Contract Breaches: Strategies for Small Business Owners

Contracts are fundamental to any business operation, and unfortunately, the risk of a breach is always present. As a small business owner, understanding how to effectively resolve a contract breach is crucial.  

Breach of Contract Doesn’t Immediately Mean Litigation

A breach of contract does not necessarily lead to litigation. Litigation can be costly and may not always be necessary if there is clear communication between the parties involved.   

Many contract breaches can be effectively resolved through negotiation or a form alternative dispute resolution (ADR) method such as arbitration or mediation. However, approaching disputes with the intent of making the other party pay for their mistake can make the process longer, and more expensive.  

Concentrate on achieving a positive outcome and potentially maintaining your business relationships rather than proving who is right. Should escalation become necessary, you’ll have the advantage of demonstrating good faith and documenting repeated breaches, bolstering your position.  

From Our Video Archive: Read the Contract 

Expend All Channels of Communication Prior to Harsher Action

Breaches of contract can be from an honest mistake.   

Imagine you own a small catering business, Tasty Events, that regularly provides services for corporate events. You have a signed contract with Event Planners Inc., which agrees that they will hire your services for all their events during the year in exchange for a discounted rate, stipulating a minimum of 12 events. The contract specifies payment is due 30 days after each event.  

Six months into the agreement, you realize that Event Planners Inc. has only used your services for three events and has been late on two of the three payments, violating the agreed minimum number of events and payment terms. This might constitute a breach of contract due to non-compliance with the agreed-upon terms of frequency and timing of payments.  

To resolve this issue while considering the business relationship, you could revisit the contract with Event Planners Inc.   

During renegotiation, you might offer a revised payment plan to accommodate their cash flow issues and discuss adjusting the contract terms to reflect better the current economic reality, which might be causing them to host fewer events than anticipated. This way, you work towards receiving payments owed while helping mitigate penalties for Event Planners Inc., ensuring future cooperation and securing a sustainable working relationship.  

Regular contract reviews could have highlighted these issues earlier, allowing adjustments before breaches occurred, safeguarding your business interests, and maintaining peace of mind.  

Read Our Blog: When Is Business Litigation an Emergency?  

When is a Lawsuit a Viable Option for Addressing Breach of Contract?

If negotiation, meditation, or arbitration is no longer viable, assess whether a lawsuit is a feasible option. Factoring in the overall cost of litigation including the amount of time it will take you from running and improving your business.  

Factors to consider:  

Assess Damages vs. Litigation Costs

Evaluate the financial impact of the breach and weigh it against the potential costs of legal action. The cost analysis should include how much time it will take away form running and growing your business. It’s essential to ensure that pursuing a lawsuit is economically rational.  

Review Your Documents

Documentation is paramount in a breach of contract case. Is there a written signed contract? What written communication exists between the parties? Allocate your documentation to review.  

Statute of Limitations

A statute of limitations is a law that defines the maximum amount of time in which parties involved in a dispute must initiate legal proceedings following an alleged offense.  

The statute of limitations varies depending on the offense and the jurisdiction’s location. Courts will likely refuse to consider a dispute if the statute of limitations has lapsed.  

Waiver of Claims

Reflect on how consistently you’ve enforced the contract in past breaches. A history of overlooking breaches could weaken your position in court.  

Anticipate Defenses

If a lawsuit is filed, the defendant will have an opportunity to present a defense and can even file an action called a counter claim. Consider if any of your actions, products, or services you provided might give rise to claims like this.  

Consulting with a legal professional experienced in contract disputes is advisable. 

Maintain Amicability

Even when preparing for litigation, strive to maintain a fair and amicable relationship with the other party. Resolving the issue without severing ties can prevent significant losses, including valuable business relationships.  

Litigation is a viable option to address damages to your business, but the outcomes is not guaranteed, and it can be expensive and time consuming. Your might open yourself up to counter claims. It is a good first option to try to resolve claims through negotiation or alternative dispute methods.  

Richards Rodriguez & Skeith‘s team of business and transactional lawyers may be able to provide guidance. We support middle-market companies with a lean, focused team of attorneys who craft value-added, tailored solutions to help their clients accomplish their business objectives. Contact our firm today for all your business contract and litigation needs.