Business owners rely on contracts to protect their business, establish boundaries and set expectations. However, situations arise where one or both parties breach a contract. When this happens, business owners should know what can happen and what options they have.
Generally speaking, there are a few different outcomes of a contract dispute:
- The breaching party agrees or complies with a court order to correct the breach.
- The breaching party pays the non-breaching party for damages.
- The parties or courts cancel the contract.
The outcome will depend on several factors, primarily the nature of the breach.
Types of contract breaches
Breaching a contract means failing to fulfill the terms. However, not every breach will trigger legal battles. An immaterial breach is minor and does not result in financial losses for the non-breaching party. A material breach results in economic damages and gets to the very heart of the agreement.
Generally, an immaterial breach will not warrant any formal action.
However, if a material breach occurs, parties can expect a legal dispute resulting in one of the three outcomes mentioned above. If a party can remedy the breach by performing their duties, the courts can order them to do so. If the breach is irreparable, contract cancellation or damages can be more appropriate.
Means of resolving contract breaches
In the event of a material breach, parties would be wise to consult the contract for guidance. Often, agreements include terms for resolving disputes. Dispute resolution clauses could consist of instructions for:
- Having a third party investigate
- Attempting to resolve a dispute through mediation or arbitration before litigation
- Calculating damages
- Adding contingent agreements
These components can direct parties on what they can expect in the event of an alleged breach.
However, not all contracts include practical dispute resolution clauses. In these cases, parties will typically attempt to resolve the issue themselves informally. If this is not effective, the non-breaching party can file a lawsuit.
Minimizing risks, consequences of breaches
As a business owner, you can prevent contract disputes and legal fallout by diligently reviewing and negotiating the agreement before signing. If an alleged breach still occurs, you can consult an attorney to discuss the possible options you have to remedy the situation.
