They Promised, Then Ghosted You: Handling Broken Business Agreements

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What happens when your vendor drops the ball—or worse, bails entirely? Attorney Shaune breaks down how to spot, interpret, and respond to a contract breach. From anticipatory repudiation to novation and specific performance, learn your legal options and protect your business when deals go sideways. 

Transcript

Hello, everyone, and welcome once again to your business accelerated. I'm your host attorney, Shaune B Arnold. I am transaction counsel in California, Los Angeles, to be exact. I'm so excited that you're here. 

We're going to talk about some really hardcore legal issues today on your business accelerated. So I want you to understand that all of this discussion is in the context of my being a California business attorney, so that if you live in another state or another country or just another state of mind, I encourage you to take what you're going to learn here to your own attorney in your jurisdiction, and they can tell you whether there are any differences between the law where I live and the law where you live.

I also invite you to join me on my other podcast, legal biz Café. Over there, we talk about your mindset, and other issues that make you just want to pull the covers over your head and not get up at all, rather than build your business. When you listen to LegalBiz Café and Your Business Accelerated, you are fully armed as the entrepreneur.

Tonight, we’re dealing with what happens when your vendor said they would …and then they didn't. What can you do about it? We're talking about a breach of contract tonight, on your business accelerated.

What can you do when someone does not properly perform? Well, there's a lot you can do, but first you have to look at the performance and determine what kind of breach you're really dealing with, because it does make a difference.

If, for example, you've got somebody who totally failed to do what they were supposed to do, that is a total breach, and it just might completely discharge either the contract or your duties to perform under the contract.

It might be a partial breach instead, where somebody actually does perform, but they did a really bad job. You may or may not have to perform when they do something like that. We’re going to discuss what you can do when someone just does a bad job, as opposed to not showing up at all.

There is another kind of breach where someone knows that they're not going to be able to perform, and they repudiate before the performance is even due. This is called anticipatory repudiation. And there are a lot of things that you can do when somebody breaches the contract by telling you, next week, I'm not going to be able to do what I'm supposed to be doing.

So, when any of these things happen, what should you do? Well, you want to look and see whether their breach prevents your performance under the contract, whether their breach actually terminates the contract, and/or whether their breach actually is a condition precedent to even the existence of the contract.

I know that sounds a little bit weird, but let's dig into the actual legal structure that underpins breaches of contract, and the resulting damages the non-breaching party gets, and you'll begin to see what I mean by all of this information.

When you have a contract, either the common law is going to control (meaning sometime in the past judges decided how the parties should have acted). The common law will typically control when two private parties have a private contract dispute. It can also control if the contract involved the sale of goods or services, where the two parties are a vendor and a consumer.

But there is another construct that actually kicks in where you have the sale of goods, not services, just the sale of goods between commercial vendors (as opposed to between a vendor and a consumer). 

In a contract between commercial vendors, you've got two people who sell goods professionally. That makes a difference because if they've got terms missing in their commercial contract, or if the have parties are not performing the way they're supposed to perform, then the consequences will be different, depending on whether that contract is being controlled by the Uniform Commercial Code (the UCC), or the common law. Commercial parties have a choice as to which legal construct will control, either the UCC or the common law.

With the UCC, if terms are missing or misstated, the UCC has commercial terms that will be inserted into the contract. The point is to keep business moving. If the contract is governed by the common law, then things are a bit more complicated. There is no UCC in the common law – no way to just insert contract terms. Things go to mediation, arbitration or litigation under these circumstances.

You actually put the controlling language in your contract in one of two ways, either you structure it so that the contract refers to following the UCC, or the actual terms of the UCC are put into the contract. You can say that if any of these terms are found to be impracticable or illegal or missing, then we'll look to the UCC to fill in those terms, and that goes a long way towards remedying a breach, especially if it's an anticipatory breach, or if it's a breach that's coming up because there's something that's missing in the contract.

