Sound Business Insights with Dan Watkins

Episode 5: Breach of Contract

A conversation between Dan Watkins and Neil James in another episode of “Sound Business Insights:”

Podcast Transcription:

Welcome to sound business insights. I’m Dan Watkins. This episode is about breach of contract. This podcast is not intended to provide legal advice.

Neil
Dan, while this episode is about breach of contract, let’s start with an overview of what the purpose of a contract is.

Dan

The purpose of a contract is for two people to have a meeting minds and agree specifically on what they are, are not going to do for each other great and basic contract law calls for an offer and an acceptance.

Neil

Can you tell me what an offer and acceptance is comprised of?

Dan

An offer and acceptance is just like it sounds except that it has to be clear, communicated and clearly understood, hence  the meeting of the minds.

Neil
And then we have to give consideration what can serve as consideration?

Dan
Consideration is not what you would see in the dictionary in the law. We call consideration meaning money, property services, holdings, things like that, that it’s a different form of, of the definition of consideration is what do you get for what you give.

Neil
And so in circles of the law, we often refer to the benefit of the bargain. How do you define the benefit of the bargain?

Dan
benefit of the bargain is required for a contract because a contract without any exchange or any value is not a contract. So to have a contract, you have to have an offer, an acceptance and something of value. So that’s what the benefit of the bargain is. That’s what makes it a contract.

Neil
So you’ve often told me that basically, a contract serves as a roadmap. Is that accurate?

Dan
That’s absolutely accurate. What we do in drafting contracts is the same thing you would do is you would say, I will give you this for that, but contracts get more complicated. So as lawyers, we get trained in creating these, what if checklists in these contracts. So they’re, you might have a contract with four terms, but if you, on your business, we have a checklist about, about 50 terms. And we assume that you’re gonna want these, both parties will want this part of the agreement in there. And also we’ll ask our clients questions about all these, what ifs. And that is how the roadmap of a contract is created.

Neil

Basically it guides the parties through the transaction and tries to anticipate everything that might go wrong.

Dan

Well, it tries!

Neil
So what is a breach of contract?

Dan
A breach of a contract is when someone breaches a material term of the agreement or an immaterial term of the agreement. And you have different remedies for either.

Neil

So what are some examples of immaterial failure or a material breach?

Dan

Failure to perform most of or part of the contract or an important part of a contract, anything that would render the benefit of the bargain not received.

Neil
So Dan, what’s the difference and what’s the remedy if someone commits a minor breach contract versus a material breach?

Dan

Well, a minor breach means that you still have a contract. You still have an agreement and you can demand performance, or you can demand that you have to give less performance on the other side, but yet the contract isn’t completely breached and it’s not over. A material breach gives you more remedies, remedies that are important and may sound minor today. But there’s been many a situation where having a material breach gives the party who was breached or damaged the right to rescind the contract or the right to specific performance, and forced the performance of the contract. All of these things have amazing consequences, if you look at factual situations in breach of contract law.

Neil
So in a material breach, the non-breaching party no longer has to obey the terms of the contract?

Dan
Well, that’s what’s called choice of remedies in a material breach. The person who’s been damaged by the breaching party has all kinds of choices they can make. And depending on the kind of contract, the subject matter of contract, whether it’s a real estate contract or a commercial contract, they have the right to choose through a whole list of remedies, including provisional remedies and the list goes on and on. This is as opposed to a minor breach. Whereas your remedies are, are much less.

Neil
So Dan, the primary remedy for a breach of contract is damages. That’s the term a lot of people don’t understand. What are damages?

Dan
Great question! When I advise my clients, I tell ’em the most important item in litigation is not whether you are liable or they’re liable, or somebody breached. I say the three most important things in a lawsuit are: damages damages damages.

And I say, it just like, you know, location, location, location, because it’s that important in the type of damages you can obtain are so varied that if you focus on whether you’ve been damaged under the law, there will be a statute or a case that says you are entitled to those damages. So if you track it backwards from I lost a hundred thousand dollars in this deal and how you lost it on those facts and what you did lose, you’ll probably find 99% of the time, a statute or a law or a case or something that gives you a remedy, a right to those damages and how you can collect.

Neil
And in most cases, Dan damages are gonna be money, right?

Dan
Damages are what the law can afford you in a civil case. In a criminal matter, the law can afford you incarceration of the offending criminal, but in a civil matter, since your contract and your agreement was mostly about money, then you get money back. And the only time you don’t just get money is when it’s a case where a law will afford you an injunctive or provisional remedy, which is for unique types of damages and unusual circumstances.

Neil
Dan you’ve often told me mastering the damages in the cases so important. Why is that?

