📋 Overview

You've received a demand letter alleging your business breached a contract. In California, breach of contract claims require proof of: (1) existence of a valid contract, (2) plaintiff's performance or excuse for nonperformance, (3) defendant's breach, and (4) resulting damages. This guide helps you evaluate the claim and respond strategically.

⚠ Don't Ignore It

Ignoring a breach demand can result in litigation without any attempt at resolution, plus potential waiver of defenses if you don't preserve your position.

🕒 Time to Act

Most demand letters give 10-30 days to respond. Use this time wisely to investigate and formulate your position before the other side files suit.

💰 Damages at Stake

Contract damages include direct losses, consequential damages if foreseeable, and potentially attorney fees if the contract has a fee-shifting clause.

Elements of Breach of Contract in California

  • Valid contract - Written or oral agreement with offer, acceptance, consideration, and legality
  • Performance by plaintiff - Other party must have performed their obligations (or have a valid excuse)
  • Material breach by defendant - You substantially failed to perform a material term
  • Causation and damages - The breach caused actual, quantifiable harm
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🔍 Evaluate the Claim

Before responding, conduct a thorough internal investigation. Review the contract, communications, and performance history to assess the claim's validity.

Risk Assessment Matrix

Issue Potential Exposure Risk Level
Clear written contract breach Full contract damages + attorney fees (if clause) HIGH
Partial performance dispute Quantum meruit recovery for value delivered MEDIUM
Ambiguous contract terms Interpretation favors non-drafting party MEDIUM
Oral contract claim Harder to prove, but 2-year SOL applies LOW
Speculative damages claim May be reduced/dismissed on certainty grounds LOW

📄 Contract Documents

  • ✓ Original signed contract/agreement
  • ✓ All amendments and modifications
  • ✓ Related purchase orders/SOWs
  • ✓ Terms and conditions referenced

📝 Performance Evidence

  • ✓ Delivery receipts/shipping records
  • ✓ Email/written communications
  • ✓ Payment records and invoices
  • ✓ Change order documentation

⚠ Review the Contract Carefully

Pay close attention to: Notice provisions (did they properly notify you of the claimed breach?), Cure periods (do you have time to fix the issue?), Limitation of liability clauses (caps on damages), and Dispute resolution requirements (mandatory arbitration or mediation?).

🛡 Your Defenses

California law provides numerous defenses to breach of contract claims. Identify which apply to your situation.

No Valid Contract Exists

Challenge the contract's formation: lack of mutual assent, indefinite terms, lack of consideration, or failure to satisfy Statute of Frauds (Civil Code 1624) for contracts that must be in writing.

When to use: No signed agreement exists, terms were never finalized, or required writing is absent.

Prior Material Breach by Plaintiff

Under California law, if the other party materially breached first, you may be excused from further performance. Their breach must be material, not minor.

When to use: They failed to pay, didn't deliver required items, or violated a core term before your alleged breach.

Statute of Limitations

Written contracts: 4 years (CCP 337). Oral contracts: 2 years (CCP 339). The clock typically starts when the breach occurs or is discovered.

When to use: Alleged breach occurred more than 2-4 years ago depending on contract type.

Failure to Mitigate Damages

Plaintiff has a duty to mitigate damages by taking reasonable steps to minimize losses. Failure to mitigate reduces recoverable damages.

When to use: Plaintiff sat on their hands instead of finding replacement goods/services or limiting losses.

Impossibility/Impracticability

Performance may be excused if it became objectively impossible or commercially impracticable due to unforeseen circumstances (Civil Code 1511).

When to use: Government action, natural disaster, or unforeseen events made performance impossible.

Waiver, Estoppel, or Modification

The other party waived the term, is estopped from enforcing it by their conduct, or the parties orally modified the agreement.

When to use: They accepted late performance before, agreed to changes verbally, or their actions show they waived strict compliance.

🚨 Weak Defenses to Avoid

  • "I didn't read the contract" - You're bound by what you signed
  • "It was a bad deal" - Regret doesn't excuse performance
  • "They're being unreasonable" - Focus on legal defenses, not emotions
  • "Everyone in the industry does it this way" - Custom doesn't override contract terms

⚖ Response Options

Based on your evaluation, choose the appropriate response strategy.

Negotiate Settlement

If there's some merit to the claim or you want to preserve a business relationship, negotiate a resolution. Often cheaper than litigation.

  • Saves legal fees (both sides)
  • Preserves business relationships
  • Faster resolution

Dispute & Defend

If you have strong defenses, send a formal response disputing the claim and preserving your legal position.

  • Preserves all defenses
  • May deter weak claims
  • Documents your position

Cure the Breach

If the contract allows a cure period, or the breach is minor, completing performance may resolve the matter.

  • Eliminates ongoing breach
  • Shows good faith
  • May limit damages

Counterclaim

If the other party breached first or owes you money, assert a counterclaim as leverage or for recovery.

