The basic rule is that parties to contracts must perform as specified in the contract unless (1) the parties agree to the change in the contract's terms, or (2) the actions of the party who deviates from the terms of the contract are implicitly accepted ("ratified") by the action or non-action of the other party.


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The basic rule is that parties to contracts must perform as specified in the contract unless (1) the parties agree to the change in the contract's terms, or (2) the actions of the party who deviates from the terms of the contract are implicitly accepted ("ratified") by the action or non-action of the other party.

If there is no acceptance of deviation from the terms of the contract, and the deviation is serious enough to make any real difference in the intended result of the contract, then the deviating party is said to have breached the contract. His justified prevention or interference with the performance of the other party is also a breach.

Of course if one party fails more or less entirely to perform the contract, or totally prevents the performance of the contract by the other party, the situation is straightforward. The situation becomes more complex where the argument is over the quality of materials, the timing of work, or something of that sort.

Breach of contract leaves the nonperforming or improperly performing party open to a claim for damages by the other party. The non- breaching party is relieved of his obligations under the contract by the other party's breach.

The aggrieved party, to help support his claim for breach, should have done all the things required of him under the contract up until the time of breach, and must have done nothing to make it impossible or unreasonably difficult for the other party to perform his share. The nonperforming party can be expected to make excuses for his conduct, and he will try to find ways to blame the other party--an excellent argument for performing one's own side of a contract punctiliously and in a manner that leaves a record which others can see.

There are so many possible ways for performance of a contract to give rise to dissatisfaction that the courts have been forced to analyze the matter in much more subtle terms than "breached" or "not breached."

The doctrine of "substantial performance" saves a party who has largely fulfilled his obligations under a contract from suffering major loss merely because he has unintentionally fallen short in some particular which does not affect the essence of the contract.

There has to be a limit to the quibbles of the dissatisfied customer, for example, or the courts would be swamped with trials over precise shades of paint and tiny imperfections in services. A party can unintentionally fall short of perfection, but if he has substantially performed his duties under the contract, he can still sue the other party for payment.

The dissatisfied party, on the other hand, can usually win some adjustment in the amount of payment as compensation for the minor defects in the performance.

Where a party's unintentional failure to perform fully does affect the essence of the contract, he cannot sue the other party "on the contract" in order to be paid. To the extent that his work has benefited the other party, he may recover on the theory of a contract implied by law (quasi-contract), as explained above.

REMEDIES

The ordinary remedy for breach of contract is money damages.

As we said earlier, a contract should always foresee the possibility of nonperformance, intentional or unintentional, and should spell out what is to be done.

Some contracts go so far as to include an agreement on a set amount of "liquidated damages" which are to be paid in case something goes wrong. These are acceptable to the courts as long as the amount of liquidated damages is a reasonable estimation of the harm that would be done by the breach. If the amount is so excessive as to amount to a penalty or fine rather than compensation for harm the courts will ignore the liquidated damages clause and assess damages by actually measuring at trial the financial harm done by the breach.

You should, unless the provision may pose a worse threat to you than to the other party, specify in your contracts that if legal action for breach is necessary, the losing party will pay attorney's fees.

If you and the other party live in different geographical jurisdictions, you should try to include a provision which says that the contract is to be enforced under the laws of your jurisdiction. This makes it possible for any litigation concerning the contract to take place in a court near your home.

The purpose of damages in suits on contracts is at best to place the injured party in as nearly as possible the same position he would have been in had the contract been properly performed, and at least to restore him as nearly as possible to the position he would have been in had he made no contract at all. In other words, no one should suffer loss because another has failed to perform a contract properly.

Where nonperformance is total, for example, the damaged party should get back any money he has paid, along with additional money to compensate him for any actual financial loss which resulted from the nonperformance. The loss must have been a reasonably foreseeable result of the nonperformance.

Do not expect, however, to receive money damages designed merely to punish the breaching party for dishonesty or bad behavior. Such "punitive damages", which are possibilities in suits for personal injury and other wrongs, are not available in suits on contracts. Of course if you can allege that you were defrauded, for example, then you are suing for wrongdoing beyond the breach of contract, and you may receive punitive damages.

The principals of damages in contract suits are as numerous as the problems that can arise from contracts. All we have been able to do here is to give some idea of the ramifications.

FRAUD

Accusations of fraud most frequently arise where some sort of contractual situation is involved. Someone is induced to enter into an agreement by a deliberate misrepresentation made by the other party.

Here is a simplified version of the things which must occur in order to establish a case for fraud:

1. D makes a representation about a fact.
2. D knows that the representation is false, OR he makes it with complete and reckless disregard of whether it is true or not.
3. D intends P to rely on D's misrepresentations.
4. P does rely on D's misrepresentations.
5. As a result of his reliance, P suffers harm for which there is a legal remedy.

Here are some fine points which you will want to keep in mind when dealing with people:

Mere silence may not be fraudulent: D is not necessarily under a duty to tell P what D knows. But a seller may be found guilty of fraud if he fails to tell the buyer about a hidden defect (latent defect) which would not be found through ordinary inspection. (The seller must of course know about the defect before he can be responsible for revealing it.)

Words are not necessary to create fraud: Actions which are calculated to misrepresent something can be fraudulent. For example, a dealer uses a car as a demonstrator for six months and then rolls back the odometer and sprays the interior with new car scent before putting the vehicle on sale as a new car.

Fraud does not occur when a person promises to do something, intending to do it, and then changes his mind and does not do it. Fraud does occur when a person misrepresents his present intentions: If D says to P, "If you'll buy this store, I'm leaving town and taking my business with me," and D's actual intention is to open a larger, competing store across the street from P, then D is making a fraudulent misrepresentation.

If you rely to your detriment on a person who DOES mean what he says at the time he says it, but who later changes his mind, your most likely remedies are a suit for damages if there is a contract, or if there is not a formal contract, a suit in quasi based on promissory estoppel, depending on the circumstances. Those remedies are covered above.

Opinions cannot be fraudulent. If D says to P, "This foal is going to be a really great racehorse," and P buys the foal and it never wins a race, P can't win a suit for fraud. On the other hand, if D says, "This horse cost me $50,000.00," but D actually paid much less for the horse, and P buys the horse because he is impressed with its value, then D may be guilty of fraud.

Finally, even if D knowingly makes a false representation of fact, he may not be found guilty of fraud if P failed to find out the truth when it was available to him through reasonable investigation. P is not required, however, to exert himself unreasonably to verify everything D tells him. If D gives P a financial statement which doesn't have some obvious defect on its face, P is entitled to rely on it rather than to hire accountants to go over D's books.

WHAT TO DO IF YOU ARE A VICTIM OF FRAUD:

1. If convenient, simply do not perform your obligations under the contract. Then just wait for the other party to sue you. Use the other party's fraud as your defense. For example, keep the horse but stop making payments to the seller. When the seller sues you, you can then ask the court to remedy all your losses which have resulted from the seller's fraud. OR

2. Carry out your part of the contract and sue the other party for damages caused by his fraud. Remember, though, that it is usually better to let the other party go to the trouble and expense of suing you if you can arrange it that way. OR

3. Instead of treating the contract as valid (as in 2), you could rescind the contract, offering to return to the other person whatever consideration you received from him, and suing him for the return of whatever consideration you gave to him.

You cannot both confirm the contract (2) and rescind it (3), so you would choose the remedy which will put you in the best position.
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