Breach of Contract Issues for Business Owners

November 19, 2020

A contract is a legally binding agreement between two or more parties in which each party has rights and obligations. In a typical business contract, one party agrees to provide goods or services in return for payment. If one party fails to perform a specified act or pay the agreed-upon amount of money, they have likely breached the contract, allowing other parties to pursue certain remedies.
If you believe that another party has breached its contractual obligations or have questions about your own obligations under a contract, you should call the lawyers of McClanahan Powers today. Read on to learn more about common issues business owners face regarding breach of contract.

Contract Formation

Before there can be a breach, there must be a valid, enforceable contract.

A contract is valid and enforceable where there has been an offer, acceptance, consideration, and no valid issues as to the formation.

The Code of Virginia section 8.2-206 defines an offer. An offer is valid where it is communicated and understood by the offeree, and the offeree has the chance to accept or reject it. Additionally, there must be an intent to be bound by the offer. This can become confusing where there has been an invitation to make and receive offers. An invitation to make an offer will not be viewed as a valid offer in the law of contracts. An offer should also state definite terms such as price and timing of acceptance.

An acceptance is valid where the offeree has accepted all terms of the contract without changing them. Where the offeree changes the terms so that the acceptance terms no longer mirror the offer, such a situation will be considered a counter-offer, and no contract has been made.
Consideration is required for contract formation and can be defined as the mutual benefit of the parties resulting from the performance of a contract. Generally, consideration can be defined as a promise to do something that a party is not legally obligated to do or the promise to refrain from doing something that a party has the right to do. Consideration element is not met where the promise to perform is illusory or based on past consideration, the promise is a gift, or the promise is for an act that the party is already legally obligated to perform.

Lastly, to form a valid and legally binding contract, there can be no valid defenses as to the formation of the contract.

In addition to the required elements of a valid contract, one that is enforceable should also identify the parties and their rights and duties, the terms under which they are required to perform, events that will constitute a breach and the penalties of such a breach, and remedies available should a party breach the contract.

Statute of Frauds

Generally, a contract does not need to be in writing in order to be enforceable. Oral contracts will be considered valid and legally binding. However, certain contracts must meet the Statute of Frauds in order to be enforceable pursuant to the Code of Virginia section 8.2-201. Under the Statute of Frauds, these specific contracts must be evidenced in writing and signed by the party to be charged with performing a specific act as obligated under the contract.

In regards to business contracts, common contracts that must meet the Statute of Frauds include:

  • Those for goods greater than $500
  • Those that last longer than one year, such as employment contracts
  • Those for the purchase of real estate, such as a new building for the business
  • Those in which the business promises to pay the debts of another party should that party fail to pay
Common Types of Business Contracts

The most common types of business contracts include general contracts, sales contracts, and employment contracts.

General business contracts include:

  • Nondisclosure agreements which protect proprietary information relating to a business, such as trade secrets.
  • Lease agreements for the lease of equipment or real estate.
  • Contracts that indemnify parties or hold them harmless for damages resulting from a contract.
  • And contracts that specify the relationship between parties and their duties and responsibilities to a business.

Sales contracts include:

  • Security agreements where a business provides collateral in order to obtain a loan.
  • Purchase orders, which are evidence of a business owner’s agreement to buy a specific amount of goods at an agreed-upon price and delivered on an agreed-upon date.

Employment contracts include:

  • A general contract that specifies the employment relationship, duration, and pay.
  • Non-compete agreements in which an employee promises to refrain from competing with a business for a certain amount of time upon termination of employment.

Types of Breach

There are four types of breaches that are typically recognized in contract law.

1. Minor breach – this allows the non-breaching party to only collect damages for what they are owed.
2. Material breach – this occurs where a party fails to perform and allows the non-breaching party to collect damages for that breach.
3. Anticipatory breach – this occurs when a party becomes aware that the other party will not perform its obligations when the time arises. The non-breaching party will be allowed to terminate the agreement and bring a cause of action prior to the breach.
4. Fundamental breach – this allows the non-breaching party to sue for damages resulting from the other party’s breach as well as terminate the contract.

Damages for Breach of Contract

Damages available to a non-breaching party include:

  • Consequential damages, which include those foreseeable expenses and actual costs incurred,
  • Compensatory damages which compensate for the loss,
  • Liquidated damages, which are only available if agreed upon by both parties and stated in the contract,
  • An injunction which enforces a contract and requires performance by the breaching party, and
  • Punitive damages are not generally available in breach of contract causes of action in Virginia. In order to be awarded punitive damages, there must also be an independent tort committed by the breaching party.

Call Us Today to Speak with a Virginia Business Attorney

Litigation of disputes arising from business contracts can involve issues surrounding business and industry practices. Additionally, contract law can be complex and difficult to understand. If you are the party to a business contract that has been breached or you are looking to enter into a valid business contract, contact the business attorneys at McClanahan Powers, PLLC. Call (703) 520-1326 or visit our website to schedule your consultation today.