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Five Keys to Using Negotiations to Resolve a Breach of Contract

As we have said many times on this site, businesses run on their contracts. Hopefully, all of those contracts run smoothly, and all contracting parties end up getting the benefit of their respective bargains. Unfortunately – and inevitably – some contracts are going to be breached. One side is not going to honor its obligations. What to do? For San Diego businesses depending on the circumstances, there are essentially four options or strategies:

Negotiate
Bring a lawsuit, mediate, or arbitrate
Self-help — not always an option
Do nothing, move on, and avoid that contracting partner

In this article, we discuss the first of these options – negotiations. If a breach has occurred, it is important to reach out to a skilled and experienced San Diego corporate attorney for advice and counsel. Here is a quick discussion of the five keys to using negotiations to resolve a breach of contract.

Why is the Breach Occurring?

There are many reasons that a party might breach a contract and many times those reasons are innocent. As such, the first step is to communicate and find out why the breach is occurring. There might be an “easy fix” like extending more time or solving a supply chain problem. This sort of negotiation might lead to the contract being reinstated, maybe on the same terms, maybe on different terms.

Status of Your Contracting Partner

Part and parcel of communicating and understanding why the breach has occurred is learning the status of your contracting party. The essential question is whether your contracting partner is still a viable ongoing business and, if so, does your contracting partner have money, revenue, or other assets to pay for breach of contract damages. Let’s face reality: If your contracting partner is in bankruptcy, if other creditors have seized the main assets, and if the breaching party is no longer a going concern, then there may not be anything to negotiate or sue for, and it is likely time to find a new business partner. At the same time, it is important not to simply give up. There are many legal options that can be used such as filing claims with a bankruptcy court, filing for fraudulent conveyances, filing for replevin, and the like.

What is Essential to Your Business?

Assuming that the breaching party has assets worth pursuing, the next key is to carefully consider what is essential to your ongoing business. If the breach is non-payment, then seeking payment is essential. However, if the breach relates to supply chain or essential services, what may be more important is finding a replacement vendor or service supplier. Alternatively, maybe it is intellectual property or a real estate location that is essential. What is “essential” to your business will drive the negotiations.

The Amount and Type of Your Actual Damages

With respect to non-payment, calculating actual damages is generally simple. However, with other types of breaches, calculating actual damages can be more complicated. That is why it is important to assess what is essential to the ongoing running of your business. This allows you to determine what replacements are needed and also the speed with which replacement goods/services must be obtained. Once that is assessed, then it is possible to establish the actual damages caused by the breach. In a simple example, following a breach, your business needed to buy a replacement truckload of 10,000 parts. But the new vendor charged $1 more per unit and, because you needed them quickly, there was an expedited delivery charge of $5,000. So, your business suffered actual damages of $15,000 plus associated inconvenience, lost productivity, and the like.

Now you have a dollar figure for your negotiations. As a reminder, under California law, you cannot recover more than your actual damages (unless you can make some claim for punitive damages).

What are Your Rights and Limitations Under the Contract

The next key is to know what your specific contract says. Are there limits or caps on your recoverable damages? Can you recover attorneys’ fees if there is a breach or a threatened breach? Is specific performance allowable under the contract? As noted, a good corporate attorney can help.

The attorney’s fee issue is important since this creates a category of potential damages. Litigation is expensive and, if allowed under the contract, can add $50,000-$100,000 or more to your claim against the breaching party. As such, categories of potential future damages can weigh heavily in favor of a negotiated settlement. Taking all the keys together, you and your trusted attorney have the information necessary to negotiate a resolution (if possible).

Contact San Diego Corporate Law

For further information, please contact Michael Leonard, Esq. of San Diego Corporate Law. Mr. Leonard has the experience to draft your contracts properly and can provide advice in the event of a breach. San Diego Corporate Law can provide legal services for any business-related matter. Contact Mr. Leonard via email or by calling (858) 483-9200.