Creating a breach of contract notice

If you have entered into a contract and the other party is not fulfilling their obligations, it may be necessary for you to create a breach of contract notice, also sometimes called a demand letter. However, it's important to know when to use such a notice, as well as how to prepare one.

Contract law basics

A contract is a legally binding agreement between two parties, with each party having certain obligations. In its most basic form, a contract requires one party to provide goods or services and the other party to pay a certain amount of money for those goods or services. A contract may include more details, such as time frames for completion and payment and specifications for the goods or services. The failure of either party to meet one or more of the requirements is a breach of the contract.

There are two sources of law governing your contract. First, there is your state's law regarding contracts, which is typically a combination of laws enacted by the state legislature and contract law that has developed through court decisions. The second source is the terms and conditions found in your contract, especially any breach of contract provisions found in that agreement.

A breach of contract clause often defines what constitutes a breach of contract and what can happen in the event of a breach.

State law establishes a statute of limitations for a breach of contract, which is typically four years. This means that a lawsuit for a breach of contract must be filed no later than four years after the date of the breach. Therefore, a demand letter should be sent soon after the breach is discovered.

A written contract may have provisions governing a notice of breach. For example, it may state where and how such a notice is to be delivered. It is important to follow any such requirements.

Special problems may be presented if there is a breach of an oral contract, also called a verbal contract. State laws require that certain types of contracts must be in writing in order to be enforced in court. Even if a verbal contract is enforceable in your jurisdiction, it may be difficult to prove what terms were agreed to, so a written contract is always preferable.

Remedies for breach of contract

Before taking the formal step of sending a breach of contract notice, informally discussing the problem with the other party may lead to a simple fix and avoid escalating the situation to the level of a conflict.

The law provides for various remedies for a breach of contract, depending upon the nature of the contract and the nature of the breach. These include:

• Canceling the contract. Generally, a court only approves ending a contract if it is determined that there has been what is called a material breach of contract, or a breach sufficiently serious that it destroys the value or purpose of the contract to the nonbreaching party.

• Suing for damages. Damages may be available for a breach that is deemed nonmaterial or partial, meaning that the nonbreaching party has suffered some degree of financial injury but not to the extent that the value or purpose of the contract was destroyed. Damages may also be available for a material breach.

• Specific performance. In rare cases, a court may order a breaching party to repair the breach and complete their obligations under the contract. This is done only when the court determines that canceling the contract or awarding damages cannot adequately compensate the nonbreaching party.

Which course of action you pursue should take into consideration whether the other party can cure the breach within a reasonable time, the financial injury you incur due to the breach, and whether you wish to continue with the contractual relationship.

Content of a breach of contract notice

A breach of contract notice needs to explain the nature of the breach and clearly state what action is required. This can usually be done with a one-page letter.

Explaining the nature of the breach involves stating what requirement of the contract has not been fulfilled. The exact language of the contract provision at issue should be quoted in the demand letter, along with an explanation of how that provision was violated.

Stating what action is required depends upon the particular circumstances. If it is possible for the breach to be fixed and the contract completed, the notice should set forth what action the other party needs to take to remedy the problem and in what time frame. If the breach is so severe that the contract cannot be completed, the notice should state that the contract is terminated and set forth the damages to be paid by the breaching party.

In either scenario, the notice should also include a statement to the effect that if the breach is not corrected or the damages are not paid, further legal action will be taken. It is not necessary to specify exactly what that legal action is. Your next step may be to have an attorney send a demand letter or  file a lawsuit.