In today’s Freedom Friday blog and email newsletter, I want to talk about a common question that I get asked as a business attorney. There are many different ways that I get asked this question, but one of the most common questions I get asked is this: How do I deal with a breach of contract situation? This could be anything from a customer that has not paid and breached their contract with the business, to a vendor that the business paid, but the vendor did not provide the product or service, or it could be an independent contractor who breached his or her contract with your company causing damage, in some cases, which might be irreparable harm. In today’s Freedom Friday blog and email newsletter, I’m answering the question, “How do I handle a breach of contract situation?”
First of all, if you have a breach of contract situation, don’t panic. Take a deep breath for a minute and calm down before you make any decisions. Here are seven (7) steps to handle a breach of contract situation in your business:
1. Review the Contract
The first step in handling a breach of contract situation is to review the contract. Before you do anything else, you need to review the contract thoroughly, and you need to pay careful attention to certain clauses in the contract including termination clauses, dispute resolution provisions, and provisions about damages and penalties. Thoroughly understanding the contract will help you determine your next steps.
2. Document the Breach
The second step in handling a breach of contract situation is to document the breach. You need to start documenting everything related to the breach, including dates and times, e.g., when the breach occurred and what caused it; correspondence regarding the breach, including emails, letters, text messages, phone calls, and any other communication that is relevant to the breach; and evidence of the damages of the breach, including any financial losses or operational issues caused by the breach.
3. Informal Negotiation
The third step in handling a breach of contract situation is informal negotiation. Before sending a demand letter or filing a lawsuit, you should personally contact the party that breached the contract more informally, either via telephone or by email. Sometimes a breach of contract is caused by a misunderstanding or circumstances outside the control of either of the parties. By opening a line of honest communication, you may be able to resolve the issue before proceeding to more formal steps or litigation. When you speak with the other party, be calm and clear and seek resolution to the matter.
4. Evaluate the Breach
The fourth step in handling a breach of contract situation is to evaluate the breach. Once you have documented the breach and attempted to communicate with the other party to informally negotiate a solution, if the breach is still not resolved, you need to consider your options. Is this a material breach in which you need terminate the contract and seek damages, or is it a minor breach that can be fixed?
5. Send Demand
The fifth step in handling a breach of contract situation is to send demand. If the breach is serious enough, you should send a formal demand letter to the breaching party. The letter needs to explain the breach, cite the relevant terms of the contract, demand payment or performance (or other resolution) by a certain deadline, and warn the defaulting or breaching party of legal action (a lawsuit) if the breach is not resolved. At this stage, you should consult with an attorney to prepare an appropriate demand letter.
6. File a Lawsuit
The sixth step in handling a breach of contract situation is to file a lawsuit. Before you file a lawsuit, you may need to proceed to mediation or arbitration in a formal sense, so make sure you read the contract again and consult with an attorney. Also, most businesses, especially if they are an LLC, cannot represent themselves in court, so if you do file a lawsuit, you will need to hire a lawyer to do so. A lawsuit will allow you to seek to recover your damages and/or require specific performance by the other party.
7. Mitigate Your Damages
The seventh step in handling a breach of contract situation is to mitigate your damages. While going through the litigation process, you need to prevent this from happening again. You may need to find different suppliers or vendors, renegotiate other contracts, and/or adjust your operations accordingly. You should also review and update your other contracts to ensure they include clear terms to prevent future breaches and strengthen dispute resolution clauses which may require the parties mediate or arbitrate similar disputes.
Thinking about starting a small business? Or maybe your small business is having issues with contracts, leases, business partners, collection issues, or experiencing other barriers to growth? Please contact me at Jonathan@libertylegalok.com to schedule a FREE strategy session.