Critical Aspects of Breach of Contract in Texas

The Basics of Breach of Contract

A breach of contract occurs when a contracting party fails, without legal excuse, to perform any promise within the contract. A breach of contract might also result from the refusal of one party to perform a contractual duty upon the occurrence of the conditions for performance by the other party. In Texas, the elements of a breach of contract cause of action are (1) the existence of a valid contract; (2) plaintiff performed or tendered performance; (3) defendant breached the contract, and (4) plaintiff sustained damages as a result of the breach.
The Texas Supreme Court has ruled that parties may "vary the effect of provisions in the Texas law as to what constitutes a breach of contract," but requires that, "if such intention is expressed, it must be evidenced by language so plain, explicit, and obvious that there can be no doubt as to the meaning . " Thus, the Texas Supreme Court has voided a provision in a warranty that lessened the carrier’s burden from "reasonably describe the claimed defect" to a mere requirement that the carrier "state the basis for its decision."
While there are many exceptions to this rule, Texas generally does not recognize a duty to mitigate where the alleged failure to mitigate involved an injury based on a contract. Moreover, a plaintiff must respond to an alleged breach with reasonable diligence, and the duty of reasonable diligence is limited to the actions that a reasonable person would take under the circumstances.

Fundamental Elements for Breach of Contract Cases

The four essential elements of breach of contract required in Texas are:

the existence of a valid contract;
breach of the terms of that valid contract;
damages flowing from that breach; and
that the plaintiff performed or tendered performance.

These principles come from the 2016 Tyler Court of Appeals case in Hays Street Holding, L.L.C. v. Crystal City, 570 S.W.3d 120, 131 (Tex.App.—Tyler 2016), citing Heritage Res., Inc. v. NationsBank, 939 S.W.2d 131, 138 (Tex. 1996).
The jury question on breach of contract typically asks:
Did [Defendant] fail to comply with the contract?
In order to find that a party failed to comply with the contract, the jury must find that

(1) there was a contract between the parties,
(2) [Defendant] breached the contract,
(3) [Plaintiff] incurred damages, and
(4) [Defendant’s] breach caused [Plaintiff’s] damages.

Nature of Contract Breach

There are different types of breaches recognized under Texas law. "A material breach is one that reaches to the essence of the agreement between the parties and frustrates that agreement. A breach is an immaterial breach when there is no substantial deviation from the terms of the contract, and in instances where the non-breaching party obtains the significant benefit of its bargain." "Materiality of a breach … is generally considered a matter of degree, with courts determining the question of materiality on a case by case basis."
Under this definition, a material breach "affects the very essence of the agreement between the parties to the extent that it cannot be said that the parties’ initial purpose has been frustrated, or its benefit completely defeated, as the result of the less than perfect performance of one of the contracting parties."
A party who materially breaches the contract cannot recover damages for breach of contract. A non-breaching party "must demonstrate substantial performance of the contract (as opposed to something less than substantial performance)." It is recognized that "only a minor deviation from the terms of the contract is required to allow a party to recover on its breach of contract claim, i.e., only a material or substantial breach will prevent enforcement of a contract according to its terms." In order to determine whether a breach was material, the Court must evaluate whether the materiality of the breach depends on (1) what the aggrieved party has received, (2) the extent to which the aggrieved party will be adequately compensated for that part of the benefit which it has failed to receive; (3) the extent to which the aggrieved party will suffer forfeiture if the contract is not performed; (4) the likelihood that the nonbreaching party will obtain a substantial benefit for partial performance; (5) the extent of the burden on the breaching party in the event of material breach; (6) the extent to which the breaching party has already received the benefit bargained for. Restatement (Second) of Contracts § 241(1)-(6).
"Minor breaches of the contract are differentiated from substantial or material breaches of the contract." The effect of a non-material (immaterial) breach is that the aggrieved party must still perform his obligations under the contract, as the essence of the contract has not been breached. The aggrieved party can recover damages for the non-material breach but must continue to perform his own contractual obligations. "A minor or non-material breach will not affect the overall nature of the agreement between the parties." Minor breaches "do not provide excuses and leave the parties’ obligations under the contract intact."