So, if you are doing if you're a business and you're doing business with another business, then you really want to look at the UCC and determine if this is the construct that you want to control your relationship in the event that something goes wrong with performance. It’s just a really good way to help the parties figure it out and not actually stop doing business with one another. That is the purpose of the UCC. The purpose of the UCC is to make sure that business doesn't stop because the parties got something messed up, because your forms that you sent to one another have different terms and now you don't know what to do. The UCC will actually step in to fill in those missing positions.

The UCC also gives you guidelines on what to do if the if the goods arrived, but are non-conforming (that’s not what you ordered). For example, the contract says you're going to give them 1000 widgets. And you don't have 1000 widgets because your warehouse burned down. You only have 100 widgets that you were able to get from somewhere else. And the question then becomes, can you give them these 100 widgets and go out and get 900 more? If you're under the common law, you have breached your contract, and they can just walk away from you. If, however, the contract is being controlled by the Uniform Commercial Code, then you're safe, because the UCC will provide for that substitute goods fix if you, try in good faith to actually perform, but you can't. The UCC will save you by saying, yes, it's a breach, but they're going to give you time to cure the breach.

If, by contrast, you were under the common law and the contract itself did not give you time to cure, meaning time to go out and get those extra widgets that you said you were going to give and you didn't give, then you would be in breach of contract. So really consider, if you are in business and you do business with other businesses, then you really want to consider using the UCC as the construct for your contracts. And you know, if you are a business that does business with businesses, and you also do business with consumers, then you can have two different kinds of contracts, one for your commercial relationships, where the UCC will control, and the other, where common law will control.

It's very difficult to get a consumer to be held to the UCC provisions. The only way you're really going to do that is to put those UCC provisions right into the contract, so that if the consumer signs that contract, then common law will actually control to read what's in that contract and hold that consumer to what's in that contract, and so you will be able to hold them to the UCC in that way.

So, let's, let's look at what you can do in the event that you had a contract with someone and they breached the contract, they didn't perform. Besides using the UCC to augment the contract, and rather than sue them for the breach under the common law, what else can you do?

Well, there are some really basic principles that help the parties work it out. These principles are really in the case law that judges have decided. In other cases, you'll have statutes that will control the parties relationships. Statutes are created by state legislatures (and by Congress in the case of federal statutes). So, let's talk about some of these remedies.

When someone has breached the contract, first of all, you just want to try to work it out. You don't want to just run straight for the courthouse. You want to figure out a way that the other party can actually perform and give you what you want, and they can still get what they need as well. This is actually called an accord and satisfaction.

An accord and satisfaction happens when the parties actually sit down and create an entirely new agreement because one of the parties can't perform, or the purpose of the contract has been frustrated. There are a lot of reasons why this can occur. Maybe there was a strike, war, or fire. Perhaps something else happened that is preventing the parties from performing under this contract, but they still want to work together. They're not angry at each other. They want to work it out.

In that case, you do an accord and satisfaction where you sit down and you just create a new agreement and the parties agree to terminate the prior contract and operate under this new contract.

Separately, you can also simply modify the old contract with an amendment. This is slightly different from an accord and satisfaction in that the old contract is still going to be good, but you're just going to negotiate and draft an amendment to the contract that just changes one or two things in the contract and the contract itself will still be good.

Another thing that you can do when the contract is not working out is to actually create what's called a novation. A novation happens when you substitute in a third party to actually perform for the party that's breaching and the contract can remain. The old contract is now between two new people. It's not the original contracting parties. The person that was not able to actually perform actually steps out of the deal, and a third party steps into the deal in their place.

This substitution can happen on either side of the contract. Either the person that sees that someone's not going to be able to perform, or that person sees that they are not going to be able to perform. Either way, you can actually substitute in somebody who will be able to perform.

