As a small business owner, your contracts are the foundation of your operations. They define your relationships with clients, vendors, and partners. But what happens when one of those deals goes wrong? When a party fails to uphold their end of the bargain, you are faced with a breach of contract. Knowing how to respond strategically is crucial to protecting your business from financial loss and legal turmoil.

At LforLaw, we believe that understanding your rights and options is the first step toward a successful resolution. Here is a practical, step-by-step guide for navigating a breach of contract dispute.

What is a Breach of Contract?

In simple terms, a breach of contract occurs when one party fails to perform their promised obligations under a legally binding agreement without a valid legal excuse. Breaches can range in severity:

• Material Breach: This is a serious violation that goes to the “heart” of the agreement and deprives the non-breaching party of the substantial benefit of the contract. A material breach often allows the non-breaching party to terminate the contract and sue for damages.
• Minor Breach: Also known as a partial breach, this is a less severe violation that does not excuse the non-breaching party from their obligations. The non-breaching party can still sue for damages related to the breach but cannot terminate the contract.

The first step in any dispute is to determine the type and severity of the breach to understand your legal standing.

The Small Business Owner’s Playbook: Step-by-Step

When you suspect a breach, it’s vital to be methodical. Emotion can be expensive; documentation and clear action are your best allies.

Step 1: Review the Contract Before you do anything else, go back to the original document. Carefully review all terms, conditions, and clauses, paying special attention to:

• Performance obligations: What exactly was each party required to do?
• Timelines and deadlines: Were any deadlines missed?
• Dispute resolution clauses: Does the contract require you to go to mediation or arbitration before filing a lawsuit?
• Cure period: Does the breaching party have a set amount of time to remedy the breach?

Step 2: Document Everything Start a file dedicated to the dispute. Document every relevant communication and event. This creates a clear paper trail that will be essential if the conflict escalates.

• Keep copies of all emails, text messages, and letters.
• Take detailed notes of all phone calls, including the date, time, and content of the conversation.
• Gather all invoices, payment records, and evidence of non-performance (e.g., photos of incomplete work, delivery records).

Step 3: Send a Formal Demand Letter If informal attempts to resolve the issue fail, the next step is to send a formal demand letter for breach of contract. This is a powerful tool that often leads to a resolution without a lawsuit.

A demand letter should:

• State the facts clearly and concisely.
• Specifically identify the breached clauses of the contract.
• Explain the damages or harm you have suffered as a result.
• Demand a specific remedy (e.g., payment, specific performance, a new delivery date).
• State a reasonable deadline for a response.

A well-crafted demand letter demonstrates that you are serious about enforcing your rights and can often persuade the other party to negotiate a settlement.

Step 4: Consider Alternative Dispute Resolution (ADR) Before you file a lawsuit, explore options like mediation or arbitration. These methods are typically faster, more private, and less expensive than traditional litigation. Many contracts even include a clause that requires you to pursue ADR before going to court.

Step 5: File a Lawsuit (Breach of Contract Litigation) When all other avenues fail, litigation may be your only remaining option. This formal process involves filing a legal complaint in court, a period of discovery (where both sides exchange evidence), and potentially a trial. This step should only be taken with the guidance of a qualified attorney.

What Can You Recover? Remedies for a Breach

If you successfully prove a breach of contract lawsuit, the court will award you a legal remedy, often in the form of monetary damages. The goal of these remedies is to put you in the same financial position you would have been in if the contract had been fulfilled.

• Compensatory Damages: This is the most common type. It includes direct losses (e.g., the cost of a replacement product) and foreseeable losses (e.g., lost profits from a canceled project).
• Specific Performance: In rare cases where monetary damages are not enough, a court may order the breaching party to fulfill their original obligation, especially when the subject of the contract is unique (e.g., a piece of real estate or a rare antique).
• Liquidated Damages: If your contract included a liquidated damages clause, you may be entitled to a pre-determined amount of money that the parties agreed would be paid in the event of a breach.

Navigating a breach of contract is challenging, but taking a strategic and documented approach from the start is your best defense. Don’t go it alone.

If your business is facing a business contract breach and you need help with a demand letter for breach of contract, negotiating a resolution, or a breach of contract lawsuit, we can connect you with a licensed attorney who has the expertise to guide you through every step of the process.

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Sources:

• Legal Information Institute (LII) at Cornell Law School: Provides legal definitions for “breach of contract” and its remedies.
• Nolo.com & FindLaw.com: Offer practical, plain-language guides on business contracts and dispute resolution for small business owners.
• American Bar Association (ABA) Business Law Section: A professional resource on commercial contract law and litigation best practices.
• LexisNexis & Thomson Reuters Practical Law: Provide up-to-date legal analysis and how-to guides for legal professionals, which inform the content of this post.