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Biz Ladies: Contracts Are Meant to Be Broken

Today’s Biz Ladies post comes from Ben Pollock, the owner and founder of The Juniper Law Firm. Determined to help the creative small business industry, Ben established his own firm to focus on that very community. His strong belief that creativity fuels our society has helped many small businesses launch, and today Ben has graciously offered his expertise for a three-part legal Biz Ladies series, starting with contracts. Thank you, Ben, for this wonderful post! — Stephanie

Read the full post after the jump . . .

We all enter into contracts almost every day, whether we realize it or not. Every time you sign a receipt at the store, you are entering into a contract. But what some don’t realize is that you don’t have to sign something for there to be a contract. You are forming a contract when you click “I agree” on your favorite website or even when accessing some sites without doing anything more. When was the last time you actually read the “terms and conditions” of a website? Well if you do, you will often see language such as “By accessing this website, User agrees . . .” And there it is: your accessing the website IS your signature. (Here are the Google “Terms of Service.” Check out the second paragraph – the one-liner.)

Now that I have illustrated the importance of understanding contracts for everyone, lets get to the topic of today’s post: breaking contracts.

If you thought it was against the law to break (or “breach”) a contract, you are generally wrong. A contract is law, but it is law only between you and the other party to the contract. In fact, contracts are so revered in our legal system that a lot of actual laws are allowed to be altered or altogether discarded between two people so long as they have a contract saying as much.

So what happens then if you want to get out of a contract? Well, contract law specifically allows anyone to get out of a contract whenever they want, with very few exceptions. The only catch: You have to be willing to pay the price.

Generally there are three basic ways to breach a contract:

1) Failing to satisfy an express condition

This usually means that you were required to do something before the other party would be obligated to do something for you. It could also mean that some event out of your control had to happen before the contract became effective.

Usually, if an express condition is not met, it just means the contract is off. And that’s that. But if you intentionally do something to prevent the condition from happening so that the contract would be cancelled, you could be responsible for damages (which I will address below).

Example: Letterpress shop owner enters a contract with a band that promises that if they get signed, the letterpress shop has exclusive rights to print all their posters and will do it at a discount. If the band gets signed, there is a contract. If not, there’s no contract, and no one’s obligated to do anything. But if the letterpress shop owner somehow prevents the band from being signed, they have breached the contract.

2) Material breach

A part of a contract that is viewed as essential by one or both of the parties and upon which the parties relied when agreeing to the contract is called a “material term.” And if you fail to live up to a material term in a contract, you may be responsible for damages.

Example: The letterpress shop and the band have the same contract as above. The band is signed, but the letterpress shop fails to print the posters at a discount. This is a material breach because the band never would have entered into the contract if it weren’t for the promise of a discount.

3) Anticipatory repudiation

If you do or say something that lets the other party know that you are not planning to live up to your end of the bargain, you may be responsible for damages.

Example: The band is signed, but before they order any posters, the letterpress shop tells the band that it doesn’t intend to follow through on the deal. They haven’t actually failed to do anything yet, but they have made their intention known that they will fail to live up to the contract.

Ok, so now that we know the basic ways a contract can be breached, and that a common result is the need to pay damages, what are the damages?

1) Expectation damages

These types of damages require that you put the other party in the position they would have been in if the contract had been performed. Usually it is a matter of paying money.

Example: If the letterpress shop didn’t give the discount, it may have to return the money that represents the discount it promised.

2) Specific performance

Specific performance would require you to live up to your end of the bargain, even if you don’t want to. This is usually used only in situations where you are selling something that the other party can’t find elsewhere. It is almost never used when the contract called for you to perform some sort of service. Otherwise, this would be like enslaving you.

Example: This would likely never happen with the letterpress shop because it is offering services. But if the shop was selling an antique letterpress that can’t be found elsewhere and backs out of the deal after having signed a contract, it may be forced to sell.

3) Agreed remedies

It is common for a contract to include a term spelling out what will happen when someone breaches the contract. Sometimes it is very vague, but often it is a specific amount of money that has to be paid. When there is an agreed upon remedy, the courts will often enforce it if it is reasonable.

Example: It is written in the contract that if the letterpress shop is late in delivering the posters for the band, it has to pay a fee for every day that it is late.

Moral of the Story

Contracts are everywhere. People and companies use them to protect themselves and to make sure that they get what they are expecting in return for giving something themselves. But it is rarely against the law to break a contract. In fact, contracts are designed to be able to be broken. Often they include an agreed upon remedy right in the contract. But when they don’t, the law usually has a predictable method for determining what the remedy will be.

So if you are ever in a contract and want out, rest assured that there is a way. It may be expensive, but you will almost never be forced to stay in a contract against your will.

If there is no agreed upon remedy in your contract, or if you’d like to find out if you have any other options for getting out, speak with a licensed attorney who can help you explore all your options.

P.S. Never get involved with influencing or helping a friend get out of their contract. You may become liable in addition to your friend for damages to the other party.

Here’s another useful article on breaching contracts.

DISCLAIMER

Please, please, please remember that the rules I laid out above are very general in nature and are intended only to give you a basic background on these issues. This is not actual legal advice for your situation. If you would like advice that fits your situation, please contact your local friendly attorney. You can find me at www.juniperlawfirm.com.

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6 Comments

North Tahoe real estate guy

I think the word contract is scary. Knowing specific details such as this makes it much less intimidating. As long as you know the repercussions of a breach, thanks for that!

-Daytona

Jason Strong

I’m a firm believer in small businesses being some of the main roots to our economy’s health. It not only supports the middle class, but also allows people to exercise their rights and freedom. I’m not in a position to own my own business yet, but if I ever do decide to own one, I’ll be sure to remember this.

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