So talking it out has not work, denying payment isn’t getting them to perform, the mediator cannot get you two to sit down and compromise, your last stop is suing for breach of contract. Before I go any further, the importance of this topic cannot be misunderstood for small business owners and startups. For those two groups, my main target audience, you are almost always in precarious position, as many times you do not have the resources to pursue costly litigation, and if the other party is a big company (they usually almost always realize this to be the case).
So let me be clear, today’s post, as all my post have been, is filled with general legal information. Nothing here in this post is specific advice, your situation should be reviewed with an attorney, and when it comes to considering a lawsuit they can render specific advice to your situation to allow you to think about the pros and cons of such an action.
Does the Breaching Party Even Have Money? Do you have the Time and Money?
One of the first considerations for a lawsuit is it even worth the time for you to pursue a suit? If the other side did not perform because they are having financial troubles they may be heading to bankruptcy, which means they have bigger headaches to concern themselves than performing under your contract. In addition, consider that if they are going to enter bankruptcy your contract will not be valid.
Your business (in blue) has a series of contracts with your duties, such as having to pay or deliver goods/services (in red) with your rights, such as to collect payment or receive goods/services (in black), from other businesses (in gray). Remember contracts are promises exchanged for each other (which includes rights and duties) among the parties.
As I have done at some of my speaking events, consider the business a box and that box is held up by a series of strings. Those strings are contracts. When a business enters bankruptcy only special creditors will be able to collect (i.e. the strings remain attached to the box). All the other strings are cut. So typically, in your small B2B contracts you are not in the habit of secured financing, therefore it is likely you will be able to collect anything from your now bankrupt breaching party.
So let’s just use your business, let’s say you are bankrupt. So what generally happens is the court will “cut the strings” you are protected from people you owe money, unless they are a secured creditor. So as you can see the obligation to pay out is cut, and the party you breached again (if unsecured) would not be able to collect payment. So you can see how a breach of contract claim may not be worthwhile pursuing.
In addition, consider the amount of time and money you are expanding for the value of the breached contract? This infographic on Mashable shows how valuable your time is and consider that in a lawsuit: a) you will be dealing with attorneys; b) you may have to produce documents for evidence; and c) you have to be a witness. All of this takes time and money.
Finally, consider that your situation may be one can be heard by a Small Claims Court. In Hawaii, Small claims are handled in an informal process, where people with small claims can turn to this court for claims valued under $5,000.00 and counter-claims (counter lawsuit) for $25,000.00. For more information click here.
What does the Contract Say?
Ok, so you determined they got enough cash/assets for you to grab in winning a suit and you have the time and willpower to go after them. What next? Before you even get there, your attorney is going to ask to see the contract. Why? Well, take a look at my Boilerplate Blurbs (as well as if you have attended my talk on Basics of Contract Law), and you will see large time place of suit, how much you can recover, what type of laws govern, etc . . . are already built into the contract. Therefore, if you pursue in the wrong venue your claim main be dismissed.
Things to consider for a breach of contract lawsuit: (1) READ the “Miscellaneous” provisions you may found to pursuit a suit you have to fly to Texas; (2) do you have the time/energy to pursuit a suit on a small amount of money; (3) what kind of money do you have, what kind of money does your opponent have; and (4) would they sue you back?
Therefore, do not take these clauses lightly. The “Miscellaneous” provisions become the important ones in a breach of contract lawsuit or when one side is considering using a threat of a lawsuit to get the other side to perform. While, I cannot stress enough that an attorney should draft and at least review your agreements – I understand with small business owners and startups that may be too costly. I still say you should get something in writing, consider turning to Docracy or other sites to have a starting basis for your agreements. In the end, it is better to have something reduced to writing rather than it being a “he said, she said” matter.
The clauses of the contract, your resources (time and money), and their resources (money), and the possibility of suing you back (remember nonpayment may be grounds for a breach by you) are all things you need to consider before suing. An attorney can help you discuss the pros and cons of pursuing a suit. These are not things to take lightly and are a harsh reality of doing business. You may one day also find yourself in a breach of contract suit situation. Therefore, it’s always good to have an attorney to reach for when building your business as you are bound to make mistakes. Your local bar has a reference resource, and you can find Hawaii’s at this link.
As lawsuits are lengthy affairs, this post is broken into two parts. So come back next week and I will discuss the type of damages that come under a breach of contract lawsuit, other types of remedies, and a few other things to consider.
*Disclaimer: This post discusses general legal issues, but does not constitute legal advice in any respect. No reader should act or refrain from acting based on information contained herein without seeking the advice of counsel in the relevant jurisdiction. Ryan K. Hew, Attorney At Law, LLLC expressly disclaims all liability in respect to any actions taken or not taken based on the contents of this post.