ASSORTED DEFENSES TO A BREACH OF CONTRACT CLAIM
[In Progress]
By: Ethan M. Watts
Introduction
This article examines some of the defenses to a claim for breach of contract. This article is not meant to cover all possible defenses in every potential claim, but rather is an assortment of some defenses that may be raised in the appropriate case.
Contract Formation
“It is, of course, basic hornbook law that the existence of a contract is a necessary element to an action based on contract, regardless whether the plaintiff seeks specific performance or damages for breach of contract.” Roth v. Malson (1998) 67 Cal. App. 4th 552, 557. Formation of a contract requires, among other elements, mutual consent, i.e., an offer and an acceptance. See Civ. Code § 1550. Thus, a formation of a contract requires a valid offer and acceptance.
Moreover, to form a contract, “an offer must be sufficiently definite that the performance promised is reasonably certain. The phrase ‘reasonably certain’ means the terms provide a basis for determining the existence of a breach and for giving an appropriate remedy.” Alexander v. Codemaster Group, Ltd. (2002) 104 Cal. App. 4th 129, 141 [citations omitted]. In other words, the offer “must be sufficiently definite, or must call for such definite terms in the acceptance, that the performance promised is reasonably certain.” Weddington Productions, Inc. v. Flick (1998) 60 Cal. App. 4th 793, 811 [citations omitted].
“Preliminary negotiations or an agreement for future negotiations are not the functional equivalent of a valid, subsisting agreement.” Careau & Co. v. Security Pacific Business Credit, Inc. (1990) 222 Cal. App. 3d 1371, 1389 [citations omitted]. "A manifestation of willingness to enter into a bargain is not an offer if the person to whom it is addressed knows or has reason to know that the person making it does not intend to conclude a bargain until he has made a further manifestation of assent.” Id. Thus if the offeror did not intend to “conclude a bargain until he… made a further manifestation of assent,” (id.), no contract has been formed.
The intent of the offeror is similarly important as reflected in a written offers which indicates a more formal agreement is to be subsequently executed by the parties. “Taken in their ordinary sense, the words of the letter manifest an intention of the parties that no binding contract would come into being until the terms of the letter were embodied in a formal contract to be drafted …. That plaintiff may have intended or believed a binding contract came into existence upon his signing the letter is immaterial in the face of its language which plainly indicated otherwise.” Beck v. American Health Group, Int. (1989) 211 Cal. App. 3d 1555, 1563. Accordingly, if the alleged breach of contract is founded upon a letter that states the formal agreement is still to come, the defendants could argue no contract had been formed.
Additionally, an offeree cannot wait too long to accept an offer. “A proposal is revoked:... [b]y the lapse of the time prescribed in such proposal for its acceptance, or if no time is so prescribed, the lapse of a reasonable time without communication of the acceptance.” Civ. Code § 1587. “What is a reasonable time is a question of law for the court.” Standard Box Co. v. Mutual Biscuit Co. (1909) 10 Cal. App. 746, 750. What is a “reasonable time” can be a few days, or a few months depending on the circumstances. See e.g. Bandy v Westover (1927) 200 Cal. 222 (holding that a claim that an offer was revoked by unreasonable lapse of time between the making and acceptance of it was without merit, where the offer recognized that the party to whom it was made was in a foreign land and would not return for some months); Coats & Williamson, Inc. v Moran & Co. (1924) 67 Cal App 46 (finding that an offer to sell hay at a stated price was not accepted within a reasonable time where the offeree waited over two weeks without replying); Auslen v Johnson (1953) 118 Cal. App. 2d 319 (holding an optionee did not accept within a reasonable time where the optionee waited more than 50 days before attempting to exercise an option that had been offered for an unspecified amount of time). Accordingly, a defendant may be able to argue that an offer has lapsed before the plaintiff accepted.
Uncertainty
Where any of the material terms in an agreement are left for future determination and it is understood that the agreement is not to be deemed complete until they are settled, or where it is understood that the agreement is incomplete until reduced to writing and signed by the parties, no contract results until this is done. Spinney v. Downing (1895) 108 Cal. 666, 668; Peterson Dev. Co. v. Torrey Pines Bank (1991) 233 Cal. App. 3d 103, 115. Similarly, where a material term or terms of an agreement are missing, it is held to be fatally uncertain. Goldberg v. Santa Clara (1971) 21 Cal. App. 3d 857, 861; Weddington Productions v. Flick (1998) 60 Cal. App. 4th 793, 813. In such cases, a contract may fail for uncertainty.
In Goldberg v. Santa Clara (1971) 21 Cal. App. 3d 857 an attorney’s contract calling for additional compensation contingent on “savings to the City of such magnitude” as would justify it was held fatally uncertain because there was no objective standard for determining the additional compensation. Goldberg v. Santa Clara (1971) 21 Cal. App. 3d 857, 861.