Dan

For lots of reasons.  First of all, when you are in a lawsuit over a breach of contract or anything, you are investing money to get money. So if you don’t know how much you’re fighting for, how can you know how much you should spend?
Secondly, if you master the damages, if you can prove what the damage to you is, if you obtain and collect all the evidence about the damages, even before you worry about why you were damaged or what the law was breached, you can understand the case, the way a litigator understand understands it. You can help your lawyer and in the long run, you’ll be more successful in your case, by thinking about how you were damaged for, and then working it way back to, uh, who breached what and who broke what law.

Neil
So the idea, if you’re the party that’s caused the breach, would be to minimize the risk of the damages downstream, wouldn’t it be?

Dan
Yes, absolutely. It’s even more complicated and deeper than that. You don’t have to decide that you are the person that breached because most people, their ego won’t let them do that. But if you’re being accused of breaching again, the first thing you and your lawyer, or whoever should talk about or think about is how much and damages are they saying that I caused and how can I with very little expense limit those damages.

For example, in employment situations, they may be suing you for $5,000 and, and wages unpaid, but the lawyer’s gonna want to collect $50,000 in attorney’s fees. So before you even get sued or before you even answer a lawsuit, you can go to your lawyer and know what the causes are, and what claims have attorney’s fees clauses on ’em. And you can just simply remedy those before you go into the lawsuit.

Or, someone says you owe $2,000 and you disagree. Well, you could pay them and then fight the case and get your money back. There’s there’s so many situations where looking at the damages can give you a great advantage, even when you’re on the defense side or the plaintiff side, because that’s what you’re fighting about.

Neil
So everybody’s heard the term mitigating the damages. What is mitigating the damages, Dan, and when do you have to do it?

Dan
Well, it’s an obligation. A lot of people get hurt or damaged by someone who breaches a contract. And then they go with this attitude that, well, since they breach, (the other party) owes and they don’t try to mitigate their damages. I mean, doing things that would make them not suffer as much from the breach of contract or other types of causes of action. And what happens in the law is a judge or a jury will hear what you did and you’ll think you’re gonna get $300,000 in trial, but they’ll decide that you failed to perform your obligation, to do everything you could to lessen the amount of damages you suffered.

Neil

Are all contracts equal or are there different types of contracts? There are so many different types of contracts.

Dan
It boggles the mind. And there are so many statutes on the different types of contracts. You buy a car, you have a contract that’s been argued over in the legislature for years, you buy a house, same thing. You a vending machine and you wanna put it in some owner’s store, there’s rules and regulations about the contracts for buying and selling your vending machine service. There are so many … medical practices, they have rules and regulations. So even though we’re all free to contract, we are not absolutely free to contract because there are rules and regulations for every darn industry, including when you buy a product at the store, you are just a customer, but if you sell products to another vendor or another merchant, then you are governed by the uniform commercial code. So if you wanna buy and sell products across state lines, every state has some form of a UCC and they’re consistent and they imply terms on your contract.

So when I talk about what “ifs and whats” we put in contracts, they have to include consideration for the area of business you’re in or the products you’re selling or the services you’re providing, or whether it’s a restaurant, whether it’s a hotel, whether it’s a liquor license, all of these things go into consideration for when a lawyer helps you draft your contract or enforce your contract.

Neil
So Dan, in your mind, what are the important factors when you have a breach of contract case in front of you?

Dan
Bargaining power! The position and the identity of the people involved in the contract.  People who enter into most contracts we sue over, have some sort of bargaining power, or they don’t have a form of bargaining power, meaning lawsuits cost money. Sometimes people enter contracts and they know they’re gonna breach, but they figure it’s worth it.  I mean, there’s so many other subtle things that we as lawyers think about just, just beyond the basic breach, uh, consideration damages, those things. There’s so many more complicated things, cause you’re going to battle with somebody over a breach, the contract, and you gotta find out whether you can collect. Some of these contracts are entered into, by tiny corporations with no assets. And so they breach and they don’t care if you Sue ’em because they’re never gonna pay. So all those little subtle things about real life, how to sue somebody or how to defend a lawsuit for breach of contract, they come into play because after there’s a judgment, there’s still a collection process before there’s a judgment. There’s what’s gonna happen, If I get sued, to my reputation. If you sue some somebody for breach of contract, can they sue you back? Timing. Should you sue now? Or should you wait? What is the defendant doing in their life? What are you doing in your life? How is this all going to affect you? All those things are stuff you wouldn’t learn in law school, but you learn after 35 years of doing this, that suing someone for breach of contract or defending someone for breach of contract gets much more complicated than just knowing the law

Neil
What happens in cases where there is fraud or a breach of fiduciary duty?

