Breach of Contract Claims in Tennessee: Elements, Remedies, and Deadlines for Business and Property Owners

Most breach of contract disputes come down to three questions: what the contract required, how serious the failure was, and what it cost. The answers decide whether there is a claim, what it is worth, and how long it can wait. Here are the Tennessee rules behind each one.

What the claim has to prove

The Court of Appeals has stated the essential elements of any breach of contract claim as "(1) the existence of an enforceable contract, (2) nonperformance amounting to a breach of the contract, and (3) damages caused by the breach of the contract" (ARC LifeMed, Inc. v. AMC-Tennessee, Inc., Tenn. Ct. App. 2005). Each element can be its own fight, and the damages have to come from the breach itself.

Material breach or minor breach

Not every breach is serious enough to let the other side stop performing. In McClain v. Kimbrough Construction Co. (Tenn. Ct. App. 1990), the court said only the subcontractor's uncured material failure to perform would have excused the general contractor from its remaining obligations, and because the deficiencies were not material, the contractor was not entitled to terminate the subcontract as it did. To decide whether a breach is material, Tennessee courts look to Section 241 of the Restatement (Second) of Contracts (Forrest Construction Co. v. Laughlin, Tenn. Ct. App. 2009, citing Adams TV of Memphis, Inc. v. ComCorp of Tennessee, Inc., Tenn. Ct. App. 1997). The factors are:

1. The extent to which the injured party will be deprived of the benefit it reasonably expected.
2. The extent to which the injured party can be adequately compensated for that lost benefit.
3. The extent to which the party failing to perform will suffer forfeiture.
4. The likelihood that the party failing to perform will cure, taking account of all the circumstances, including any reasonable assurances.
5. The extent to which the behavior of the party failing to perform comports with standards of good faith and fair dealing.

Timing matters as much as severity. In Forrest Construction, a builder stopped work on a home and submitted draw requests not supported by the cost records the contract required. The court held that the builder was the first and only party to materially breach, that the owner had not breached by declining to pay the builder's demands, and that the builder was not entitled to damages for the owner's alleged failure to pay. A party that commits the first material breach is not entitled to damages stemming from the other side's later material breach of the same contract. The builder's material breach and the number of defects also excused the owners from giving notice of the defects and an opportunity to cure.

A party that stops performing because of the other side's breach is betting that a court will call that breach material. Construction disputes add their own notice-and-cure rules, from the contract and, for some property, from statute, discussed in construction defect claims in Tennessee.

When the other side says it will not perform

The Tennessee Supreme Court has said a repudiation can occur when a party commits a voluntary act that renders it unable or apparently unable to perform, or when its words and conduct amount to "a total and unqualified refusal to perform the contract" (UT Medical Group, Inc. v. Vogt, Tenn. 2007). An indication that more negotiations are sought is not a total and unqualified refusal.

When a repudiation comes before performance is due, the Court described three courses the non-breaching party may elect:

• rescind the contract and pursue remedies based on rescission;
• treat the repudiation as an immediate breach by bringing suit or changing position in some way; or
• wait for the time for performance and bring suit after it arrives.

The bar is high. In Vogt, a physician's email saying she planned to practice locally and wanted to discuss the buy-out and the non-competition part of her contract was not a repudiation; the Court read it as showing she intended to perform through the buy-out.

For sales of goods, when a party repudiates a performance not yet due and the loss will substantially impair the value of the contract, the other party may wait a commercially reasonable time or resort to any remedy for breach, and in either case may suspend its own performance (Tenn. Code Ann. § 47-2-610).

What damages are meant to cover

Contract damages aim to put the injured party where it would have been if the contract had been performed. In Forrest Construction, the owners were entitled to damages that would put them in the position they would have been in had the builder not breached, but not to profit from the breach.

Losses beyond that are limited by foreseeability. Citing Hadley v. Baxendale, the Tennessee Supreme Court has held that special damages must be within the reasonable contemplation of both parties at the time the contract was made (Turner v. Benson, Tenn. 1984). In Turner, buyers failed to close on a home:

• The sellers' lost income from a day-care business run out of the home was not recoverable, because the business was going to end when the house sold.
• The expenses of owning two houses, including interest on the bank loan taken to buy the new one, were recoverable, because the buyers knew the sellers were buying another home with the sale proceeds.

Courts may award damages that are the normal and foreseeable results of a breach, including reasonably foreseeable incidental and consequential damages (Morrow v. Jones, Tenn. Ct. App. 2004). Remote and speculative damages may not be recovered, but contract damages proved with reasonable certainty may be (Wachtel v. Western Sizzlin Corp., Tenn. Ct. App. 1998). Many commercial contracts waive consequential damages or cap liability; those clauses are covered in vendor, supplier, and SaaS agreements in Tennessee.

The injured party is also expected to limit its loss. The critical factor is whether the method used to avoid further injury was reasonable under the circumstances at the time, and the breaching party may not use the rule for a hypercritical examination of the injured party's conduct (Salley v. Pickney Co., Tenn. Ct. App. 1992, as quoted in Forrest Construction). The burden is on the breaching party to prove the damages could have been prevented or mitigated (Hailey v. Cunningham, Tenn. 1983).

