In All


Understanding and recognizing what constitutes a contract is key to understanding many legal questions and avoiding legal pitfalls.  Often a dispute centers on whether a contract existed in the first place and not necessarily on whether your client/customer has violated a contract.  Other disputes center on whether a change in circumstances has made a contract unenforceable.  Much of the time when things go wrong, such could have been avoided by having consulted with an attorney or by having an attorney review a contract or other legal document/issue before its execution, saving you much unwanted hardship and expense.  All to many times, people wait until a legal dispute arises before talking to an attorney.  

From a cost-benefit analysis standpoint, generally being proactive by engaging an attorney at the outset of the contractual relationship to provide a legal opinion or  otherwise, is a prudent business decision.  Just as a business owner generally utilizes the services of a tax professional to obtain financial advice and prepare financial documents, it makes sense for the individual/business owner to utilize an attorney to review/approve legal documents and provide legal opinions before a legal dispute occurs.  It has been my experience that having a law firm on retainer to provide day to day legal assistance  greatly reduces the risk of costly litigation.  Business owners, even individuals, should think of their law firm as their personal “general counsel,” someone who they can call to discuss general to specific legal issues in order to avoid legal pitfalls.  

As a professional, you know how contracts should work, and how to generally avoid basic problems. But what happens when something goes wrong, such as the other contracting party is failing to perform, you can no longer perform, or you want to amend the contract due to changed circumstances?  As you may know, generally a violation of a material provision of a contract is a breach.  A remedy is how you can go about repairing a breach, or getting compensated for the loss it causes.  

There are different kinds of contract relief/damages you can seek from a court/arbitrator.  Compensatory damages are damages that compensate you for your loss.  Liquidated damages are an amount that is built into the contract, as long as it fairly estimates the damages.  The courts will not enforce a penalty clause with an amount of liquidated damages that is way out of line with the actual loss.  Other remedies include a court order requiring the breaching party to perform as promised in the contract.  This is known as specific performance.  Courts will generally impose specific performance only if there is no other remedy available because of the contract’s unique subject matter, such as real estate or a unique piece of personal property.  A court may rescind, or cancel, a contract that one party has breached.  The court could reform the contract. That involves rewriting the contract according to what the court concludes, based on evidence at trial, the parties actually intended. These are often used under fraud laws. In addition to breach of contract, you may also have fraud and claims for unfair or deceptive trade practices in consumer transactions.  However, their use involves numerous technicalities and competent legal advice is absolutely necessary to take advantage of them.

Remember, depending on which side you are on (the breaching party or the non-breaching party), the actions you take to address the situation can often have a significant impact on liability issues and/or your ability to recover damages.  It is important that if you find yourself in a foreseeable or existing contractual dispute, that you call your attorney to develop a plan of action to maximize your position/recovery or mitigate your potential exposure.

A breach of contract—also called a default—is one party’s failure, without a legally valid excuse, to live up to any of his or her responsibilities under a contract. A breach can occur by the failure to perform as promised; making it difficult/impossible for the other party to perform; and by the repudiation of the contract (proclaiming an intent not to perform before your obligation to perform actually arises).  A repudiation of a contract is a clear statement made by one party before his/her performance is due that the party cannot or will not perform under the contract – such a statement can have a dire legal impact, such as immediately allowing the other side to declare you are in breach before your performance is even due, and permit a suit for damages.  Having previously spoken with your “general counsel” in order to create a plan/strategy to deal with a breach and/or the best way to mitigate the situation, can often be critical from a liability, monetary exposure and litigation cost standpoint.

When someone commits a material breach of a contract, the other party is typically no longer obligated to keep its end of the bargain, and may proceed in several ways.  By way of example, the damaged party may use diplomacy and see if the breaching party will reconsider the breach, the injured party may engage his legal counsel in an attempt to persuade the other side to perform or pay damages, or the injured party may sue the breaching party for damages and/or for other remedies.  When there is a breach, your attorney can recommend courses of action based upon a cost/benefit analysis (i.e. liability analysis, damage analysis, collectibility of a judgment, recovery of attorneys’ fees, etc. versus litigation costs/expenses).  A telephone call with your attorney on how best to proceed can go a long way to obtaining compliance or mitigating your monetary exposure.  The breaching party may have breached the contract because of a misunderstanding or misinterpretation of the contract – this is why spending money on the front end can save you money at the back end by avoiding the expense and time of litigation.  Further, after speaking with your attorney, you may simply decide to attempt to work things out and renegotiate.  The key is to ensure that the action you take is the proper course from a legal standpoint, and will only serve to bolster your legal position should a legal dispute arise.

Further, as part and parcel with speaking with your “general counsel,” as a business professional, you know that you should  maintain records of all your communications with your customer/client, and certainly with a breaching party.  Yet, many business owners fail to document communications, and rely on oral understandings/statements.  You should not wait until you are in for a struggle before making a file.  Keep copies of all written communications you send and receive to this file, and confirm oral statements that you rely on in writing/e-mail.  A written file will serve you well in any legal dispute.

Even assuming that the breaching party does not move,  you will have the benefit and comfort of knowing that you have a well documented file, and legal plan in place to move forward accordingly, and can make an informed decision as to whether to proceed with litigation or alternative dispute resolution. 

As you may know, there are different types of alternative dispute resolution systems, such as mediation and arbitration.  Many times the contract itself may include a specific type of alternative dispute resolution that you are required to use.  Hence, you may have already agreed not to go to court to resolve disputes. Sometimes, however, these alternative dispute agreements are not enforceable, and there are circumstances where courts refuse to enforce arbitration agreements in adhesion contracts or when fraud is involved.  Having consulted with your attorney prior to signing such an agreement, you  will have an opinion in hand as to whether you have given up your right to your day in court, as well as the pros and cons of the same.

If you are an owner of a business, it is likely that your success has been the result of hard work and expense undertaken by you over the years.  Your time should be spent on building your business and not dealing with legal matters that could have been avoided or resolved expeditiously had an attorney been engaged in the beginning of the business relationship.  You will likely find that having “general counsel” on retainer will assist in avoiding litigation and go a long way towards building a more profitable business.