Contracts & Breach of Contracts

According to Texas law, the requirements for a valid contract are:

1) an offer;

2) an acceptance in strict compliance with the terms of the offer;

3) a meeting of the minds on all essential terms of the contract (which is a subpart of the offer and acceptance elements);

4) each party’s consent to the terms of the contract;

5) consideration (a benefit each party gets or expects to get, by entering the contract); and

6) execution and delivery of the contract with the intent that it is mutual and binding.

These requirements apply to both written and verbal contracts and must be accounted for in order for the contract to be valid. Without these elements, an enforceable contract does not exist.

Verbal agreements can be legally binding in Texas if valid and supported by evidence. In determining whether an oral contract exists, the court looks to the communications between the parties and to the acts and circumstances surrounding those communications. The terms of an oral contract must be definite, certain, and clear as to all essential terms; if they are not, the oral contract fails for indefiniteness. Both the existence and the terms of an oral contract may be established by direct or circumstantial evidence.

According to the law, a contract is formed when one party communicates an offer and the other party communicates acceptance and valuable consideration passes between the contracting parties.

To prove a valid offer, a party must show (a) the offeror intended to make an offer, (b) the terms of the offer were clear and definite, and (c) the offeror communicated the essential terms of the offer to the offeree. For there to be an offer that may ripen into a contract by simple acceptance, the offer must be reasonably definite in its terms and must sufficiently address the essentials of the proposed transaction that, with an expression of assent, there will be a complete and definite agreement on all essential details. Most offers can be revoked at any time before acceptance. The only exception to this rule is when the offeror is contractually bound because the offeror has received some “consideration” to keep a certain offer open for a fixed amount of time. Even if the offeror states in the offer that the offer will not be revoked, or even if the offeror voluntarily gives the offeree a specified amount of time to accept the offer, the offer may be revoked at any time prior to acceptance unless it is an independent contractual promise duly supported by consideration. Revocation of an offer must be communicated to the offeree to be effective. However, the communication may be made either expressly or simply by conduct inconsistent with the offer, such as selling property that is the subject of the offer. If the revocation is expressed, it is effective when the offeree receives the notice of revocation. The offeror may dictate the manner, time, and place of acceptance of the offer. An offer whose manner, time, and place of acceptance is dictated by the offeror becomes a binding contract only when it is accepted according to its terms. Thus, an offer not accepted in a timely or proper manner lapses. The offeror may, but is not compelled to, waive strict compliance with the provisions of the offer concerning acceptance. Thus the offeror may waive compliance with a provision specifying a time limit for acceptance, even if the contract states that time is of the essence. If no time is fixed for acceptance, an offer will lapse if it is not accepted within a “reasonable time”. What a “reasonable time” depends on all the circumstances existing when the offer and any attempted acceptance are made, including the nature of the proposed contract, the purposes of the parties, and the course of dealing between them. A “reasonable time” is the time necessary to do conveniently what the contract requires to be done, as soon as circumstances permit. When an offeree rejects an offer, the offer is terminated and it may not be revived by a later attempt at acceptance. A counter-offer that relates to the same subject matter as the original offer acts as a rejection of the original offer unless, at the same time, the offeree states in express terms that the offeree is still keeping the original offer under consideration.

