In the second of a six-part-series, retired senior partner Greg Miller continues to explain contract law, with definitions of obligations and conditions.
I’m often asked by clients, “what are my obligations under this contract?” This is often a prelude to a discussion of a situation where a client has not been paid and wants to know, “Do I have to continue? How can I recover what I’m owed?” The answer depends on the exact circumstances, but the analysis is always the same.
A contract is an agreement among two or more persons that’s enforceable at law. At it’s simplest, it confirms each parties’ promise to perform in some manner. For example, a consultant promises to provide certain professional services, and a client promises to pay for those services. Looked at another way, each party is entitled to receive the benefit of the performance promised by the other. And each party is obligated to perform exactly as promised. Once the mutual promises have been completed the contract is said to be discharged.
How is performance judged? The obligations – promises – must be performed until discharged. Performance is judged strictly, close enough is not sufficient. Anything less than full performance is a breach.
How are contracts discharged? Full performance discharges any further obligation. Discharge can also be achieved by external events. An Act of God, for example. The failure of a condition precedent. The operation of law, such as bankruptcy of one of the parties. Or the agreement by the parties to discharge the contract.
Breach is anything less than full performance. An express breach is where an obligation is not performed as and when required. It’s a clear repudiation of the contract. An implied breach is an indication that the contract may not be performed as and when required.
Now, the remedies depend on the type of breach. An express breach, the rights have crystallized. An implied breach, the rights have not yet crystallized. The remedies and rights also depend on the type of term breached.
A condition is one of the essential terms of a contract. Breach of condition entitles the innocent party to a choice between accepting the breach as repudiation of the contract, which discharges the innocent party from its obligations and gives it the right to sue for damages, or not considering the breach as a repudiation of its further obligations, and giving the innocent party only the right to sue for damages.
Warranties are minor terms in the contract. Breach of warranty only entitles the innocent party to sue for damages, to consider it’s own obligations having been discharged.
What is a condition and what is a warranty is not always clear cut. And note that a condition can become a warranty if it isn’t pursued. Damages is the dollar value of what it would take to put an innocent party back in the position it would have been in had the breach not occurred. Now the innocent party is only entitled to a reasonable measure of damages. It is obliged at law to take reasonable steps to lesson or mitigate its own damages.