Finally, you can just rescind the contract if somebody has breached the agreement in a material way. And what I mean by material is it affects whether the other party needs to perform. See, there are ways to breach a contract where it doesn't really matter if somebody says, for example, I want the money wired to this account, and they give routing number and account number and it's in the contract. And rather than do that, the person who's doing the paying actually takes cash over to the other party and offers them cash. Technically speaking, that's a breach of contract, but the person who's receiving the cash, do they really care? If they don't, then it's not material.

So, every breach of contract is not a material breach of contract. Every breach of contract will not stop the contract or stop your performance under the contract, or allow you to repudiate your performance or even rescind the entire contract. Not every breach will allow you to do that. It has to be a material breach. It has to go to the heart of the purpose or the performance that's due.

So, once you do find that you're able to rescind a contract, then you may just rescind the contract and walk away. Some people will rescind the contract and sue if they find that the person who didn't perform actually caused damages because they didn't perform. And you know that is extremely important, because not every injury is compensable. If someone hurts your feelings, you can't necessarily sue them unless there's a public policy reason, like discrimination or something like that, where your feelings are hurt because they wouldn't serve you in that restaurant.

That's very different than somebody just saying, I don't like you. You can't sue them because they don't like you. There has to be damage, actual damage. You have to incur injury, direct or indirect costs or expenses.

Let’s discuss the damages that will be due to you for the other party’s breach of the contract. There are different kinds of damages that might apply in litigation (or in a mediation settlement). Compensatory damages are going to pay you back for the actual costs that you incurred. Consequential damages are going to give you back your indirect costs that you incurred when somebody materially breached your agreement. And then, of course, there's restitution that will make you whole if somebody took something from you or hit you, for example, in a car accident, and you lost your car, which was how you made your living. You would get restitution damages to pay you back for that car that you lost, and you would get compensatory damages for your medical bills.

And then, of course, there's liquidated damages, where the damages can't be easily calculated. In this case, the parties can determine upfront what the damages will be in the event that there's a breach. So, you don't have to fight about that particular issue. You can actually put that in the contract. And so you can sue for the liquidated damages.

You can also sue for specific performance. If someone says, I can't do that, you can actually go to the court and say, “Your Honor, make them do it.” The court might issue an injunction, which requires them to specifically perform. It requires them to do what they said they would do under the contract.

There are other concepts in equity that would operate if you have to sue. For example, you can sue for detrimental reliance if you relied to your detriment on them performing the contract that was breached. For example, if someone said, “I'll sell you my train set.” Then you go out and borrow the money to buy it and do all kinds of preparation to buy that train set, and then they sell it to somebody else.

You may be able to show the court that you relied to your detriment on the promise that they made you, and the court might make them carry out that promise. The law might also operate to terminate your contract or to discharge your performance. 

The law might even operate to cancel your contract if your performance becomes impossible, meaning you can't do it because the underlying purpose has been destroyed because Congress or your state legislature passed a law making whatever the purpose of that agreement illegal.

There are myriad ways that a performance can become impossible such that no one can perform it. The court will then step in and just discharge the party's performance under that agreement.

Impracticability is another way that the law can operate to terminate a contract or to terminate a performance that is due under a contract. Impracticability means I can't perform, but someone else may be able to do it. This is a perfect scenario for that novation that we talked about earlier, where you can substitute in a third party if the purpose of the agreement gets frustrated. The important thing to remember is you can get different kind of damages to completely make you whole.

Ladies and gentlemen, I want to thank you for joining me today on this week’s episode of Your Business, Accelerated! I’m attorney Shaune B. Arnold. I invite you to follow me on Facebook, LinkedIn and Twitter X. In all of those places, I’m known as S.H.A.U.N.E dot Arnold.

In the meantime, and in between time, I am, …as always, reminding you to MAXIMIZE your COMPETENCE to get the CONFIDENCE YOU NEED to succeed.

I’ll see you right back here next week, on Your Business, Accelerated! …Bye-bye, friends.