An “acceptance” must be identical to the offer; otherwise, there is no binding contract. As a general rule, an acceptance must not change or qualify the terms of the offer; an attempt to do so results in a counter-offer rather than an acceptance. A purported acceptance that contains a new demand, proposal, condition, or modification of the terms of the offer ordinarily is not an acceptance; it is a counter-offer and a rejection. The materiality of the altered term is key, however, and an immaterial variation between the offer and the acceptance will not prevent the formation of an enforceable agreement. An offeree cannot accept an offer to form a contract unless the terms of the offer are reasonably certain. When an offer prescribes the manner of acceptance, its terms must be followed precisely to create a contract. An offeree’s use of a different method of acceptance is not effective unless the offeror subsequently manifests to the offeree the offeror’s consent to this different method. When a counteroffer is made, any specific manner of acceptance required by the original offer does not apply to the original offeror absent clear specification in the counteroffer’s terms. When an offeror makes an offer without specifying a required manner of acceptance, the offeror impliedly authorizes an acceptance in the same manner used to present the offer. The offeree need not always adopt the manner of the offer as the manner of acceptance. When the manner of acceptance is not specified in the offer, the offeree may accept according to any established usage and custom found in similar cases. If proof of an established custom or usage is not available, the courts will consider what is “reasonable” under the circumstances. Although there are few rules as to when a particular manner of acceptance is sufficient in a specific situation, the important consideration is whether the mode of attempted acceptance used actually informs the offeror that the offer has been accepted. For example, offers are often accepted by mail. Acceptance by mail is usually permitted either when the offer has been delivered by mail, or when acceptance by mail is reasonable under the circumstances. An oral offer may be accepted by execution of a written instrument that embodies the terms of the agreement. Similarly, a written offer may usually be accepted orally. Acceptance may also, in most cases, be shown by conduct such as where the offeree actually performs its obligations under the agreement. Acceptance may even be shown by silence, provided that the circumstances of the case are such that it may be inferred that notice of acceptance is not required. Silence is also sufficient when the offer is one to enter into a unilateral contract. Such an offer envisions the offeree accepting not by making a reciprocal promise but by performing the act requested by the offer. If a written offer relates to the sale of land or the lease of land for a term of one year or longer, the acceptance must be in writing in order to form a binding contract under the statute of frauds. An acceptance is effective only if made before an offer is revoked or lapses. When an offer prescribes the time for acceptance, its terms must be followed precisely. An offer accepted at a time other than prescribed in the offer is effective only if the offeror waives strict compliance with the time provisions of the offer. An acceptance takes effect and creates a contract when the acceptance is communicated to the offeror. An acceptance is not effective when some abstract conduct other than communication with the offeror occurs. For example, signing documents does not constitute a binding contract or bind the accepting party when the offeror does not know about the signing. The accepting party may change his or her mind until the act of acceptance is actually communicated to the offeror. Although an acceptance is effective only when communicated to the offeror, when an offer may be validly accepted by mail, the “mailbox rule” provides that the communication has been made and the contract is binding when the offeree deposits a properly addressed letter of acceptance in the mail, regardless of whether it is actually received by the offeror. If mailing is a proper method of accepting an offer, the “mailbox rule” will not apply only if the offer specifies that a mailed acceptance does not become effective until it is actually received.

Determining when an offer or acceptance is made can be complex and depends on the circumstances of each case. The courts may use principles of fairness, the intentions of the parties, or public policy in determining whether an agreement exists. If you have questions about whether there has been a valid offer or acceptance in a transaction to which you are a party, you should consult with an experienced Texas contract attorney for an evaluation of your situation.

For a contract to be enforceable, there must be mutual assent. Mutual consent or assent is often described as the parties’ “meeting of the minds” regarding the subject matter and all essential terms of the contract. Evidence of mutual assent in written contracts generally consists of the parties’ signatures on the contract and delivery of the contract with the intent to bind. Whether a written contract is signed is relevant to determining whether the contract is binding on the parties. Parties may provide that the signature of each is a prerequisite to a binding contract. When the parties intend that a contract will not be binding until the parties sign it, the signatures of both parties are required to give effect to the contract. A party’s signature on a contract is “strong evidence” that the party unconditionally assented to its terms. Although signature and delivery are often evidence of the mutual assent required for a contract, they are not essential. Texas law recognizes that a contract is not required to be signed to be “executed” unless the parties explicitly require signatures as a condition of mutual assent. When a draft of a contract is prepared, and submitted to both parties, and each of them expresses its unconditional consent to the contract, there is a written contract.

The fact that one of the parties to the contract failed to sign it does not necessarily negate the formation of a valid contract. As long as the parties give their consent to the terms of the contract and there is no evidence of an intent to require both parties’ signatures as a condition precedent to its becoming effective as a contract, signatures are not a required element of the making of a valid contract. When a party’s signature is not present, other evidence may prove the party’s unconditional assent. If one party signs the contract, the other party’s acceptance may be shown by its conduct, making it a binding agreement for both parties. A provision in the contract that it may only be modified or amended by a writing signed by both parties and a blank signature block at the end of the contract is evidence that the parties did not intend to be bound until they both signed the contract.

Express terms of a contract are those provisions the parties set out in either their written or oral contract that set forth the material terms of the parties’ agreement with sufficient certainty to define the nature and extent of the parties’ obligations. A court will not enforce a contract unless it can determine what the parties’ agreement actually is. The rules requiring that a contract’s material terms must be definite are based on the concept that a party cannot accept an offer unless the terms of that offer are reasonably certain.

Implied terms are those that parties may be bound by, but have not been expressly stated in the parties’ agreement. Courts are reluctant to hold contracts unenforceable because of minor, remediable uncertainties regarding the subject matter of the contract. Therefore, courts may remedy uncertainties in contracts that concern the time of performance, the price to be paid, the work to be done, the service to be rendered, or the property to be transferred. The court may supply a reasonable time for the performance of a contract, a reasonable duration for a contract, and a reasonable price for goods and services when none is specified in the contract. But a court may not imply terms in a contract merely because they are reasonable. Instead, a court can imply terms in a contract only when they are necessarily involved in the parties’ contractual relationship and are such that the parties must have intended them and failed to express them only because of mere inadvertence or because they are too obvious to need expression.

