Contracts provide security and predictability in everyday life and business operations, defining mutual obligations and responsibilities. Ordinary business operations would have been unthinkable without them. In commerce, contracts deal with relationships between clients, vendors, and employees.
Simply put, contracts are binding agreements between two sides, each promising to fulfill their part of the deal in achieving the purpose of the contract.
Each contract must meet specific fundamental requirements such as an offer, consideration, acceptance, intent, capacity, and legality. The validity depends on each element – if one is absent, the contract is not enforceable.
1. Offer. The contract-making process starts when one of the parties proposes entering into a contractual relationship. The initiative to enter into the contract is called an offer. An offer can be an oral or written statement containing the crucial elements of the contract (the price and the description of goods/services). An offer should outline the agreement so that accepting the initiative creates a valid contract.
2. Consideration. The reason parties sign a contract is called consideration – the underlying motivation for entering into a binding agreement with the other party. The consideration must be legal, meaning the parties cannot make a valid contract by agreeing to purchase/buy drugs or other illegal items.
3. Acceptance. The next step is acceptance of an offer. The party receiving the initiative can accept it by simply sending an affirmative response (oral or in writing).
4. Intent. The initiative to enter into a contract must be intentional and mutual. In other words, there should be a meeting of the minds between the parties. Without that requirement (for example, one party thinks they are buying oranges, while the other thinks they are selling apples), the contract cannot produce legal effects. In case of a dispute, the injured party can claim there the meeting of the minds requirement is not fulfilled, rendering the contract invalid.
5. Capacity. The contract is a binding agreement between two parties, meaning both parties must have the legal potential to commit to the contractual terms. If one of the parties is a minor or suffers from mental illness, they cannot enter into a valid contract.
6. Legality. Finally, the terms of the contract must not violate the law. As mentioned above, the consideration (the reason why parties enter the agreement) must be legal. That applies to all other aspects of the contract.
Acting in good faith in fulfilling contractual obligations is the essence of each agreement. The principle of good faith is the underlying principle behind commercial transactions. Without honesty and transparency, enforcing contracts would require going to court in each case. Litigating contract disputes should be an exception, not a rule. That is why parties should conduct themselves ethically, honoring the agreements they enter wilfully.
Acting opposite to the terms constitutes a breach of contract, which occurs when one party fails to uphold its obligations.
For example, if your supplier fails to deliver goods on time or the quality of products does not fit the purpose known to them before entering into the contract, you are dealing with a breach of contract. Failing to pay on time is also a breach.
There are two main types of breaches of contract: non-material and material.
1. Non-material (Immaterial) Breach. A minor breach that does not compromise the integrity of contractual relationships is called a non-material (partial) breach. The non-material breach involves minor non-compliance with the contractual terms, such as delivery delays, late payments, goods and services that do not fit the purpose, etc. For example, delivery delays shorter than two days constitute an immaterial breach, giving the complying party right to seek damages in addition to subsequent performance. Similarly, paying the price one day after the due date does not question the integrity of the contract. The non-complying party can pay subsequently, but the other party can seek damages too. Sometimes the seller delivers the goods or performs services of lower quality. Or the goods do not fit the purpose both parties agreed. The complying party has the right to seek the delivery of appropriate goods in addition to damages they suffered due to the breach.
2. Material (Fundamental) Breach. An actual breach of contract (a fundamental breach) is a substantial deviation from the agreement. The material breach affects the existence of the contract. The complying party can seek damages, but subsequent performance is usually impossible. Instead of performance, the injured party can ask the court to order contract rescission or grant restitution. Some typical examples of material breach include failure to pay the price, long delays in delivery, and failure to pay the rent. When the purchaser refuses to pay for the goods or services they received, that constitutes a material breach of contract, giving the other party the to seek compensation or restitution. If there are elements of fraud, the court can order contract rescission. Next, delivery delays that last for several weeks compromise the purpose of the deal. The complying party may no longer be interested in upholding the contract, so compensation is the only option. Finally, when a tenant fails to pay the rent, the landlord can evict them, seeking compensation for the damage incurred.
The traditional way of dealing with breaches of contract is by filing a lawsuit in court.
To prove a breach of contract claim, the plaintiff must prove the following:
When determining the type of breach (material or immaterial), the courts consider several factors. The judges analyze the extent of the damage, how the parties conduct themselves, and their intentions.
