Business Contract Disputes FAQ

Under California law, a breach of contract occurs when a party fails to perform any term of a contract without legal excuse. California Civil Code Section 3300 and common law establish the elements a plaintiff must prove: the existence of a valid contract, the plaintiff's performance or excuse for nonperformance, the defendant's breach, and resulting damages. Breaches can be material or minor. A material breach substantially defeats the purpose of the contract and excuses the non-breaching party from further performance, while a minor breach entitles the injured party to damages but does not discharge their performance obligations.

Anticipatory breach occurs when a party indicates they will not perform before performance is due, allowing the other party to treat the contract as breached immediately. California courts interpret contracts according to their plain meaning, and when terms are ambiguous, consider the parties' intent, course of dealing, and industry custom to determine whether a breach occurred.

California Civil Code Sections 3300-3302 govern contract damages, entitling the non-breaching party to recover the amount that will compensate for all detriment proximately caused by the breach. General damages, also called direct or expectation damages, put the injured party in the position they would have occupied had the contract been performed, including lost profits that were reasonably foreseeable at the time of contracting. Consequential damages compensate for additional losses flowing from the breach, such as lost business opportunities, reputational harm, or costs incurred due to the breach.

However, consequential damages must be reasonably foreseeable and proven with reasonable certainty. The injured party has a duty to mitigate damages by taking reasonable steps to reduce losses. Incidental damages cover costs reasonably incurred in responding to the breach, such as inspection costs or finding replacement suppliers. While punitive damages are generally not available in contract actions, they may be recoverable when the breach also constitutes a tort involving fraud, malice, or oppression.

Limitation of liability clauses are generally enforceable in California business contracts, but courts apply several constraints under Civil Code Section 1668 and common law principles. Clauses attempting to exempt a party from liability for fraud, willful injury, or violation of law are void as against public policy. Limitations must be clear, conspicuous, and negotiated between parties with relatively equal bargaining power. Courts scrutinize limitations in contracts of adhesion, where one party had no meaningful opportunity to negotiate terms.

Exclusions of consequential damages are typically enforceable if clearly stated, but caps on direct damages must be reasonable and not unconscionable. Under the California Commercial Code Section 2719 for goods transactions, remedy limitations fail if circumstances cause the limited remedy to fail of its essential purpose. Sophisticated commercial parties are generally held to their agreed limitations, while courts protect parties who lacked meaningful choice. To maximize enforceability, businesses should ensure limitations are prominently displayed, specifically identify excluded damages, and bear reasonable relationship to foreseeable risks.

Enforcing a vendor contract dispute in California begins with reviewing the contract's dispute resolution provisions, as many commercial contracts require mediation or arbitration before litigation. If no alternative dispute resolution is required, or if it fails, a lawsuit may be filed in California Superior Court or federal court if diversity jurisdiction exists. For disputes under $10,000, small claims court offers a streamlined process, while limited civil jurisdiction handles claims up to $25,000.

The statute of limitations is four years for written contracts under Code of Civil Procedure Section 337 and two years for oral contracts under Section 339. Before filing, send a formal demand letter documenting the breach and damages, as this may prompt settlement and demonstrates good faith. During litigation, discovery allows you to obtain documents and testimony supporting your claims. California's prejudgment attachment procedures under Code of Civil Procedure Section 481.010 may allow you to secure the defendant's assets. Consider filing a lis pendens if real property is involved. Prevailing parties may recover attorney fees if the contract includes a fee-shifting provision.

California imposes different limitation periods depending on the type of contract. Written contracts have a four-year statute of limitations under Code of Civil Procedure Section 337, running from the date of breach. Oral contracts have a two-year limitations period under Section 339. For contracts involving the sale of goods governed by the California Commercial Code, Section 2725 provides a four-year period from tender of delivery, regardless of when the breach was discovered.

The statute begins running when the breach occurs, not when it is discovered, unless the breach was fraudulently concealed. Continuing or repeated breaches may allow claims for breaches within the limitations period even if earlier breaches are time-barred. The limitations period may be tolled during periods when the defendant is absent from the state, or when the plaintiff was a minor or lacked legal capacity. Contractual provisions shortening the limitations period are generally enforceable if reasonable, but extensions beyond statutory periods are void. Filing an action stops the clock, while demand letters do not extend the deadline.

