For small businesses, contract disputes can be both costly and disruptive. Whether you delivered a product and your customer didn’t pay or one of your vendors came up short and prevented you from meeting your obligations to your clients, there are contract rights at issue, and you will need to decide what course of action is best for your company.
Should you take legal action? If so, what exactly does that mean?
Considerations for Taking Legal Action Following a Breach of Contract
If you believe that a customer or supplier may have breached its contract with your company, the first course of action is to review your agreement. You will need to answer questions including:
Is it clear that the other party violated the terms of the agreement?
Is it possible that the other party could claim that your company violated the agreement (for example, by missing a deadline or not satisfying service level agreements (SLAs))?
What does your agreement say about dispute resolution (if anything)? Does it require mediation or arbitration? Are you subject to mandatory jurisdiction in another state?
What are the potential remedies for the breach (and are there any limitations on those remedies, such as a cap on damages)?
Are there any other terms, such as representations, warranties, or indemnification obligations that could impact your legal dispute?
Based upon your assessment of these and other considerations, you can decide whether you should pursue legal action (which typically begins with sending a formal demand letter), or whether attempting to work things out amicably may present a better alternative.
Common Claims in Contract-Related Business Disputes
With regard to the first question, there are numerous types of contract provisions which, if breached, can lead to legal disputes between businesses. Some of the most common types of claims in breach-of-contract litigation include:
Violation of Payment or Performance Obligations. If you are having trouble getting paid, you may need to pursue legal action for collection. If you paid and your counterparty didn’t perform, you may need to take legal action to recover damages or enforce your counterparty’s performance obligation.
Breach of a Confidentiality, Non-Solicitation or Non-Competition Clause. In many ways, confidentiality, non-solicitation and non-competition clauses are among the most-important provisions in commercial agreements. If another company or individual is using your company’s proprietary information without authorization, you may need to act quickly to prevent irreparable harm.
Breach of Representations or Warranties. If you entered into the agreement based upon representations that turn out to be false, or if your counterparty has breached a warranty regarding its product or service, protecting your business may mean taking your case to court.
While some contract disputes lead to full-blown litigation, it is far more common for parties to come to terms in an out-of-court settlement. Taking legal action does not necessarily mean going to trial; and, when used strategically, initiating legal action can be a cost-effective way to protect your company’s immediate and long-term business interests.