If market conditions or other conditions have changed, since the making of the contract such that the expected cost of fully performing the contract is greater than the expected benefit to be derived from the fulfillment of the contract, then it might be economically efficient to breach the contract. In that situation, you are choosing to minimize losses by incurring the obligation to pay the non-breaching the lesser amount available in a breach of contract action rather than to take the more expensive step of fully performing the contract.

To prove a contract breach, one must first establish its existence. Then, one must prove the failure to perform an obligation under the contract. In order to win a breach of contract lawsuit, the plaintiff must prove a valid contract, adherence to contract terms, defendant's failure to fulfill terms, and proof of resulting damages. A material breach is one in which a party is deprived of the benefits of the contract. A skilled and experienced contracts lawyer is necessary to argue the case in court and protect the plaintiff's interests.

The non-breaching party must take reasonable steps and undergo minimal expense to avoid or lessen losses after learning of the other party’s breach. In other words, the non-breaching party has a duty to mitigate damages to the extent possible with minimal expense and reasonable exertion. For some contracts, the duty to mitigate is incorporated into statutory law, such as a landlord’s duty to re-lease the premises when the tenant abandons the property in violation of the lease and a buyer’s duty to take reasonable measures to minimize or prevent consequential damages stemming from the seller’s breach of a contract for the sale of goods. Any amounts the injured party saves by mitigating or that would have been saved had the party exercised reasonable diligence and mitigated damages are to be deducted from the injured party’s recovery. Reasonable expenses incurred in mitigating damages, on the other hand, may be added to the injured party’s recovery.

Chapter 16 of the Texas Civil Practice and Remedies Code provides that suits for breach of contract must be brought within four years of the date the claim accrues. A breach of contract claim accrues when the contract is breached. If you fail to file a lawsuit within the four-year limitations period, you will not be able to pursue your case. It's important to consult a lawyer experienced in Texas breach of contract cases as soon as you believe a breach has occurred in order to initiate a lawsuit within the appropriate time period.

The penalty for breaching a contract in Texas is that the breaching party must pay damages to the non-breaching party. Contract damages compensate the non-breaching party for loss or damage actually sustained. A party’s actual damages may include both direct and consequential damages. Breach of contract damages are generally designed to protect three distinct interests: expectation interest, reliance interest, and restitution interest. Contract damages are measured differently depending on the nature of the interest harmed.

The traditional measure of expectancy damages is referred to as the “benefit of the bargain” rule. Benefit of the bargain damages compensate the non-breaching party for the value it expected to gain from the contract but lost as a result of the breach. Benefit of the bargain damages place the non-breaching party in the same position it would have been in had the breaching party fully performed. These damages are typically measured by subtracting the value the non-breaching party actually received from the value that the non-breaching party expected to gain. If the breaching party did not perform at all, the loss in value caused by the breach is equal to the value of full performance. If the breaching party partially performed, the loss in value caused by the breach is equal to the difference between the value of the performance if there had been no breach and the value of the performance actually rendered. Calculation of expectancy damages must also take into account any costs the non-breaching party incurred because of the breach and any costs/expenses the non-breaching party avoided because of the breach.

As an alternative measure of contract damages, the non-breaching party may use the out-of-pocket or reliance measure of contract damages to recover expenditures incurred in reliance on the contract. This measure of damages is often used when the non-breaching party’s expectancy damages are too speculative to be proved. Reliance damages compensate the non-breaching party for any cost incurred in reliance on the contract, less any loss that the breaching party can prove the non-breaching party would have incurred if the contract had been performed. The purpose of reliance damages is to restore the non-breaching party to the position it occupied before the contract was made. When the out-of-pocket measure of damages is used, the loss of anticipated profits is not includable in the recovery because the non-breaching party cannot be said to have spent or parted with profits that were never received. A non-breaching party’s reliance interest will be less valuable than the lost expectation interest unless the non-breaching party made a “losing contract”. Thus, a non-breaching party will usually choose this out-of-pocket measure and seek to recover expenditures reasonably made in the performance of the contract or in necessary preparation only if the non-breaching party cannot prove the value of the lost expectation interest with the amount of certainty required by Texas law.

Restitution damages compensate the non-breaching party for the value of what it parted with while performing the contract in order to put that party in the same economic position it would have been in if no contract had been made. These damages are often pursued in a suit for “quantum meruit” where no enforceable contract can be proved. Restitution damages are measured by the reasonable value of the services or materials provided. The “reasonable value” of services depends on the facts and circumstances of each case and must include consideration of the end achieved and the time and effort expended.

