An extract from The Complex Commercial Litigation Law Review, 2nd Edition

Breach of contract claims

The elements of a cause of action for breach of contract are: (1) the existence of an enforceable contract, (2) plaintiff's performance (or excuse for nonperformance), (3) defendant's failure to perform, and (4) resulting damages to the plaintiff. The required harm or damages may be modest; even when a breach 'has caused no appreciable detriment', the non-breaching party may recover nominal damages or seek an order of enforcement.

In addition to an award of damages, parties claiming breach of contract may seek an order terminating the agreement and relieving them of their obligation to perform. But not just any breach of contract warrants termination. For that, the breach must be 'material', a designation that depends on the circumstances of the breach. A material breach generally refers to a situation where a party is substantially deprived of the benefit for which it bargained, but it could also include a less serious breach that indicates the likelihood of a future failure to perform. For instance, a minor breach 'prior to or at the outset of performance' may permit a termination, despite that the same breach would not be material if it had occurred after considerable performance.

If a party communicates that it will not perform under the contract, even before performance is due, that can be enough to justify termination. This is called anticipatory repudiation, and it does not have to be expressly communicated. It may be implied from the circumstances when, for example, one party to a contract takes steps that make it impossible for it to perform. In the face of an anticipatory repudiation, the non-breaching party does not have an obligation to act. He or she is permitted to seek relief immediately, but may also wait until the time of performance to initiate legal action.

In addition to the express terms of the agreement, every contract in California includes an implied covenant of good faith and fair dealing. While the implied covenant does not impose obligations to which the parties did not agree, it does require that the parties carry out their obligations in good faith and without attempts to thwart the other party from receiving the benefit of its bargain. The application of this doctrine does not require that a party act with malicious intent. It is enough that a breaching party's conduct was 'objectively unreasonable' and prevented its counter-party from receiving that for which it contracted.

Defences to enforcement

Parties sued for breach of contract in California have several available defences. In the first instance, they can establish that they in fact did perform their obligations under the agreement, or that no enforceable agreement was formed in the first place. But there are also several bases on which a California court might refuse to enforce a valid contract that has admittedly been breached. These are known as affirmative defences, and the burden is typically on the defendant to show that they apply in a particular case.

i No enforceable contract was formed

As noted above, to be enforceable, a contract requires 'reasonably certain' terms. If the parties leave essential elements to be worked out later, their understanding might be deemed a mere 'agreement to agree', which is typically not enforceable. Parties in California can, however, execute enforceable agreements to negotiate in good faith. Unlike some European jurisdictions, California does not impose a default obligation of fair dealing on parties to a negotiation. But an agreement to negotiate in good faith allows parties to create such an obligation by contract.

ii Limitation period unenforceable

The statute of limitations to assert a breach of contract claim in California is four years for written contracts and two years for oral contracts. The limitations period begins when the contract has been breached and the non-breaching party knows or has reason to know of the breach.

California permits parties to shorten or lengthen the time period for asserting a breach in their contract. If the parties agree to lengthen the limitations period, their agreement must be in writing and cannot extend the deadline for more than four years at a time. The parties may then make 'any number of successive, separately executed agreements for additional four-year' extensions. If the parties agree to shorten the limitations period, the cutoff date must still provide a reasonable period for the non-breaching party to raise a claim, a standard that varies based on the circumstances of the agreement.

iii Enforcement contrary to public policy

A contract with an illegal purpose is unenforceable as a matter of public policy. California takes a strict approach to illegal contracts, stating that an entire contract is void if any part of its consideration is unlawful. There are rare exceptions, however. California may uphold a contract with an illegal object if the nature of the contract's illegality is not 'grounded in common standards of morality', and the party seeking enforcement is 'less morally blameworthy' than its adversary.

iv Unconscionability

A contract is unconscionable if it is so grossly unfair that it should not be enforced. Unconscionability has two components, one procedural and the other substantive, both of which must be present to find a contract unenforceable. Contracts that are substantively unconscionable have been described in a variety of ways, including 'overly-harsh', 'unfairly one-sided', 'unduly oppressive', or 'so one-sided as to 'shock the conscience''. The California Supreme Court held that all of these terms 'mean the same thing', which it characterised as 'a substantial degree of unfairness beyond 'a simple old-fashioned bad bargain''.

Procedural unconscionability refers to some element of 'surprise' or 'oppression' in the process of negotiating or executing the agreement. For example, a material term may have been hidden by the party seeking to enforce it (i.e., surprise), or there may be such a disparity in bargaining power that the weaker party is not given a meaningful choice (i.e., oppression).

Adhesion contracts, which are the standardised agreements offered on a 'take it or leave it' basis by parties with superior bargaining power, all contain an element of procedural unconscionability. But the surrounding circumstances may mitigate that unfairness. For example, the weaker party may have had other counter-parties with whom he could have contracted. And even an adhesion contract that is procedurally unconscionable will be enforced, provided it is not substantively unconscionable and complies with the 'reasonable expectations' of the adhering party.

In evaluating unconscionability, courts consider the totality of circumstances, in which a high degree of substantive unconscionability can be counteracted by a low degree of procedural unconscionability, and vice versa. For example, the presence of one-sided terms could be offset by the fact that the parties had relatively equal bargaining power.

v Duress

California will allow a party to rescind a contract if it was 'under duress' when it agreed to the terms. Traditionally, duress refers to circumstances where a person or his property were unlawfully confined or threatened. California courts have extended the doctrine to cover economic duress, but that defence is generally only available to a party who had no choice but to agree or face financial ruin. For example, in one case, the fact that a party would merely have lost a job if he did not agree to the contract was not enough to show economic duress.

vi Impossibility or impracticality

California law provides a defence to the enforcement of a contract when, through some intervening event, performance becomes physically impossible or so excessively expensive or difficult that it is no longer practical. A merely unforeseen expense, even a sizeable one, is not enough to excuse performance. But if the difficulty of performance becomes so great that the parties could not have expected compliance under the new circumstances, the defence of impracticality is available. For example, in one case, a builder agreed to buy his gravel from the operator of a particular gravel pit. Unknown to the parties at the time, most of the gravel was under water and would cost ten times the anticipated amount to extract. The builder was excused from performance on the ground of impracticality.

vii Frustration of purpose

The doctrine of frustration of purpose is similar to the doctrines of impracticality and impossibility in that some development after the execution of the contract changes the basic expectations on which the agreement was reached. But, unlike those other defences, frustration of purpose applies to situations where performance is still feasible but would not accomplish the purpose of the agreement. For example, in one case, a hotel company agreed to pay a monthly fee to a golf club to allow access to the course for its guests, but the hotel later burned down. Payment of the fee was still possible, but achieving the underlying purpose of the agreement was not, and the agreement was not enforced.