Dan

That’s a, a great question because the law’s been changing about breaches of fiduciary duty and fraud. When it comes to fraud, it’s harder to prove fraud. These days, they’ve taken out a couple elements over the last 30 years, but when, when it comes to breach of fiduciary, they’ve expanded it. Now of course, fraud can have in certain circumstances, double triple damages and it can be a breach of fiduciary duty. It’s putting professionals, like CPAs and brokers at more risk for liability based on what they say, what they do or what they refrain from doing or what they fail to do to protect their fiduciaries.

Neil
How does that relate to an unfair business practice?

Dan
It relates tremendously.  Unfair business practices are governed by statute, but most of them arise when people have some type of contract or they’re buying and selling goods with each other or they’re in a business real relationship.
So when you look at fraud, breach of fiduciary duty, likely you’re gonna see a cause of action. The most used cause of action that I know of is unfair business practices and it’s in the B and P section of the law. And it’s covers a tremendous amount of how businesses relate, compete and do business with each other. And it’s related to just not playing fair, not doing things that are fair to each other, taking advantage in the marketplace or taking advantage of each other in a way that was not maybe anticipated in your contract, but it’s covered by statute.

Neil
So we’ve talked about a lot of the elements of breach of contract. Dan, how are these cases generally resolved?

Dan
95% are resolved by settlement. They parties agree to settle after they get tired of beating each other.  But more specifically the offers, an offer of settlement negotiations. That’s the first way. And then very, very helpful is mediation settlement conferences, where you go to a third party and you literally sit in different rooms. While one experienced judge goes back and forth and say is, what about this? What about that? What about this? Until you can try to make a meeting of the minds. And that judge will tell you practical things about what you’re doing, how you’re wasting your life and litigation and how you could just resolve this and probably come out more ahead than if you went to court.

And there’s also arbitrations. A lot of contracts have an arbitration clause and there’s been a lot of bad press in the media, but they are valuable. You have a pandemic, you can’t go to court for three years, but you had an arbitration clause. You got your matter decided in a year, year and a half. And it costs half as much money. And finally going to trial. If you’ve got to go to trial, then you should be preparing for, and as I’ve said, a hundred times, you should be preparing for your trial thinking about damages, whether you are the one who who’s alleged to have caused them or not. That’s what you’re there for. So put a lot of your focus on, you know, whether someone was damaged and then you know who will probably be more successful.

Neil
So Dan, what are some settlements to strategies?

Dan
Well, I could tell you some stories. I’ve learned from some judges, a lot of judges, over the years who became new judges or were judges. And they were in, they got to do their continuing education too. They would go up in the old days to the law school called Pepperdine law school up in Los Angeles and they’d have a seminar just for judges.

And they would talk to them about the psychology of a settlement. And they would say, you have to understand that when people are at odds with each other, there’s a lot of emotion there. And just like, when you negotiate to buy a car, you always say, I can only afford this. And they always say that, but that’s what we call going through the dance. If you don’t appreciate and understand that this case is worth $50,000 and you say I’ll pay $50,000 and they say no. And you’re like, why? They know it’s worth $50k, you know, it’s worth $50k, but their egos, their emotions, won’t let, ’em get there. You have to say, I’ll pay $10k. And they have to say, they want $90k. That’s just it. And if you’re not willing to go through those dance steps to solve your problem, you won’t, you will not get that same result.

And that is what judges talk about when they bring you in. And they say, where are you? And you say, I’m here. And they say, well, why don’t we start here? And then they go the other side. And then they hear all the reasons. And then we, we walk it through. We hear everyone vent about what was wrong and what the other side did wrong until everybody’s happy or not happy. And we have a settlement. And if it, it seems like a totally not legal proposition, but lawyers are called counselors and we’re supposed to counsel our clients both on the law, on emotions and on the combination of both.

Neil
So generally speaking, Dan, what’s the advice you would have for someone who finds themselves in a breach of contract scenario?

Dan
Well, as lawyers, we are champions of our client’s cause. So when you come to see a lawyer, we talked about how to resolve things and whether we have that skillset to do so.  So what we really do as lawyers is we’re advocates for you. So if you are being accused of breach of contract and you don’t think it’s true, we don’t either. And we want to compete, go after and win that case for you. We want to be reasonable and tell you to not spend too much money on us, but we are lawyers. And what ever you believe is true, we believe is true. And we’ll even gather more evidence for you to prove your point. So when you’re talking to a lawyer, you should understand you’re talking to somebody who wants to be, your advocate, wants to be your champion will give you straight advice. But if you want to go for it, they’ll go for it. If you want to settle, they’ll help you settle.  So that’s what you should think about. If you’re in a real breach of contract dispute that requires a lawyer understand that he’s your guard dog. He’s going to go and protect you as much as you want. He’ll tell you to calm down a little bit, but if you’re, if you’re furious, he’s furious or she’s furious. So that’s what you should understand when you hire a lawyer in a breach contract situation.

Neil

Caveat Emptor!

Dan

Let the buyer beware!