In Weddington Productions v. Flick (1998) 60 Cal. App. 4th 793, a settlement agreement was held fatally uncertain where the agreement referred to a licensing agreement, which licensing agreement, other than being mentioned in the settlement agreement, was not further defined. The court stated that the settlement agreement “might be enforceable even though all terms of the Licensing Agreement were not expressly stated in the Deal Point Memorandum. However, this could be true only if the parties had objectively manifested a ‘meeting of the minds’ as to ‘all material portions’ of the licensing agreement, perhaps by reference to a standardized document, so that their use of the terms ‘Licensing Agreement’… could be found to have a specific, understood and agreed meaning.” Weddington Productions v. Flick (1998) 60 Cal. App. 4th 793, 814.
Therefore, where a contract contains important but undefined terms, under Goldberg and Weddington Productions, a defendant could argue a contract was fatally uncertain.
Failure of Conditions Precedent
“A condition precedent is one which is to be performed before some right dependent thereon accrues, or some act dependent thereon is performed.” Civ. Code § 1436. Such conditions are normally specified in the contract. For example, a contract might specify that the offeror will only convey stock to the offeree if the offeree pays a purchase price. If the contract depends on such a condition precedent, which condition has not been satisfied, then a defendant may challenge the contract on a failure of a condition precedent.
The Statute Of Frauds
The Statute of Frauds, section 1624 of the Civil Code, states:
1624. (a) The following contracts are invalid, unless they, or some
note or memorandum thereof, are in writing and subscribed by the
party to be charged or by the party's agent:
(1) An agreement that by its terms is not to be performed within a
year from the making thereof.
(2) A special promise to answer for the debt, default, or
miscarriage of another, except in the cases provided for in Section
2794.
(3) An agreement for the leasing for a longer period than one
year, or for the sale of real property, or of an interest therein;
such an agreement, if made by an agent of the party sought to be
charged, is invalid, unless the authority of the agent is in writing,
subscribed by the party sought to be charged.
(4) An agreement authorizing or employing an agent, broker, or any
other person to purchase or sell real estate, or to lease real
estate for a longer period than one year, or to procure, introduce,
or find a purchaser or seller of real estate or a lessee or lessor of
real estate where the lease is for a longer period than one year,
for compensation or a commission.
(5) An agreement that by its terms is not to be performed during
the lifetime of the promisor.
(6) An agreement by a purchaser of real property to pay an
indebtedness secured by a mortgage or deed of trust upon the property
purchased, unless assumption of the indebtedness by the purchaser is
specifically provided for in the conveyance of the property.
(7) A contract, promise, undertaking, or commitment to loan money
or to grant or extend credit, in an amount greater than one hundred
thousand dollars ($100,000), not primarily for personal, family, or
household purposes, made by a person engaged in the business of
lending or arranging for the lending of money or extending credit.
For purposes of this section, a contract, promise, undertaking or
commitment to loan money secured solely by residential property
consisting of one to four dwelling units shall be deemed to be for
personal, family, or household purposes.
(b) Notwithstanding paragraph (1) of subdivision (a):
(1) An agreement or contract that is valid in other respects and
is otherwise enforceable is not invalid for lack of a note,
memorandum, or other writing and is enforceable by way of action or
defense, provided that the agreement or contract is a qualified
financial contract as defined in paragraph (2) and (A) there is, as
provided in paragraph (3), sufficient evidence to indicate that a
contract has been made or (B) the parties thereto by means of a prior
or subsequent written contract, have agreed to be bound by the terms
of the qualified financial contract from the time they reached
agreement (by telephone, by exchange of electronic messages, or
otherwise) on those terms.
(2) For purposes of this subdivision, a "qualified financial
contract" means an agreement as to which each party thereto is other
than a natural person and that is any of the following:
(A) For the purchase and sale of foreign exchange, foreign
currency, bullion, coin or precious metals on a forward, spot,
next-day value or other basis.
(B) A contract (other than a contract for the purchase of a
commodity for future delivery on, or subject to the rules of, a
contract market or board of trade) for the purchase, sale, or
transfer of any commodity or any similar good, article, service,
right, or interest that is presently or in the future becomes the
subject of a dealing in the forward contract trade, or any product or
byproduct thereof, with a maturity date more than two days after the
date the contract is entered into.
(C) For the purchase and sale of currency, or interbank deposits
denominated in United States dollars.
(D) For a currency option, currency swap, or cross-currency rate
swap.
(E) For a commodity swap or a commodity option (other than an
option contract traded on, or subject to the rules of a contract
market or board of trade).
(F) For a rate swap, basis swap, forward rate transaction, or an
interest rate option.
(G) For a security-index swap or option, or a security or
securities price swap or option.
(H) An agreement that involves any other similar transaction
relating to a price or index (including, without limitation, any
transaction or agreement involving any combination of the foregoing,
any cap, floor, collar, or similar transaction with respect to a
rate, commodity price, commodity index, security or securities price,
security index, other price index, or loan price).
(I) An option with respect to any of the foregoing.
