The first entry in our North Carolina Dispute Resolution series addresses contracts and claims for breach of contract. At its most basic, a contract is simply an agreement. Often it is in writing, but it does not have to be. Contracts are everywhere. From the purchase agreement when you buy a car to the service contract with your landscaper, from employment agreements to software licenses, contracts govern countless transactions and relationships.
Whenever someone fails to honor their promises under a contract, a potential legal claim for breach of contract arises. But what exactly constitutes a contract claim? This post addresses that question.
What Is a Contract Claim?
A contract claim arises when one party alleges that another party has breached, or failed to fulfill, their obligations under a legally binding agreement. At its core, a contract is a promise or set of promises that the law will enforce. When those promises are broken, the injured party may seek legal remedies through the court system.
The Essential Elements: When Does a Contract Exist?
Before exploring different types of contract claims, it’s crucial to understand when a legally enforceable contract exists. Generally, a valid contract requires four key elements:
- Offer and Acceptance: One party must make a clear offer, and the other must accept it. This creates mutual agreement on the terms.
- Consideration: Both parties must exchange something of value. This could be money, goods, services, or even a promise to do (or not do) something. Consideration is what distinguishes a contract, that can be enforced in court, and a gift, which normally cannot. If you promise to buy someone a meal, but then you renege on your promise, the person you promised cannot sue you for breaking your promise, unless he or she had given you something in exchange for the promised meal.
- Legal Capacity: Both parties must have the legal ability to enter into contracts. This typically means being of legal age and sound mind. For example, contracts with minors are generally unenforceable.
- Legal Purpose: The contract’s purpose must be legal. Agreements to engage in illegal activities cannot be enforced by courts.
Types of Contract Claims
Contract claims generally fall into several categories, each with distinct characteristics and potential remedies:
Breach of Contract
This is the most common type of contract claim. A breach occurs when one party fails to perform any duty or obligation specified in the contract. Breaches can be categorized as either material or minor. A material breach goes to the heart of the contract and defeats its essential purpose, while a minor breach involves a failure to perform some less critical aspect of the agreement.
For example, if a contractor agrees to build a deck by June 1st using specific materials but uses inferior materials and finishes three weeks late, this would likely constitute a material breach. However, if the contractor uses the correct materials and finishes on time but paints the railings navy blue instead of the specified midnight blue, this might be considered a minor breach.
Anticipatory Breach
Sometimes called “anticipatory repudiation,” this occurs when one party clearly indicates, either through words or actions, that they will not fulfill their contractual obligations before the performance is actually due. This allows the non-breaching party to treat the contract as breached immediately, rather than waiting for the actual failure to perform.
Fraudulent Misrepresentation
This claim arises when one party intentionally provides false information to induce another party to enter into a contract. The misrepresentation must be material to the agreement and relied upon by the other party. For instance, if a seller knowingly lies about a product’s specifications to secure a sale, this could form the basis for a fraudulent misrepresentation claim.
Mistake and Duress Claims
Contracts may be challenged when they were formed under circumstances involving mutual mistake about a fundamental fact, or when one party was coerced or pressured into agreement. These claims seek to void or modify the contract based on the flawed circumstances of its formation.
Common Types of Contract Claims by Agreement Type
Contract claims vary significantly depending on the type of agreement involved. Understanding the specific issues that commonly arise with different contract types can help you identify potential problems and protect your interests.
Purchase Agreements
Purchase agreements for real estate, vehicles, or significant assets frequently generate contract claims. Common disputes include failure to deliver goods as specified, undisclosed defects, financing contingencies not being met, or failure to transfer clear title. In real estate transactions, claims often involve misrepresentations about property conditions, failure to meet closing deadlines, or disputes over what fixtures and appliances are included in the sale.
Service Contracts
Service agreements create some of the most frequent contract disputes because they often involve subjective standards of performance. Whether it’s a landscaping contract, home renovation project, or professional consulting agreement, claims typically center on quality of work, timeliness of completion, or scope of services. These contracts often suffer from vague specifications, making it difficult to determine whether performance met contractual standards.
Employment Contracts
Employment agreements can generate various types of claims, particularly around restrictive covenants like non-compete clauses, confidentiality obligations, and compensation disputes. Claims may involve wrongful termination, disputes over commission calculations, violation of non-solicitation agreements, or failure to provide promised benefits. Employment contracts also frequently involve claims related to severance payments and stock option vesting.
Promissory Notes and Loan Agreements
Financial agreements like promissory notes create relatively straightforward but high-stakes contract claims. These typically involve failure to make payments according to agreed terms, disputes over interest calculations, or disagreements about collateral. Claims may also arise from alleged violations of loan covenants or early payment penalties.
Shareholder Agreements
Disputes among business owners often stem from shareholder agreements or buy-sell agreements. Common claims include restrictions on share transfers, valuation disputes when owners want to exit the business, breach of voting agreements, or failure to honor tag-along or drag-along rights. These agreements frequently become contentious during business divorces or when companies face financial distress.
Operating Agreements and Partnership Agreements
Limited liability companies and partnerships rely on operating agreements and partnership agreements to govern relationships among owners. Claims often involve profit and loss distributions, management authority disputes, restrictions on member withdrawal, or violations of fiduciary duties. These agreements can also generate claims related to capital contributions, expense allocations, and decision-making processes.
