How to Handle a Breach of Your Small Business Contract
Every small business needs the right contracts in place to protect the way that you work. When you rely on people, businesses or third parties, a contract will define exactly what’s expected of both parties. If someone should not meet their obligations under the contract, they will be “in breach of contract” and that may give you the right to file a lawsuit and sue for breach of contract. We’ll explore what a breach of contract is, and the remedies that you can pursue to ensure your business gets what is due.
Types of Small Business Contracts
There are many different types of small business contract, including:
- Employee contracts with the people who work for your business
- Contractor contracts where you hire people like freelancers on a temporary basis to do specific work
- Vendor contracts where you agree to enter into a vendor relationship as a supplier or a customer
- Partnership contracts where you go into partnership with another party
- Manufacturing contracts where you agree to manufacture for someone else, or agree to purchase manufactured goods from a manufacturer
- Service provider contracts where you agree to provide or receive services to specific standards
How to Deal with a Breach of Contract
There are several steps you’ll need to take if you believe another party has breached a contract with you. Ask yourself these questions.
Do You Have a Contract in Place?
This sounds obvious, but for a contract to be breached, you need to have a contract in the first place. Confirm that you have a contract in place with the other party and the exact wording of the contract. Check that the contract has been signed by all parties and that it is in effect.
What Is the Nature of the Breach?
Next, you’ll need to establish exactly how the contract has been breached. Confirm the breach that has occurred and find the exact part of the contract that addresses this specific issue.
Is This a Material or Immaterial Breach?
Typically, a breach will fall into one of two areas:
- A material breach, where substantial damage has or could occur
- An immaterial breach, where substantial damage is not likely to occur
A material breach typically occurs when one party fails to perform their duties as specified within the contract. For example, if you have a contract with a construction company to wire your meeting room within the next week for a business-critical function, and they do not turn up, that’s likely a material breach of contract.
On the other hand, if you have a contract with a supplier to deliver goods to you every Tuesday, and on one day the goods do not turn up until a Wednesday, that’s likely an immaterial breach. Material breaches cause unavoidable losses for your business (e.g. lost customers, lost revenue), whereas immaterial breaches are typically inconveniences.
In most cases, you cannot pursue an immaterial breach of contract if you cannot demonstrate that there was potential damage to your business.
Remedies for Breach of Contract
There are various methods you can use to resolve a breach of contract, ranging from least to most severe.
Contact the Other Party and Ask for Resolution and Restitution
You can start by contacting the other party, explaining the issue and breach, and specifying what you would like them to do. If you have not suffered a large amount of business damage, this type of approach may work to resolve your issue. If you can identify the damage that has been done, state that when you contact the other party and ask for restitution.
Issue a Demand Letter for Breach of Contract
This is a formal request to settle a claim and is often sent before you formally sue for breach of contract. A demand letter typically states the breach, explains what has happened, remind the other party of their obligation, and state what you want to happen. It can also indicate that if your demands are not met that you may sue for breach of contract.
File a Lawsuit and Sue for Breach of Contract
Finally, if other methods do not work, you can raise a formal lawsuit against the other party. For smaller amounts of damages, you may be able to resolve such claims through your state’s small claims court. If that’s not possible, you will need to contact an attorney who handles breach of contract litigation. They will be able to talk you through your options in terms of formally filing a lawsuit and suing for breach of contract.
In every case, it’s important to get contracts in place with all other parties so that you can protect the stability and growth of your business. You can then take legal action if the contract is materially breached for any reason.
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