Specific performance is an equitable remedy requiring the breaching party to perform their contractual obligations rather than pay damages. Under California Civil Code Sections 3384-3395, specific performance is available when monetary damages would be inadequate, the contract terms are sufficiently definite, and the requesting party has performed or is ready to perform their obligations. Courts most commonly order specific performance for contracts involving unique property such as real estate, rare goods, or exclusive business assets.

For ordinary commercial goods or services, specific performance is rarely granted because damages typically provide adequate compensation and substitute performance can usually be obtained elsewhere. The California Commercial Code Section 2716 allows specific performance for goods when they are unique or other proper circumstances exist. Courts retain discretion to deny specific performance if enforcement would be impracticable, cause undue hardship, or the contract was obtained through unfair dealing. The remedy requires court supervision of performance, making courts reluctant to order specific performance of ongoing service contracts requiring sustained cooperation.

Choice of law clauses specify which state's laws govern contract interpretation and disputes, while forum selection clauses designate where disputes must be litigated. California courts generally enforce both types of clauses between sophisticated commercial parties under Civil Code Section 1646.5 and common law principles, unless enforcement would violate California's fundamental public policy or the chosen law has no substantial relationship to the transaction.

Mandatory forum selection clauses require litigation in the designated forum, while permissive clauses allow but do not require that forum. Courts consider whether the clause was freely negotiated, whether it was obtained through fraud or overreaching, and whether enforcement would be unreasonable or unjust. California Labor Code Section 925 invalidates forum selection and choice of law clauses requiring California employees to litigate claims outside California or under non-California law, demonstrating that some statutory protections cannot be waived. When evaluating enforceability, California courts apply either California law or the law of the designated forum, depending on which parties argue applies. Businesses should carefully consider these clauses' implications before signing.

California Civil Code Sections 1549-1622 establish the requirements for valid contracts. First, there must be mutual consent, meaning an offer by one party and acceptance by the other demonstrating a meeting of the minds on essential terms. Second, the parties must have legal capacity to contract, excluding minors (with some exceptions), persons of unsound mind, and those under undue influence. Third, the contract must have a lawful object; agreements for illegal purposes or violating public policy are void. Fourth, there must be sufficient consideration, meaning something of value exchanged between parties, though adequacy is generally not examined.

Fifth, certain contracts must comply with the Statute of Frauds under Civil Code Section 1624, requiring written evidence for agreements that cannot be performed within one year, contracts for the sale of goods over $500, and real property transactions. Business contracts should clearly identify the parties, describe the goods or services, state the price and payment terms, specify delivery or performance requirements, and allocate risks. While oral contracts may be enforceable, written agreements provide better evidence and reduce disputes.

California imposes an implied covenant of good faith and fair dealing in every contract under Civil Code Section 1655 and established case law. This covenant prevents either party from doing anything to unfairly interfere with the other party's right to receive the benefits of the agreement. Unlike some jurisdictions, California recognizes breach of the implied covenant as a contract claim, not an independent tort, meaning damages are generally limited to contract remedies.

The duty prohibits conduct such as exercising discretion granted under the contract in bad faith, unreasonably withholding consent when the contract requires it, deliberately evading contractual obligations while technically complying, and creating conditions that prevent the other party's performance. However, the implied covenant cannot create obligations beyond the contract's express terms or override explicit provisions. California Commercial Code Section 1203 imposes good faith obligations specifically on contracts for the sale of goods. Courts examine whether a party's conduct frustrated the other's reasonable expectations based on the contract's purpose. While subjective bad intent may be relevant, courts primarily focus on whether actions objectively violated the implied covenant.

California offers multiple alternative dispute resolution options that can provide faster, less expensive, and more private resolution than traditional litigation. Mediation involves a neutral third party who facilitates negotiation but cannot impose a resolution. California courts strongly encourage mediation, and many Superior Courts require it before trial. Arbitration involves a neutral arbitrator who hears evidence and issues a binding decision. The California Arbitration Act under Code of Civil Procedure Sections 1280-1294.4 governs arbitration agreements and proceedings.

Arbitration offers streamlined procedures, limited discovery, and typically faster resolution, but parties waive their right to jury trial and extensive appeal rights. Private judging allows parties to hire a retired judge to resolve disputes with the same authority as sitting judges, with decisions appealable to regular courts. Many commercial contracts include mandatory arbitration clauses that courts generally enforce under both California and federal law. When selecting ADR, parties should consider confidentiality needs, the complexity of legal and factual issues, the importance of establishing precedent, and whether the relationship requires preservation. Many disputes combine mediation first, with arbitration if mediation fails.