Damages are the ordinary remedy for a breach of contract. The general rule for measuring damages for a breach of a contract is “just compensation for the loss or damage actually sustained”. A non-breaching party is ordinarily entitled to all actual damages necessary to put the party in the same economic position in which it would have been if the contract had not been breached. Recoverable damages are categorized as (1) direct or general damages and (2) special or consequential damages. The difference between these is that direct damages represent compensation for losses that naturally and necessarily result from a breach of contract. Special or consequential damages repay losses that follow naturally but not necessarily from the breach and, thus, are recoverable only if the breaching party had notice or could have foreseen at the time the contract was made that the other party would suffer that loss if the contract was not performed according to its terms. Direct damages are normally measured by the loss of the expected “benefit of the bargain” or the “out-of-pocket” loss of funds or other value expended in reliance on the other’s good performance or an amount set out in the contract as liquidated or agreed damages. Other losses and expenses caused by breach of contract and recoverable through a money judgment include attorney’s fees incurred in the prosecution of the action for the breach and prejudgment and post-judgment interest.

Other possible remedies available for breach of contract in addition to, or as an alternative for, the recovery of money damages include rescission, specific performance, declaratory judgment, reformation, and injunctive relief.

Rescission is an equitable remedy that operates to set aside a contract that is legally valid, but is marred by fraud or mistake, or if, for some other reason, the court must set it aside to avoid unjust enrichment. As a general rule, the court will order the parties to return any consideration paid, restoring them to their respective positions as if the contract had never existed. The remedy of rescission is often sought as a defense to an action to enforce a contract. A party seeking the equitable remedy of rescission must first give timely notice to the other party that the contract is being rescinded and must tender or offer to tender any property received and the value of any benefit derived from its possession back to the other party. A party may lose the right to rescind a contract by inaction and conduct showing an affirmation of the contract after having acquired knowledge of the facts that are grounds for rescission. A court may also refuse to grant rescission to a party when the evidence shows that this party was partly responsible for the fraud perpetrated by the other party. Rescission is an alternative to the recovery of damages for breach. A party establishing grounds for rescission, such as by proof of fraudulent inducement to make the contract, must choose either to stand on the contract and recover damages or to rescind. In general, equity does not allow rescission of a contract for mere breach of the contract, particularly when damages are an adequate remedy. But a partial breach is sufficient for rescission if (a) it affects a material part of the agreement going to the essence of the contract, or (b) it clearly evidences an intention by the party in default to rescind or abandon the agreement. To be entitled to rescission, a party must show that (a) the party and the defrauding party are in the status quo (i.e., there are no retained benefits received under the instrument and not restored to the other party), or (b) there are equitable considerations that obviate the need for the status quo relationship. The court should consider any inability to return the parties to their former position in determining whether rescission would be equitable.

Specific performance is an equitable remedy in which the court orders a party to perform a contract as promised. It is usually available when the recovery of money damages for the contract’s breach is not adequate to compensate the non-breaching party for the loss of the benefits of the bargain, and the subject matter of the contract is real estate or a unique item of personal property. This remedy is an alternative to the recovery of money damages; the non-breaching party cannot have both the bargained-for performance and judgment for damages for nonperformance. If the non-breaching party sues for damages, that party has elected to treat the contract as terminated by the breach and to seek compensation for that breach. If the non-breaching party sues for specific performance, that party affirms the contract and requests the court to enforce the agreement. The relief associated with specific performance may include monetary compensation in narrow circumstances—when it is deemed necessary to put the parties in the same position as if the contract had been performed in full. This compensation is incident to an order for specific performance and does not amount to legal damages for breach of contract. The rationale for this compensation is that the contract is being enforced retrospectively and the equities are adjusted accordingly. An essential prerequisite to obtaining specific performance is that the non-breaching party must plead and prove that it was ready, willing, and able to timely perform its obligations under the contract. As a consequence, the non-breaching party must, as a general rule, actually tender performance as a prerequisite to obtaining specific performance. But if the breaching party refuses to perform or repudiates the contract, the non-breaching party may be excused from tendering performance before filing suit. In such a case, the party seeking specific performance may simply plead that performance would have been tendered but for the breach or repudiation. A party seeking specific performance has the burden of showing that the advantages of specific performance outweigh those of the legal remedy of damages. The factors to be considered in making this consideration are whether ongoing supervision by the court will be required, whether complete relief can be rendered by the remedy sought, and whether, if this remedy is granted, it can be adequately enforced. Courts will generally not order a party to perform a continuous series of acts that extend over a period of time requiring court supervision. In appropriate circumstances, a court may order, in addition to specific performance, payment of expenses the non-breaching party incurred as a result of the other party’s non-performance. This is not considered damages for breach of contract, but instead equalizes any losses caused by the delay by offsetting them with monetary payments.