Construction Contracts
Construction agreements present unique challenges due to their complexity and the potential for unforeseen circumstances. Common claims include delay damages, change order disputes, payment for extra work, defective construction, and lien rights. These contracts often involve multiple parties (owners, general contractors, subcontractors, suppliers) creating complex webs of potential liability.
Licensing and Franchise Agreements
Intellectual property licensing agreements and franchise agreements frequently generate claims involving royalty payments, territorial restrictions, quality control standards, and termination provisions. Franchisees may claim that franchisors failed to provide promised support or training, while franchisors often pursue claims for trademark violations or failure to maintain brand standards.
Non-Disclosure and Non-Compete Agreements
These restrictive agreements create claims when former employees or business partners allegedly violate confidentiality obligations or compete improperly. Courts often scrutinize these agreements carefully, as they limit individuals’ ability to work in their chosen field. Claims frequently involve disputes over what constitutes confidential information, the geographic and temporal scope of restrictions, and whether the restrictions are reasonable.
Software and Technology Agreements
Technology contracts, including software licenses, development agreements, and service level agreements, present modern challenges in contract law. Common claims involve software performance issues, data security breaches, intellectual property ownership disputes, and failure to meet technical specifications or uptime commitments.
I was wronged! Evaluating Whether You Have a Contract Claim
Determining whether you have a viable contract claim requires careful analysis of several factors:
Document the Agreement
Start by gathering all documentation related to your agreement. This includes written contracts, emails, text messages, invoices, receipts, and any other communications that evidence the terms of your arrangement. Even if your agreement was primarily verbal, written communications that reference the deal can be crucial evidence.
Identify the Specific Obligations
Clearly identify what each party was supposed to do under the contract. What were the deliverables, deadlines, payment terms, and performance standards? The more specific you can be about these obligations, the easier it becomes to determine whether a breach occurred.
Assess the Breach
Consider whether the other party’s failure to perform was material or minor, and whether it significantly impacted the value you expected to receive from the contract. Ask yourself: did you receive substantially what you bargained for, or were you deprived of the essential benefit of the agreement?
Calculate Your Damages
Contract law typically seeks to put the injured party in the position they would have been in had the contract been properly performed. Consider what losses you suffered as a result of the breach, including direct costs, lost profits, and additional expenses incurred to remedy the situation.
Consider Potential Defenses
Evaluate whether the other party might have legitimate defenses to your claim. Did you also fail to perform some aspect of the contract? Were there circumstances beyond their control that prevented performance? Understanding potential defenses helps you assess the strength of your position.
Am I the Defendant? When Someone Might Have a Contract Claim Against You
It’s equally important to recognize when you might be vulnerable to a contract claim. Regular self-assessment of your contractual obligations can help prevent disputes and legal exposure.
Review Your Performance
Regularly evaluate whether you’re meeting all your contractual obligations on time and according to the agreed specifications. If you’re falling behind or anticipating problems, communicate early and clearly with the other party. Often, parties can work together to modify terms or find solutions that avoid breach.
Communication Is Key
Many contract disputes arise from misunderstandings or lack of communication. If circumstances change or problems arise that might affect your ability to perform, notify the other party immediately. This transparency can prevent small issues from becoming major legal problems.
Document Everything
Keep detailed records of your performance, including work completed, communications with the other party, and any changes to the original agreement. Good documentation protects you if disputes arise and demonstrates your good faith efforts to fulfill your obligations.
When to Seek Legal Advice
While not every contract dispute requires legal intervention, certain situations warrant professional guidance. Consider consulting with an attorney when the contract involves significant financial stakes, when the legal issues are complex, when the other party has retained counsel, or when attempts at direct resolution have failed.
Additionally, if you’re regularly entering into contracts as part of your business, having an attorney review your standard agreements can prevent problems before they occur. Well-drafted contracts with clear terms and appropriate protective clauses can significantly reduce the likelihood of disputes.
The Path Forward
Understanding contract claims empowers you to better protect your interests in business and personal dealings. Whether you’re evaluating a potential claim or assessing your own contractual performance, the key lies in careful documentation, clear communication, and thorough understanding of your rights and obligations.
Remember that contract law seeks fairness and the enforcement of reasonable expectations. When parties enter into agreements in good faith and perform their obligations diligently, contract claims become unnecessary. However, when disputes do arise, knowledge of your legal options and obligations provides the foundation for resolving them effectively.
Contract claims are a fundamental aspect of commercial and personal relationships in our society. By understanding these concepts, you’re better equipped to navigate the complex world of legal agreements and protect your interests when promises are broken.
If you believe you have a contract claim against another party, or if you’re concerned that someone might pursue a breach of contract claim against you, don’t navigate these complex waters alone. The experienced attorneys at Revolution Law Group can help you evaluate your situation, understand your rights and obligations, and develop an effective strategy to protect your interests. Contact us today for a consultation to discuss your contract dispute and explore your legal options.
Revolution Law Group is located in Greensboro, NC, and serves individuals and small businesses throughout the Triad and surrounding areas. To contact us please visit Revolution.law or call 336-333-7907.
The information included here is for informational purposes only, is not exhaustive of all considerations when creating documents, is not intended to be legal advice, and should not be relied upon for that purpose. We strongly recommend you consult with an attorney and do not attempt to create your own documents.