Chapter 9 BREACH OF CONTRACT

• Jurisdiction: North Carolina

9 BREACH OF CONTRACT¹

A. Definition

The essence of a breach of contract is simple: a party promised to do something and did not do it.²

Though the action for breach of contract is, at its core, uncomplicated, it has been made more complex by modern developments: the Uniform Commercial Code³ and the enormous variety⁴ and intricacy⁵ of modern commercial transactions.

Unlike tort law, which has created many causes of action over the years and continues to create news ones today, contract law, despite having existed since at least the time of ancient Rome,⁶ has only a few related actions. One example is the action for an account stated;⁷ another is the "equitable cousins," such as quantum meruit, a creation of Courts of Equity that allows a party to recover for the fair value of services rendered absent a contract.⁸

B. Elements

The elements of a breach of contract claim are:

(1) A valid contract, and
(2) A breach of the terms of that contract.⁹

Many recent opinions cite only these two elements, yet courts of other jurisdictions generally state three or four elements of a cause of action for breach of contract. In addition to contract and breach, some of those courts add performance by the plaintiff, or justification for nonperformance, and others add damages. Some include both.¹⁰ The North Carolina Supreme Court suggested in one case that a plaintiff's performance and damages might be elements even if the cases generally don't state more than two elements.¹¹ Another case emphasized the need to show damages.¹² The strongest statement on performance as an element comes from a nearly century-old North Carolina decision where the court said: "One party to a contract cannot maintain an action for its breach without averring and proving a performance of his own antecedent obligations arising on the contract, or some legal excuse for a nonperformance thereof, or, if the stipulations are concurrent, his readiness and ability to perform them."¹³ Thus, while recent opinions suggest that there are only two elements to a breach of contract action, the plaintiff should still allege and be prepared to prove his or her performance and damages.

C. Elements Defined

1. Valid Contract¹⁴

A basic definition of a contract is found in the Restatement of Contracts, which says a contract is "a promise or a set of promises for the breach of which the law gives a remedy, or the performance of which the law in some way recognizes as a duty."¹⁵ The Uniform Commercial Code, as adopted in North Carolina, defines a contract as "the total legal obligation that results from the parties' agreement . . . ."¹⁶ Corbin, one of the leading treatise writers, warns us not to equate the word "contract" with a physical document. The document is evidence of a contract, but is not the contract. In the legal sense, a contract is the relationship, not the paper.¹⁷

North Carolina courts generally say that a valid contract needs agreement based on meeting of the minds of the parties and sufficient consideration.¹⁸ Agreement first requires, as essential elements, offer and acceptance.¹⁹ An "offer" has been defined as "an expression by one party of assent to certain definite terms, provided that the other party involved in the bargaining transaction will likewise express assent to the same terms."²⁰

Generally, acceptance may be manifested by words or conduct showing the offeree means to accept, and silence does not constitute acceptance except in unusual circumstances.²¹ Acceptance must ordinarily be made within a reasonable time.²²

In general, acceptance of an offer completes the agreement;²³ however, agreement requires a meeting of the minds (mutual assent).²⁴ "[A]ssent, or meeting of the minds, requires an offer and acceptance in the exact terms and that the acceptance must be communicated to the offeror."²⁵ As the North Carolina Supreme Court pointed out in one early case, the legal consequences of a contract are not dependent on the "impressions or understandings" or what either party thinks, "but what both agree."²⁶

Generally, when parties are merely negotiating to see if they can agree on terms and a subsequent writing is to be the contract, there is no contract until that writing is executed. On the other hand, where one party makes an offer to the other and that other party accepts, a contract may be formed even though the parties intended to later have a written agreement.²⁷

Offers are subject to change or revocation. The offeror has an opportunity to change the offer until acceptance;²⁸ however, once accepted, the constituent elements of an enforceable contract exist.²⁹ An offeror may revoke the offer and revocation terminates it, after which the offeree has no power to revive the offer by any subsequent attempts to accept it.³⁰ If an offeree changes the terms of an offer, he or she has made a "qualified or conditional acceptance," which is actually a counteroffer, and a counteroffer amounts to a rejection of the original offer.³¹