1. Damages. Regardless of the type of breach (material or non-material), you can always seek damages from the non-complying party. In case of material breach, the subsequent performance is not possible, so getting compensation is the only way court can put you in a position before the breach. On the other hand, non-material violations do not affect the integrity of the contract, meaning performance is still possible. Nevertheless, a complying party can seek damages insisting on performance. In that case, the other party must fulfill their contractual obligation and pay the damages to the plaintiff. There are two types of damages under Florida law: compensatory and special. In the first case, the defendant must compensate the complying party, recovering their initial position. Special damages refer to indirect losses that occurred due to the contract breach.
2. Restitution. In the case of a material breach, performance is impossible. The violation compromised its integrity, so there is no possibility of subsequent obligation fulfillment. Likewise, damages cannot achieve satisfactory results. The breach of contract results from impracticable terms, not from a failure to respect the terms and conditions. Restitution differs from compensation in the following way – it focuses on gains rather than losses. So, instead of damages (based on loss calculation), the plaintiff seeks restitution (depending on the defendant’s profits).
3. Contract Rescission. Florida courts can order the rescission in cases that involve fraud (material breaches). The court can order unilateral rescission to the injured party if no other remedy is available. In that case, the complying party has no more obligation under the contract (while the other party may face criminal charges). The rescission can be bilateral, meaning both parties agree to rescind the contract, relieving each other from future obligations.
4. Specific Performance. Specific performance is a legal remedy similar to compensation. In both cases, the non-complying party must recover the other party’s losses, putting them in the state before the breach. But unlike compensation, which applies to material breaches, specific performance applies to immaterial breaches (where subsequent performance is possible and desirable). Of course, the complying party can seek compensation in addition to performance when a minor contract breach occurs.
Court litigation is a time-consuming and financially-draining process. Getting an initial court date can take months. Strict litigation rules and multiple stages (discovery, opening statements, witness examination, and closing arguments) result in considerable fees and court expenses. In commercial relationships, the costly and time-consuming court process is ineffective for resolving breach of contract disputes.
The court process is public, meaning everything parties reveal during litigation becomes part of the public record. That can negatively affect contractual parties, especially in commercial relationships. Their competition can get invaluable insights into their business strategy and use that knowledge to gain market advantage.
As a vindictive process, litigation cannot reconcile the disputed parties. Instead, contractual partners engage in a court fight to defeat each other, minimizing the chances for future cooperation.
The dynamics of business relationships require resolving contract disputes quickly and effectively, without undue publicity. An alternative dispute resolution method, mediation is perfect for dealing with sensitive breach of contract issues.
Stages of the Mediation Process
The mediation process consists of four stages: an introduction, opening statements, and private and joint sessions. First, the mediator presents their credentials and explains the procedure to the parties. The parties then can give an outline of their case. In private sessions (caucuses), parties talk to the mediator in separate rooms. The mediator attempts to identify their arguments and the possibility of settling. Following caucuses, the parties gather in a joint session to discuss the matter openly, bringing offers and counteroffers. The mediator facilitates the negotiations without proposing or imposing solutions.
The Role of the Mediator
The mediator is a neutral third person (a retired judge or another professional). Mediators have subject matter knowledge and negotiation skills. The parties choose the mediator voluntarily by signing the agreement (unlike a trial where a state-appointed judge imposes a binding decision). In facilitating negotiations, mediators do not have decision-making authority.
Confidentiality
Unlike litigation, mediation is a confidential process. Everything revealed during sessions stays out of the public. The parties agree to keep all shared information private, including future litigation.
Reconciliation
The central aspect of the mediation process is its reconciliatory effect. Instead of engaging in a vindictive court battle, the parties negotiate disputed matters in a non-adversarial environment. The mediator seeks to reconcile contractual parties, helping them to continue their relationship after resolving the dispute.
The Settlement
A successful mediation results in a settlement, resolving the dispute. After signing, it becomes a binding agreement, enforceable in court.
The Mediation Group is a Florida-based mediation firm.
Relying on years of experience, our mediators have a deep understanding of contractual relationships. At Mediation Group, we use sophisticated communication skills to facilitate negotiations, bringing reconciliation between you and your contractual partner.
If you value your peace of mind and care about your thriving business, seek no further – at Mediation Group, we have your back.
Call us today at 954-474-8700 to discuss how we can help. To book a mediation – please click on the following link.