  • Creates settlement leverage
  • May offset their damages
  • Recovers your losses

📊 Cost-Benefit Analysis: Settlement vs. Litigation

Example: $50,000 breach of contract claim

Claimed contract damages $50,000
Consequential damages claimed $25,000
Interest (10% prejudgment) $7,500
Their attorney fees (if contract provides) $30,000+
Your defense costs $25,000+
MAX EXPOSURE IF YOU LOSE $137,500+

💡 Settlement Sweet Spot

For claims under $75,000, settling for 40-60% of claimed damages often makes economic sense. You avoid attorney fees, business disruption, and uncertainty. Always require a mutual release of all claims.

📝 Sample Responses

Copy and customize these response templates for your situation.

Acknowledgment & Investigation
We acknowledge receipt of your demand letter dated [DATE] alleging breach of the [CONTRACT NAME/DATE]. We take this matter seriously and are conducting a thorough review of the contract, performance records, and relevant communications. We note that your letter does not include documentation supporting the claimed damages of [$AMOUNT]. Please provide: (1) your calculation of damages with supporting invoices or receipts, (2) evidence of your performance under the contract, and (3) copies of any correspondence regarding the alleged breach. We will respond substantively within [14/21] days of receiving this information. Nothing in this letter should be construed as an admission of liability.
Dispute Response - Prior Breach
We have reviewed your demand letter and dispute the allegation that we breached the [CONTRACT NAME] dated [DATE]. In fact, it was [CLAIMANT] that first materially breached the Agreement by [describe their breach - e.g., failing to make the payment due on X date, failing to deliver specifications by X date, etc.]. Under California law, a party's material breach excuses the other party's further performance. See Brown v. Grimes (2011) 192 Cal.App.4th 265. Our performance was properly suspended following your breach. We therefore deny liability and reserve all rights, including the right to pursue our own claim for damages resulting from your breach in the amount of [$AMOUNT]. If you wish to resolve this matter, we are open to discussing a mutual release. Otherwise, we are prepared to defend any litigation vigorously.
Settlement Offer
Without admitting liability, and solely in the interest of resolving this dispute efficiently, we are prepared to offer [$AMOUNT] as full and final settlement of all claims arising from the [CONTRACT NAME] dated [DATE]. This offer is contingent upon execution of a mutual general release agreement, which shall include releases of all claims, known and unknown, under California Civil Code Section 1542. Each party shall bear its own attorney fees and costs. This offer is made pursuant to California Evidence Code Section 1152 and is inadmissible for any purpose other than to prove a settlement agreement. The offer will remain open for [14] days, until [DATE]. If we do not receive your acceptance by that date, the offer will be withdrawn and we will defend any claims through all available legal channels.
Statute of Limitations Defense
We have reviewed your demand letter dated [DATE] alleging breach of contract. Your claim is barred by the applicable statute of limitations. The alleged breach occurred on or about [DATE OF ALLEGED BREACH], which is more than [four years (written contract) / two years (oral contract)] ago. Under California Code of Civil Procedure Section [337/339], claims for breach of [written/oral] contract must be brought within [four/two] years of the breach. Your claim is therefore time-barred and we decline to make any payment. We are prepared to raise this affirmative defense in any litigation you may choose to file. This letter is without prejudice to any other defenses available to us.

🚀 Next Steps

What to do after receiving a breach of contract demand letter.

Step 1: Preserve Evidence

Immediately preserve all contracts, emails, invoices, and communications. Issue a litigation hold to prevent document destruction.

Step 2: Review Contract

Read every provision carefully, especially notice, cure, dispute resolution, and limitation of liability clauses.

Step 3: Calculate Exposure

Determine maximum damages, including consequential damages and attorney fees if the contract has a fee clause.

Step 4: Respond in Writing

Send a professional response preserving your defenses. Silence can be used against you in litigation.

If They File Suit

  • Answer within 30 days - File your answer or face default judgment
  • Assert affirmative defenses - All defenses must be raised in your answer or they may be waived
  • Consider a cross-complaint - If they breached first, assert your own claims
  • Check for arbitration clause - You may be able to compel arbitration and stay the case

Alternative Dispute Resolution

  • Mediation - Voluntary settlement facilitation, often effective for contract disputes
  • Arbitration - If the contract requires it, faster and more private than court
  • Early neutral evaluation - Get an objective assessment to facilitate settlement

Get Professional Help

Contract disputes can escalate quickly and become expensive. Get a professional response letter drafted on attorney letterhead.

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California Resources

  • California Civil Code 1549-1693: Contract formation and obligations
  • California Commercial Code: UCC provisions for goods contracts
  • CCP 337-339: Statutes of limitations for contract claims
  • California Courts: courts.ca.gov - Self-help resources