Breach of Contract Basics for Small Businesses

For a small business, getting legal guidance in drafting and implementing contracts and agreements helps to define the legal responsibilities and liabilities of the business and establish unambiguous expectations. If a breach of contract occurs, a well-written contract provides legal protection and can help to avoid expensive legal action. In addition, talking with a business law attorney early in the process is a prudent approach if a potential breach of contract occurs.

What Constitutes a Breach of Contract

Contracts form a significant part of the legal foundation of every business. A breach of contract can pose substantial issues that a business owner must address.

For a breach to occur, there must be a valid, enforceable contract in place, which requires five essential criteria to be met:

• Offer and acceptance
• Mutual asset or intention
• Consideration (value exchanged)
• Legal capacities of the parties
• Legality of purpose

In addition, Arizona law requires some contracts to be in writing. But even if a contract is not legally required to be written, the best practice for a business is to put every contract or agreement in written form.

When these requirements are met, and a legal contract exists, a breach can occur in many ways. Failure or refusal to abide by the terms in any regard may constitute a breach, for which legal remedies may be available, including contract termination and financial damages. Examples are non-payment, failure to deliver goods or services, untimely performance or missing deadlines, and disputes over the terms.

Types of Contract Breach and Remedies

A contract breach may be characterized in several ways:

• A material breach goes to the central purpose of the contract.
• A minor or partial breach is more limited and may not affect the contract purpose.
• An anticipatory breach occurs when one of the parties clearly indicates that they do not expect to fulfill their obligation.

The type of breach often affects the legal rights and remedies of the aggrieved party. In Arizona, the most common remedy for a proven breach is monetary damages, which may be compensatory, consequential, or liquidated:

• Compensatory damages reimburse losses directly caused by the breach.
• Consequential damages include foreseeable indirect losses.
• Liquidated damages are pre-determined amounts agreed to in the contract.

If monetary compensation is not sufficient, a court may grant an equitable remedy. These remedies may include:

• Specific performance: a court order to the breaching party to fulfill their obligations, which is generally only available in the case of unique goods or real estate.
• Injunction: an order that prevents a party from taking specified actions that would violate the contract.
• Rescission: an order canceling the contract, which restores the parties to their positions before the contract.

In some cases, a court may order restitution, which requires the breaching party to return value received under the contract. In addition, Arizona law or the contract itself may provide for payment of attorney’s fees by the breaching party. A.R.S. § 12-341.01 specifically provides:

1. In any contested action arising out of a contract, express or implied, the court may award the successful party reasonable attorney fees. If a written settlement offer is rejected and the judgment finally obtained is equal to or more favorable to the offeror than an offer made in writing to settle any contested action arising out of a contract, the offeror is deemed to be the successful party from the date of the offer and the court may award the successful party reasonable attorney fees. This section shall not be construed as altering, prohibiting or restricting present or future contracts or statutes that may provide for attorney fees.
2. The award of reasonable attorney fees pursuant to this section should be made to mitigate the burden of the expense of litigation to establish a just claim or a just defense. It need not equal or relate to the attorney fees actually paid or contracted, but the award may not exceed the amount paid or agreed to be paid.
3. The court and not a jury shall award reasonable attorney fees under this section.

Statute of Limitations

Under Arizona law, the statute of limitations sets a legal deadline for filing a breach of contract lawsuit. The right to sue is lost if action is not taken in time. For a written contract in Arizona, the time limit is six (6) years from the date of breach. For an oral contract, the limit is three (3) years from the date of breach.

How To Proceed After a Potential Breach

If a potential breach occurs, it is always advisable to contact legal counsel at the earliest possible time, rather than waiting until the statute of limitations is about to expire. Your lawyer can review the contract terms and the circumstances and guide you on how to proceed. In many cases, discussion and negotiation can resolve issues relating to a potential breach and avoid the necessity of taking formal legal action.

Taking proactive measures to protect your business, such as working closely with a business law attorney to ensure that all contracts include maximized protection and clear terms, is always a prudent approach for a small business owner.

Schedule a Free Consultation With an East Valley Business Law Attorney

In our business law practice at Peterson Law Offices, our goal is to help your business succeed, grow, and thrive, while minimizing legal problems you encounter and finding the best solutions for the issues that do arise. Our services include ensuring that you protect your contract rights for all agreements relating to your business. We offer contract review, drafting, and negotiation and always provide high-quality legal services at affordable prices. Your first consultation is free of charge.

We welcome inquiries from clients throughout the East Valley, including Queen Creek, San Tan Valley, Gilbert, Mesa, and Chandler. Schedule your free initial consultation by calling 480-878-5998 or using our online contact form.