Similarly, if the subject matter of the contract is illegal, it is not a valid, enforceable contract.
What Remedies Are Available to Resolve a Breach of Contract Claim?
When one party believes the other has failed to fulfill their obligations as outlined in a contract, it becomes their burden to prove that a breach occurred. Generally, that means proving:
- The existence of a valid agreement (the requirements of which are listed above);
- The non-breaching party performed its end of the contract;
- A material breach was committed by the other party; and
- The non-breaching party suffered damages.
Texas law allows parties who prevail in breach of contract claims to be “made whole,” which usually means monetary payment in the form of damages, including:
- General (or direct) damages, which are profits lost on the contract itself.
- Special (also known as consequential or incidental) damages, which are profits lost on other contracts or relationships as a direct result of the breached contract.
- Liquidated damages, which are a reasonable estimate of just compensation when the harm caused by the breach is impossible or difficult to estimate. A provision for these types of damages must be included in the original contract to be considered. These are common in construction contracts, where delays can cause exponential harm.
- Nominal damages, which are – as the name implies – nominal and trivial in amount. Nominal damages are, however, enough to support the recovery of attorney’s fees.
- Attorney’s fees, which maybe recovered if the breach is proven and if monetary damages are recovered (even nominal damages).
Exemplary damages, punitive damages, and damages for mental anguish are generally not recoverable in breach of contract matters.
Are There Non-Monetary Ways to Resolve a Contract Dispute?
In situations where money does not make the non-breaching party whole, equitable remedy for the contractual breach may be sought. This can include:
- An injunction, which is a court order that requires a party to refrain from an action. This is intended to restore the status quo while the claim is resolved.
- Specific performance, which requires the breaching party to fulfill its contractual obligations as agreed upon in the contract.
- Rescission, which involves setting aside or “undoing” a contract to avoid unjust enrichment and the return of consideration that has been exchanged, thus restoring the parties to the same position they were in before forming a contract (and allowing them to enter into a new contract if desired).
- Reformation, which involves the court correcting a mistake in the prevailing contract so it reflects each party’s intentions correctly.
As with liquidated damages, some remedy options are included as provisions in the original contract. It is imperative to review the underlying contract prior to considering your legal options.
Proactive and Responsive Counsel for Contract Matters
Breach of contract disputes are among the more common commercial suits brought in civil courts but can be high-stakes matters when it comes to the success and longevity of your business. Speak to an attorney with experience drafting contracts and litigating contractual disputes. The business attorneys of Hendershot Cowart P.C. specialize in business contracts and contract disputes, handling thousands of such matters each year. Our team can help you prevent or mitigate any resulting damage from a breach of contract when a partner, vendor, or third party acts unlawfully, violates the terms of a contract, or fails to perform any promise contained in the binding and legally enforceable contract.
Call (713) 909-7323 or contact us to speak with an attorney.