How to Handle a Breach of Contract with a Client or Supplier in California

Contracts form the backbone of business relationships, outlining the rights and obligations of each party. When a client or supplier fails to fulfill their contractual duties, it can lead to significant financial losses and operational disruptions. In California, understanding what constitutes a breach of contract and the legal remedies available is crucial for protecting your business interests.

What Constitutes a Breach of Contract in California?

Under California law, a breach of contract occurs when one party fails to perform their obligations as outlined in the agreement. This can take various forms, such as:

• Failing to deliver goods or services as promised
• Providing substandard or defective products
• Missing payment deadlines
• Violating non-disclosure or non-compete clauses
• Failing to meet project milestones or specifications

California Civil Code Section 1549 defines a contract as “an agreement to do or not to do a certain thing.” When a party doesn’t uphold their end of the bargain, they may be liable for breach of contract.

Types of Breach of Contract

California law recognizes several types of contract breaches:

1. Material Breach

A material breach is a significant violation that goes to the heart of the agreement, depriving the non-breaching party of the benefit they expected from the contract. In such cases, the non-breaching party may be entitled to terminate the contract and seek damages.

2. Partial Breach

A partial breach occurs when a party fulfills some of their obligations but fails to perform others. The non-breaching party may be able to recover damages for the breach while still being bound by the remainder of the contract.

3. Anticipatory Breach

An anticipatory breach happens when one party indicates, through words or actions, that they will not fulfill their contractual obligations. This allows the non-breaching party to take legal action before the actual breach occurs.

Legal Remedies for Breach of Contract in California

When a breach of contract occurs, California law provides several remedies for the non-breaching party:

1. Compensatory Damages

Compensatory damages aim to put the non-breaching party in the position they would have been in had the breach not occurred. This may include:

• Direct damages: The actual financial losses suffered as a result of the breach
• Consequential damages: Indirect losses that were reasonably foreseeable at the time of contracting
• Incidental damages: Additional expenses incurred due to the breach, such as the cost of finding a replacement supplier

2. Specific Performance

In some cases, monetary damages may not adequately address the harm caused by the breach. California Civil Code Section 3384 allows courts to order specific performance, requiring the breaching party to fulfill their obligations under the contract. This remedy is typically reserved for situations where the goods or services are unique or difficult to replace.

3. Liquidated Damages

If the contract includes a liquidated damages clause, which specifies a predetermined amount of damages in case of a breach, California courts will enforce it as long as the amount is reasonable and not considered a penalty (California Civil Code Section 1671).

Statute of Limitations for Breach of Contract Claims

It’s important to note that California imposes time limits for filing a breach of contract lawsuit. Under California Code of Civil Procedure Section 337, the statute of limitations for written contracts is four years from the date of the breach, while oral contracts have a two-year statute of limitations (California Code of Civil Procedure Section 339).

Handling a Breach of Contract: Best Practices

If you suspect a client or supplier has breached your contract, consider taking the following steps:

1. Document the breach: Gather evidence that clearly demonstrates how the other party failed to meet their contractual obligations.
2. Review the contract: Carefully examine the terms of the agreement to identify the specific provisions that have been breached and any applicable remedies or dispute resolution procedures.
3. Notify the other party: Send a written notice of the breach to the client or supplier, outlining the issues and your expectations for resolving the matter.
4. Attempt negotiation: Try to resolve the breach through open communication and negotiation, focusing on finding a mutually beneficial solution.
5. Consider alternative dispute resolution: If negotiation fails, explore mediation or arbitration as a way to settle the dispute without going to court.
6. Consult with a business attorney: Seek guidance from an experienced California business attorney who can assess your case, advise you on your legal options, and represent your interests in any legal proceedings.

Protect Your Business with Strong Contracts and Legal Counsel

Proactively managing your business relationships is key to minimizing the risk of contract breaches. By working with a business attorney to draft clear, comprehensive contracts and address potential issues early on, you can safeguard your company’s interests and maintain productive partnerships with your clients and suppliers.

If you’re facing a breach of contract with a client or supplier, our California business lawyers at TONG LAW can provide the legal guidance and representation you need to resolve the dispute and protect your business. Contact us today for a confidential consultation to discuss your case.