“In civil courts, more cases are filed for breach of contract than any other”
Here’s what we cover:
About one-third of all civil lawsuits filed in Arizona are for breach of contract. That translates into more than 35,000 new breach of contract cases every year in the state of Arizona. This chapter looks at breach of contract claims in Arizona.
What is a contract? A contract is simply an agreement between two or more persons. It may be written or oral. It may also, under appropriate circumstances, be implied by law.
For a contract to legally exist there must be an offer, acceptance of the offer, and either a benefit received or something given up or exchanged, known as “consideration.” There is no contract if there is no consideration. Failure of consideration occurs when a party fails to do something required by the contract which is so important to the contract that the failure defeats the very purpose of the contract.
Illustration: Fred offers to sell his used car to Barney for $1,000. Barney accepts Fred’s offer, but fails to pay the agreed price. There is no consideration for the contract, and Fred will be excused from performance. Thus, Fred will be free to sell his car to someone else.
“Substantial Performance” of a Contract
In some cases, especially in the field of construction, one party may claim that the other party did not fully complete the contract. (In construction cases, this is referred to as “substantial completion.”) The party making that claim probably is trying to avoid payment. If a party has substantially performed, then he is entitled to payment from the other party.
Substantial performance means that a party has performed all that is required by the contract, except for slight defects that can be easily cured. To determine whether a party has substantially performed his obligations under a contract, consideration will be given to the nature of the promised performance, the purpose of the contract, and the extent to which any defects in performance have defeated that purpose. Returning to the construction area, if there has been substantial although not full performance, the building contractor will have a claim for the unpaid balance and the owner will have a claim only for damages.
A contract will not be enforced where its performance depends on an event (condition) not certain to occur, and that event does not occur. This is known as failure of condition. A condition may be waived by a party, if the condition is intended solely for that party’s benefit.
A party to a contract may also waive what the other party agreed to do as his part of the contract. Waiver is an intentional relinquishment of a known right. (“I waive my right to payment.”) A waiver may be expressly stated by a party, or it may be implied by or inferred from actions taken by him. By knowingly and unconditionally accepting defective performance, a party will have waived any objection to it. If a party waives a promised performance, then the other party is no longer bound to perform on that promise.
Intent not to Perform Contract
If one party states or shows his intent not to perform a contract as promised, and the other party is ready, willing and offers to perform his duties under the contract, the first party will be guilty of anticipatory breach. This means that the party who conveyed his intent not to perform will be liable to the other party for breach of contract.
Claims by Contract Beneficiaries
A person who is not a party to a contract may sometimes sue for breach of contract, as a “third-party beneficiary.” To prove this claim, the third party must show that:
- the parties intended that he directly benefit from the contract;
- the parties intended to recognize him as the primary party in interest; and
- the contract itself indicated an intent to benefit him or a class of persons including him. (A beneficiary named in a life insurance policy is a good example of a third-party beneficiary.)
Duty of Good Faith and Fair Dealing
Every party to a contract, whether oral or written, has a duty to act fairly and in good faith. This duty is implied by law and need not be in writing.
This duty requires that neither party do anything that prevents the other party from receiving the benefits of their agreement. If a party breaches the duty of good faith and fair dealing, the other party will be entitled to recover any damages that resulted from the breach.
“Direct Damages” for Breach of Contract
If a party breaches a contract, he will be required to compensate the other party for all damages that resulted naturally and directly from the breach of contract. The damages will be the amount of money that will place the nonbreaching party in the position he would have been in if the contract had been performed. To determine those direct damages, consideration will be given to:
- the profit that the nonbreaching party would have received had the contract been performed; 2) the return of the value of the things or services that he provided to the other party; or
- the value of things or services expended by him in preparing to perform his part of the contract or in preparing to accept the benefits of the other party’s expected performance. Consideration will also be given to whether the party, by not having to perform his part of the contract, avoided any cost or loss which should be deducted from his damages.
The nonbreaching party must prove his damages in a breach of contract case with specific evidence. Ordinarily, a party may recover on only one of the three damage elements stated in the preceding paragraph; the law will not allow double recovery of damages under more than one theory.
“Consequential Damages” for Breach of Contract
A party may recover both direct and consequential damages. Direct damages are those which, in the ordinary course of human experience, can be expected to result directly from a breach (see above discussion). Consequential damages do not flow directly from a breach, but arise because of special circumstances. To recover for consequential damages, a party must show:
- that it was foreseeable to the parties when they entered into the contract that these damages would probably result if the contract was breached;
- that these damages were in fact caused by the other party’s breach of contract; and
- the amount of the damages.
To recover damages for lost profits, a party must show:
- that it is reasonably probable that the profits would have been earned except for the breach;
- that the loss of profits is the direct and natural consequence of the breach; and
- the amount of lost profits can be shown with reasonable certainty. The amount of lost profits cannot be based on conjecture or speculation. In determining lost profits, it is appropriate to subtract the costs and expenses the party would have incurred from the gross revenue he would have received if the contract had not been breached.
Duty to Reduce Damages
A party may not recover for any damages that could have been prevented or reduced through reasonable efforts. The party objecting to damages must prove:
- that the party claiming damages did not make reasonable efforts to prevent or reduce damages;
- that if the party claiming damages had acted reasonably, he could have prevented or reduced damages; and
- the amount of damages that could have been prevented or reduced through reasonable efforts.
Award of Attorney’s Fees and Costs
A person who wins a lawsuit arising out of a contract, either express or implied, may be entitled to an award of his reasonable attorney’s fees. To recover attorney’s fees, the successful party will be required to submit a detailed application for attorney’s fees to the judge at the end of the case. The judge has the authority in contract cases to award fees to the successful party, and will generally do so. In some cases (sad to say), the attorney’s fees can be even more than the amount of contract damages. The successful party will also be entitled to award of his court costs.
In the law, there are literally more reported contract cases than can be counted (at least by this author). First-year law students are required to take (and pass) a course on contract law, and in that class they spend countless hours studying and debating contract issues and cases.
It is, therefore, unreasonable to assume that a fair treatment of the subject has been rendered in this short chapter. At best, it is hoped that this has achieved its intended purpose—to provide a fair overview of the subject—and that the reader will consult an attorney if a contract issue arises.
The above article is an excerpt from Arizona Laws 101: A Handbook for Non-Lawyers, 2nd Edition (Fenestra Books, 2012), by Donald A. Loose, republished with the author’s permission.
Disclaimer: Laws change constantly. Specific legal advice should be obtained regarding any legal matter. The information contained on this website does not constitute legal advice and no attorney-client relationship is created.
Donald A. Loose is an Arizona attorney, and the author of Arizona Laws 101: A Handbook for Non-Lawyers, and Estate Planning in Arizona: What You Need to Know. Mr. Loose is a regular guest on radio shows featuring local newsmaker interviews. He may be contacted at firstname.lastname@example.org.
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