Contracts require consideration in some form.³² For "a contract to be enforceable it must be supported by consideration. A mere promise, without more, is unenforceable." Neither past consideration nor moral obligation is adequate consideration to support a contract.³³ And, "as a general rule, consideration consists of some benefit or advantage to the promisor or some loss or detriment to the promisee."³⁴ Consideration that may be withdrawn "on a whim" is illusory and insufficient to support a contract.³⁵

In one case, the federal Fourth Circuit Court of Appeals relied on the Restatement definition of "consideration" as an act or forbearance, "or the creation, modification or destruction of a legal relation, or a return promise, bargained for and given in exchange for the promise."³⁶ The North Carolina Supreme Court said in a later case that it is not necessary that the promisor be the one who receives the consideration for there to be the legal consideration required to support a contract, and agreed that forbearance "to exercise legal rights is sufficient consideration for a promise given to secure such forbearance even though the forbearance is for a third person rather than that of the promisor."³⁷ In a case of first impression, the Court of Appeals decided that entry of a contest ticket into a raffle or contest may create a binding contract and that consideration is provided by entering the contest and complying with all of the terms of the offer.³⁸

Note that while the courts generally say that the plaintiff must prove a valid contract exists³⁹ and that consideration is required for there to be a valid contract, by rule, failure of consideration is an affirmative defense.⁴⁰

North Carolina generally follows the rule that when a contract is under seal, there is no requirement to show any consideration.⁴¹ Two sections of the Uniform Commercial Code, as adopted in North Carolina, override that rule for sales contracts⁴² and leases⁴³ governed by the Code. Additionally:

[I]n actions seeking equitable relief . . . the court [may] look behind the seal and refuse to act unless the seal is supported by actual consideration. Even in actions traditionally at law, the effect of the seal is not to preclude the court from dealing with the issue of consideration entirely, but the seal merely raises a presumption of consideration which must be rebutted by clear and convincing evidence.⁴⁴

2. Breach of Contract Terms⁴⁵

Without a breach of the terms of the contract, the plaintiff's claim fails.⁴⁶ The North Carolina Supreme Court defined the concept of breach in one case when it said: "[In] the obligations assumed by a party to a contract is found his duty, and his failure to comply with the duty constitutes the breach."⁴⁷ Thus, the alleged breach must relate to a duty assumed by the party alleged to have breached.⁴⁸ Where a contract states a time for performance, failure to perform within the stated time would constitute a breach. However, where no time is stated, a party has a "reasonable" time within which to perform.⁴⁹ Generally, for a breach to be actionable, it must be material — that is, a breach that substantially defeats the purpose of the agreement, goes to the very heart of it, or can be characterized as a "substantial failure to perform."⁵⁰ A contract can be breached by repudiation based on statements and actions of the allegedly repudiating party and the response of the non-repudiating party treating the contract as breached.⁵¹

North Carolina recognizes the theory of anticipatory breach, under which one party may sue for damages immediately when another party renounces its entire future contractual performance.⁵² Anticipatory breach has been defined as one "committed before there is a present duty of performance."⁵³ For there to be an anticipatory breach, two things must occur. First, the words or conduct alleged to evidence the intention to breach must be a "positive, distinct, unequivocal, and absolute refusal" to perform when the time fixed for performance arrives.⁵⁴ Second, the injured party must have treated the renunciation as a breach.⁵⁵

D. Defenses

The applicable statute of limitation is three years and applies to "a contract, obligation or liability arising out of a contract, express or implied."⁵⁶ The statute begins to run when the promise is broken.⁵⁷ However, there is a 10-year statute of limitation for actions on sealed instruments,⁵⁸ a four-year limitation on actions concerning contracts for the sale of goods⁵⁹ and lease contracts⁶⁰ governed by the Uniform Commercial Code, and a two-year limitation on actions against a local government.⁶¹

A contract that violates the Statute of Frauds may not be enforced. Actually, there are several statutes. They govern certain contracts charging an executor, administrator, or collector;⁶² contracts for sale of land or for certain leases;⁶³ promises to revive a debt of discharged in bankruptcy;⁶⁴ commercial loan commitments;⁶⁵ certain contracts for the sale of goods under the...