A suit for declaratory judgment is a remedy available to a party to a contract faced with a dispute over the meaning or validity of the agreement. Declaratory relief is available in contract cases before or after a breach and may be an additional remedy and apply in conjunction with granting other equitable relief such as rescission, reformation, specific performance, or injunction. The existence of another adequate remedy does not preclude a plaintiff from maintaining an action for declaratory judgment. Declarations of non-liability under a contract are the most common suits filed, including suits by insurers to declare non-liability under a duty-to-defend clause, suits by employees to declare non-liability under a covenant not to compete, and suits by a party to declare non-liability for higher or additional payments.

Reformation is an equitable remedy by which a judicial decree conforms a written contract to the true agreement of the parties. The remedy may be invoked when the written words fail to express the actual understanding of the parties due to their mistake or due to one party’s mistake coupled with fraud or other inequitable conduct of the other party. Reformation normally accompanies another remedy; that is, the party seeking the remedy wants the court, first, to conform the contract to reflect the true agreement and, second, to declare the parties’ rights, order specific performance, or award (or deny) money damages for a breach of the contract as reformed.

Temporary injunctive relief seeking to preserve the status quo between the parties, pending final litigation of a dispute, may be available in a contract dispute when the party seeking relief either has probable grounds for a decree of specific performance of the contract or can demonstrate the probability of an irreparable injury and the inadequacy of a damage award as compensation. The fact that the party seeking injunctive relief asks for monetary damages is not necessarily fatal to the request for temporary injunctive relief (the black letter usual rule is that where the party can be compensated in the form of monetary damages, the party cannot obtain injunctive relief because of the existence of an adequate remedy at law in the absence of injunctive relief). Even if requested, monetary damages may be inadequate because the award may come too late and the petitioner may become insolvent in the meantime, or the opposing party may become insolvent before a final judgment can be obtained. Also, the nature of the loss may make it difficult to calculate damages. Typically, an injunction is not available to enforce a contract; an action for damages is deemed adequate in most situations.

Compensatory damages, also known as "actual damages," are awarded to the non-breaching party in order to put the party in the same economic position that it would have been if the contract had not been breached.

Punitive damages are payments beyond actual damages meant to punish wrongful acts. However, punitive damages are not recoverable in action solely for recovery under a breach of contract theory. But when a breach of contract is accompanied by a tort, separately pleaded and proved, involving fraud, malice, or gross negligence which causes actual damages, exemplary damages can be awarded. Similarly, when a breach of contract is accompanied by a violation of the Texas Deceptive Trade Practices Act (“DTPA”), a plaintiff may be entitled to recover not only economic damages and attorney’s fees, which the plaintiff would be entitled to recover for breach, but also “additional damages” for knowing or intentional violation of the DTPA, up to three times the amount of plaintiff’s economic damages.

Nominal damages are damages inferred by law when there is evidence that a legal right has been invaded but no proof of damage to the injured party. Nominal damages may be recovered for breach of contract. These damages are not intended to compensate the plaintiff but are available in cases in which there are no damages or damages cannot be proved. Nominal damages are a form of vindication. They are not available when the harm to the plaintiff is entirely economic and subject to proof. Nominal damages should be a trivial amount such as $1, although cases have awarded $10 or $100. An award of $1,000 is not nominal.

The parties to a contract may include a “liquidated damages provision” that stipulates the amount or method of calculating damages for any breach. Whether a liquidated damages provision is an enforceable liquidated damages clause or an unenforceable penalty is a question of law for the court. When the issue arises, the court considers whether the extent to which the injury caused by the anticipated breach is capable of estimation and whether the amount stipulated is a “reasonable forecast of just compensation.”If the contract provides for liquidated damages in excess of actual damages, the court can decline to enforce it and limit any recovery to actual damages.

The Uniform Commercial Code, codified in Texas under the Business & Commerce Code, invalidates a liquidated damages provision that permits an “unreasonably large” recovery. A liquidated damages clause is valid in a contract governed by the UCC only if the amount stated is reasonable in light of the anticipated or actual harm caused by the breach, the proof of actual loss is difficult, and obtaining an adequate remedy through some other means is inconvenient or not feasible. The UCC also invalidates liquidated damages provisions that attempt to waive liability for violations of the Texas Deceptive Trade Practices Act.