Liquidated damages or a penalty

A liquidated damages clause sets the amount owed for a breach in advance. In Guiliano v. Cleo, Inc. (Tenn. 1999), the Tennessee Supreme Court adopted a prospective approach: courts look at the contract language and the circumstances when the contract was formed, including whether the sum was a reasonable estimate of potential damages and whether actual damages were indeterminable or difficult to measure at that time.

If the clause meets those factors and reflects an intent to compensate, it is upheld. If the provision and circumstances show the parties intended merely to penalize a breach, it is unenforceable as against public policy. In Guiliano, the clause was a reasonable estimate when the employment contract was made, so the extent of the employee's actual damages had no bearing on his recovery of the stipulated amount.

Attorney's fees and interest

Tennessee follows the American rule. A party may recover attorney's fees only if a contractual or statutory provision creates the right, or some other recognized exception applies (Cracker Barrel Old Country Store, Inc. v. Epperson, Tenn. 2009). A contract must specifically and expressly provide for fees: in Cracker Barrel, a provision assessing "all costs and expenses of any suit or proceeding" against the defaulting party did not, and the Court pointed to language like "including reasonable attorney fees" as the kind that does.

Prejudgment interest may be awarded in accordance with the principles of equity at a rate not exceeding a maximum effective rate of ten percent per year, with different limits for contracts subject to § 47-14-103. A contract may also expressly set a rate to be paid after breach or default, within the limits of § 47-14-103 (Tenn. Code Ann. § 47-14-123).

The award is within the trial court's discretion. Its purpose is to fully compensate a plaintiff for the loss of the use of funds it was legally entitled to, not to penalize the defendant, and uncertainty about the existence or amount of the obligation does not by itself require denying interest (Myint v. Allstate Insurance Co., Tenn. 1998). It is not automatic: in ARC LifeMed, the Court of Appeals applied Myint and disallowed prejudgment interest on a breach of contract judgment.

The implied duty of good faith and fair dealing

Tennessee implies in every contract a duty of good faith and fair dealing in its performance and enforcement (Dick Broadcasting Co. v. Oak Ridge FM, Inc., Tenn. 2013). The covenant does not create new contractual rights or obligations and cannot be used to circumvent or alter the agreement's specific terms, but it protects the parties' reasonable expectations and their right to receive the benefits of their agreement.

In Dick Broadcasting, a contract allowed assignment only with the other party's consent and was silent on the standard for withholding it. The Court held that the decision had to be made in good faith and in a commercially reasonable manner. Parties may contract for sole, absolute, unfettered discretion, but to avoid the implied covenant they must explicitly state that intention.

Agreements that must be in writing

Tennessee's statute of frauds bars an action on certain agreements unless the agreement, or some memorandum or note of it, is in writing and signed by the party to be charged or someone that party lawfully authorized (Tenn. Code Ann. § 29-2-101(a)). The list includes:

• a special promise to answer for the debt, default, or miscarriage of another person;
• a contract for the sale of land, or a lease of land for longer than one year; and
• an agreement that is not to be performed within one year from its making.

In a contract for the sale of land, the party to be charged is the party against whom enforcement is sought. For goods, a contract for sale for $500 or more generally is not enforceable by action or defense unless there is a record sufficient to indicate that a contract for sale has been made, signed by the party against whom enforcement is sought or that party's authorized agent or broker, subject to the statute's exceptions (Tenn. Code Ann. § 47-2-201(1)).

How long you have to file

• Contracts generally: actions on contracts not otherwise expressly provided for must be commenced within six years after the cause of action accrued (Tenn. Code Ann. § 28-3-109(a)(3)). For causes of action arising on or after July 1, 2024, a claim for unpaid wages, salary, bonuses, commissions, or other compensation owed to an employee or independent contractor must be brought within three years, even when it is framed as a breach of contract (Tenn. Code Ann. § 28-3-105(4), added by 2024 Tenn. Pub. Acts ch. 747).
• Sale of goods: an action for breach of a contract for sale must be commenced within four years after the cause of action accrued, and the original agreement may shorten that to not less than one year but may not extend it. The claim generally accrues when the breach occurs, even if the aggrieved party does not know of it, with a separate accrual rule for warranty claims (Tenn. Code Ann. § 47-2-725(1), (2)).

The label on the complaint does not decide which period applies. In Benz-Elliott v. Barrett Enterprises, LP (Tenn. 2015), the Tennessee Supreme Court held that a court must identify the gravamen of each claim by considering both the legal basis of the claim and the injury for which damages are sought. There, a land seller's deed left out an access strip the contract reserved to her. The Court of Appeals, focusing on the damage to her remaining property, applied the three-year period for injury to property; the Supreme Court held the claim was for breach of contract and the six-year period applied. Fraud and misrepresentation claims can carry a different deadline.

When the remedy you want is the property

In a failed real estate purchase, money may not be what the buyer is after. Specific performance, a court order requiring the other side to close, is its own remedy, and it is not automatic: the decision rests in the trial court's discretion, and whether it fits depends on the facts of each case (Morrow v. Jones, Tenn. Ct. App. 2004). It is described on my office's specific performance page. Deposit fights are covered in when earnest money becomes a lawsuit.

Whether a particular failure is a breach, whether it is material, and what it is worth depend on the contract's wording and the facts. If you want a contract read for what it requires and what its remedy, fee, and notice clauses would mean if the deal goes wrong, my office can review the contract with you.

Educational disclaimer: This article provides general Tennessee educational information only and is not legal advice for any specific contract or dispute.