Breach of Contract Example

The purchase and sale agreement signed on August 1st 2014, between Insurance Depot Limited (Depot) and Mr. Sanford (Sanford), is a legally binding contract. As a result, Depot will be able to effectively enforce its contract with Sanford by taking legal action. Depot’s contract with Sanford satisfies the necessary elements of consideration, consensus, intention, legality, and capacity:

  • Consensus
    • There was a written agreement that was signed by both parties. This is proof of an offer and signed acceptance.
  • Consideration
    • Sanford sold his business for $1.4 million to Depot – this is an exchange.
  • Intent
    • Intention is presumed in commercial transactions such as the sale or purchase of a business.
  • Capacity and legality
    • There is no evidence to suggest that either party lacked capacity, and both were represented by legal counsel. There were no signs of illegality in the contract.

Because the contract satisfies all major elements outlined above, it is enforceable under the rules of contract law.

What will be the likely result if they go to trial?

If they go to trial, Depot must successfully demonstrate that Sanford breached at least one of the provisions of the contract. The contract outlines one major restrictive covenant: a non-competition clause. In this case, Depot can sue Sanford for breaching the non-competition provision of the purchase and sale agreement.

The non-competition clause is legally enforceable as it is reasonable, and it does not contradict public policy. The clause is also clear and unambiguous. It is specific as it denotes the time frame of five years and geographical range of one hundred kilometres that prohibit Sanford from engaging in the business of insurance brokerage. In order for the clause to be enforceable, these constraints need to be considered reasonable. The geographic and time-based restrictions are assumed to be reasonable in this case.

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Sanford violated the non-competition clause by opening his new insurance brokerage only two blocks away from Depot. Sanford’s breach of the non-competition clause effectively gives Depot the right to claim damages. In order to be entitled to a remedy, Depot must prove in a court of law that Sanford’s breach of contract adversely affected Depot’s business profits. Depot could then be awarded financial compensation (pecuniary damages) for the lost potential business. In addition, Depot may also be entitled to the equitable remedy of an injunction on Sanford’s new business. This would mean Sanford would have stop business operations until the five-year time span has elapsed, allowing Depot to establish itself as a major industry player in the area.

In terms of solicitation, Sanford did not actively solicit customers – these customers chose to switch to Sanford’s new firm at their own will. If the contract did include a non-solicitation clause, Depot would likely be unsuccessful in taking legal action with regards to it.  Depot should focus its legal efforts solely on the breach of the non-competition clause.

Should Depot sue with respect to the overstatement of accounts receivable?

Although there was an overstatement of the accounts receivable on Sanford’s financial statements, Depot should not sue for this misrepresentation. This is because Sanford innocently miscalculated the accounts receivable figures; it was not done in a fraudulent or negligent manner. While the statement was a misrepresentation given the fact that it was false, unambiguous, concerned with a fact, and material, it does not fully satisfy all of elements of actionable misrepresentation. As a result, Depot should not sue.

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In the case of innocent misrepresentation, the result is the remedy of rescission. This means that the contract would be cancelled, and both parties would return to their pre-contractual ownership positions. This is likely not in Depot’s best interest, as they have already owned the business for two years, and have thus invested a significant amount of time and money into the business’s development. Moreover, Depot has known about this error since approximately January 2015, and did not act upon it immediately. This reduces the likelihood of the remedy of rescission. Due to the innocent nature of the misrepresentation, and the fact that the only outcome is rescission, Depot should not pursue any legal remedy with regards to the misstated accounts receivable.

What should Depot do?

For the reasons outlined above, Depot should sue Sanford for breaching their contract, specifically the non-competition clause of it. The company is very likely to win a legal dispute against Sanford, and runs the risk of losing even more business to Sanford if they choose to remain passive.

Going forward, Depot should hire a lawyer to represent them, and to examine precedent cases in order to evaluate the most appropriate course of legal action. Depot should also consider whether or not the financial compensation that may be awarded in a lawsuit will outweigh the direct and indirect costs involved in a lawsuit. Legal action is most likely worth Depot’s time and money in this case, as an injunction on Sanford would allow them to establish themselves in the insurance industry and create customer relationships without Sanford’s competition for the remaining time frame of the covenant. In order to avoid losing more customers to Sanford, who has many connections and more experience in the local competitive landscape, Depot should pursue legal action immediately.

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