(3) There is sufficient evidence that a contract has been made in
any of the following circumstances:
(A) There is evidence of an electronic communication (including,
without limitation, the recording of a telephone call or the tangible
written text produced by computer retrieval), admissible in evidence
under the laws of this state, sufficient to indicate that in the
communication a contract was made between the parties.
(B) A confirmation in writing sufficient to indicate that a
contract has been made between the parties and sufficient against the
sender is received by the party against whom enforcement is sought
no later than the fifth business day after the contract is made (or
any other period of time that the parties may agree in writing) and
the sender does not receive, on or before the third business day
after receipt (or the other period of time that the parties may agree
in writing), written objection to a material term of the
confirmation. For purposes of this subparagraph, a confirmation or
an objection thereto is received at the time there has been an actual
receipt by an individual responsible for the transaction or, if
earlier, at the time there has been constructive receipt, which is
the time actual receipt by that individual would have occurred if the
receiving party, as an organization, had exercised reasonable
diligence. For the purposes of this subparagraph, a "business day"
is a day on which both parties are open and transacting business of
the kind involved in that qualified financial contract that is the
subject of confirmation.
(C) The party against whom enforcement is sought admits in its
pleading, testimony, or otherwise in court that a contract was made.
(D) There is a note, memorandum, or other writing sufficient to
indicate that a contract has been made, signed by the party against
whom enforcement is sought or by its authorized agent or broker.
For purposes of this paragraph, evidence of an electronic
communication indicating the making in that communication of a
contract, or a confirmation, admission, note, memorandum, or writing
is not insufficient because it omits or incorrectly states one or
more material terms agreed upon, as long as the evidence provides a
reasonable basis for concluding that a contract was made.
(4) For purposes of this subdivision, the tangible written text
produced by telex, telefacsimile, computer retrieval, or other
process by which electronic signals are transmitted by telephone or
otherwise shall constitute a writing, and any symbol executed or
adopted by a party with the present intention to authenticate a
writing shall constitute a signing. The confirmation and notice of
objection referred to in subparagraph (B) of paragraph (3) may be
communicated by means of telex, telefacsimile, computer, or other
similar process by which electronic signals are transmitted by
telephone or otherwise, provided that a party claiming to have
communicated in that manner shall, unless the parties have otherwise
agreed in writing, have the burden of establishing actual or
constructive receipt by the other party as set forth in subparagraph
(B) of paragraph (3).
(c) This section does not apply to leases subject to Division 10
(commencing with Section 10101) of the Commercial Code.
Thus, depending on the particular case, a defendant may be able to raise the statute of frauds as a defense.
The Statute of Limitations
The statute of limitations is two years for an “action upon a contract, obligation or liability not founded upon an instrument of writing.” Code Civ. Proc. § 339. As for when the two year period begins to run, “[i]t is a fundamental principle in determining when the statute of limitation commences to run, that it runs from the time a cause of action accrues and it invariably accrues when there is a remedy available.” Irvine v. Bossen (1944) 25 Cal. 2d 652, 658; see also Robinson v. Raquet (1934) 1 Cal. App. 2d 533, 542. A remedy is available when the contract is breached. Whitney Inv. Co. v. Westview Dev. Co. (1969) 273 Cal. App. 2d 594, 602. The unjustified failure to perform a material promise or covenant is a breach. Los Angeles Gas & Electric Co. v. Amalgamated Oil Co. (1909) 156 Cal. 776, 781.
Section 337 of the Code of Civil Procedure establishes the statute of limitations for an action upon a written agreement. That section states in full:
Within four years: 1. An action upon any contract, obligation
or liability founded upon an instrument in writing, except as
provided in Section 336a of this code; provided, that the time within
which any action for a money judgment for the balance due upon an
obligation for the payment of which a deed of trust or mortgage with
power of sale upon real property or any interest therein was given as
security, following the exercise of the power of sale in such deed
of trust or mortgage, may be brought shall not extend beyond three
months after the time of sale under such deed of trust or mortgage.
2. An action to recover (1) upon a book account whether consisting
of one or more entries; (2) upon an account stated based upon an
account in writing, but the acknowledgment of the account stated need
not be in writing; (3) a balance due upon a mutual, open and current
account, the items of which are in writing; provided, however, that
where an account stated is based upon an account of one item, the
time shall begin to run from the date of said item, and where an
account stated is based upon an account of more than one item, the
time shall begin to run from the date of the last item.
3. An action based upon the rescission of a contract in writing.
The time begins to run from the date upon which the facts that
entitle the aggrieved party to rescind occurred. Where the ground
for rescission is fraud or mistake, the time does not begin to run
until the discovery by the aggrieved party of the facts constituting
the fraud or mistake. Where the ground for rescission is
misrepresentation under Section 359 of the Insurance Code, the time
does not begin to run until the representation becomes false.
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The above discussion is intended to be a general commentary on legal issues. Each situation is different and this article is not intended as legal advice. Further, nothing in this article is intended to create an attorney-client relationship.