Typical Defenses in Breach of Contract Cases

If a party to a contract does not fulfill its obligations under the agreement, it can be liable for breach of contract. However, not every violation of a contract gives rise to a breach of contract claim. The party who failed to fulfill its obligation may have breached the contract, but it might have been justified in doing so, which may render the breach not actionable in court.
One commonly used defense against a civil breach of contract claim in Texas is impossibility of performance. Impossibility of performance refers to circumstances that make it impractical or irrational for the breaching party to perform under a particular contract. The breach must arise from circumstances that were not wrongfully brought about by either party, like acts of God, and that were unforeseeable when the contract was made. These circumstances can include, but are not limited to: natural disasters, the destruction of the subject matter of the contract, the death of a person whose performance is essential to the contract and the enactment of new laws that prohibit performance. If one of these circumstances occurs, the breaching party must show that the other elements of impossibility of performance are also fulfilled, and the burden is on the breaching party to show the court this is the case. If the breach involves a personal service, such as a written contract between an artist and a buyer for the creation of a painting, the artist’s death would justify nonperformance of the contract. However, an artist’s illness would not excuse nonperformance, because anyone else could potentially paint the piece for the buyer.
Another potential defense to a breach of contract claim is illegality or contrariety to public policy. Illegality occurs when the object of the contract is illegal. Any contract involving drug trafficking, illegal gambling, prostitution or any other provision of goods and services that are prohibited by law is subject to a breach of contract claim if the object of the contract is illegal. Contracts that violate public policy are not necessarily illegal, but any agreement in which either party is likely to violate a statute is contrary to public policy. An example of a contract that would be subject to a breach of contract claim on public policy grounds is an agreement between an apartment owner and a tenant that the tenant will not participate in any form of exercise in the common areas of the apartment complex. While a tenant may legally enter into the agreement, enforcing it would be contrary to public policy, because exercising is vital to good health, and infringing upon someone’s ability to exercise is against public policy. If the contract is subject to a breach of contract claim on either of these grounds, the Texas courts will not hear the case.
Another possible defense to a breach of contract claim is duress. Duress applies when someone entering into a contract is placed under extreme pressure to do so. A duress claim requires that there was an improper threat, that someone used this improper threat to coerce another into signing a contract and that this improper threat caused someone else’s inability to exercise free will. Due to the high burden imposed on a party asserting a duress claim, it is rarely successful, but when the defense is proven, it can render a contract voidable.

The Implications and Ramifications of a Contract Breach

Consequences of Breach of Contract in Texas
The purpose of any remedy is to make the innocent party whole again, and that is certainly the case with a breach of contract. The party that is seeking to enforce the contract must prove what damages it is entitled to recover. The consequence of a breach of contract is that the party who committed the breach is legally liable to the non-breaching party and the non-breaching party can sue to recover damages. Damages are usually in the form of liquidated damages that are spelled out in the contract in order to make the non-breaching party whole again. In other situations , Texas law requires the non-breaching party to prove their damages to the jury with documentation.
Specific performance is also a type of legal remedy. If the item that the breaching party was supposed to perform was unique (not just because of its description in the contract but also because of its rarity or scarcity), then the aggrieved party may be able to compel (a form of specific performance) the breaching party to hand over the item because it would be impossible to find another one.
Rescission is another type of legal remedy. Rescission makes the contract disappear like it had never existed in the first place. Rescission restores the parties to the position they were in before the contract was formed. A rescission can be partial (only reforms one part of the contract) or total (voids the entire contract). Rescission is a common equitable remedy when a contract has been entered into by mistake.

Examples and Fact Patterns in Breach of Contract Cases

The fact is that contracts are breached every day. But the ________ or ___________ are often the ones that end up in court, with huge litigation costs that often do not result in full compensation for the breached of contract claim. One of the biggest costs for both sides is Attorney fees. I had a case a few years ago that had $80,000 in legal fees at trial, and it was a $200,000 contract.
Over the past few years, we have seen a few more breach of contract cases coming down the pipeline in Texas, and that’s good for consumers and small businesses who are victims of breach of contract. For instance, in a landmark case for Texas, a consumer group sued allegedly fraudulent companies selling investment real estate to Texas consumers. The lawsuit was settled for injunctive relief, monetary damages, and attorneys’ fees in excess of $10,000,000, with approximately $2 million of that going to attorneys’ fees.
In another case, an oil man from Texas signed a development agreement and was sued in a federal court as a result. The money to pay the settlement was in a retirement account and should have been exempt from the litigation, but not in Texas. The money was treated as income, which had no exemptions, rather than deposit and was paid to the plaintiff.
Third, the Supreme Court ruled that there the election to the remedies statute does not apply to attorneys’ fees. There had been an attempt to treat attorneys’ fees the same as other forms of damages and limit a party’s ability to recover attorneys’ fees if they elected a remedy other than a suit for breach of contract. The election of remedies applies to actual damages, which are designed as a remedy for a breach of contract, but not attorney’s fees, which are designed as a different remedy in cases of breach. These cases are all things to watch for in the future, and will affect the way we all do business in Texas.

How to Avoid a Breach of Contract

The key to preventing breach of contract is drafting a contract that is clear and unambiguous, which includes a definition section that defines any significant words used in the contract, if necessary. If you don’t have the terms defined and one party later challenges what a term means under the contract, it can be very expensive to get someone to interpret the term, including going to trial and/or appeal. When determining whether or not an ambiguous contract term exists under Texas law, the reviewing court will determine if the term is subject to more than one reasonable interpretation. Therefore, if the term is not properly defined in the contract, I would recommend that you try to come up with 2 or more reasonable interpretations of the term, as the court will likely do the same .
You should also require that disputes go through mediation before filing suit against the other party. Mediation can allow the parties the opportunity to try to settle the case before filing a lawsuit and incurring attorney’s fees and litigation expenses. Based on my experience, many times the parties can reach a resolution that works for both of them at mediation without having to file the lawsuit, and in most cases that is preferable to filing the lawsuit.
It is also helpful to have a section entitled "Governing Law", where the parties can agree to what law will apply to the contract disputes. If there is no governing law provision, the court may determine what law applies to the contract disputes between the parties. The laws of different states may vary, so in many cases, you may want to have a specific state’s law apply to your contract with the other party.