Draw the Law: Contract Disputes, Breach Remedies – the Lawsuit Part I

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.

Draw the Law: Contract Disputes, Breach Remedies – Alternative Dispute Resolution!

Practice Updates: Business Entity Formation Talk Tomorrow (August 1)

Hey everyone, sorry for the week delay, but the talk on Basics of Contract Law was fun and went well with Docracy. I hope to do this talk again in the future, as it is clear a lot small business owners, startups, and freelancers do not have a firm grasp of what they are getting into in business deals.

Bottomline: You are NOT a consumer, so you do not have the same protections as consumers do when you are a business owner.

Next, thing, I have a talk tomorrow night (August 1st) at the ING Direct Café in Waikiki from 6-7pm. This talk is on Business Entity Formation, and will mainly focus on the differences between LLCs and Corporations. So come learn the pros and cons, and what might be appropriate for your business. This talk is free.

Today’s Draw the Law: Using ADR to Remedy Your Contract Breaches

We all know how costly lawsuits can be, and sometimes the value of the contract is just not worth going toward that direction. Therefore, many times the best way to resolve the breach is to talk it out, but sometimes you are too close to the deal. You need a third-person to look at the situation and come to a decision or help resolve the dispute. This is where alternative dispute resolution (ADR) steps in.

Arbitration is similar to a court proceeding, as it is adversarial and the arbitrator makes a decision (like a judge); mediation is more concerned about asking questions to define the problem and having the parties sit down and find a solution.

There are two types of ADR: (1) mediation; and (2) arbitration. They are NOT the same process. In addition, you can put in an ADR clause in your contract to determine what the procedure is in a dispute. It can be one or the other, it can be both, or it can be neither. This is a negotiation matter.

Mediation: No Judging, Just Identifying the Problem

Mediation is less about blame and more about figuring out what the problem is and possible solutions. This tends to be more constructive, but only effective if both parties are willing to sit down for mediation, which is not always the case for breach of contract situations.

In mediation, a mediator does not act like a judge. Nor are they the lawyer for either side. All they do is help both sides resolve disagreement by identifying and defining the items you disagree with. The goal here is cooperation through informal and problem-solving processes, and is NOT adversarial. Generally, this is suitable for divorces and neighbor-to-neighbor disputes, but can work out situations among business partners, customers, and misunderstandings that need clarification.

If you are curious for more information and our in the State of Hawaii, go visit the Mediation Center of the Pacific‘s site by clicking here.

Arbitration: Informal Court

Before you even get to trial in a lawsuit there are a lot of pre-trial motions, evidence-gathering, etc . . . procedures. Sometimes it can be close a year before you even get to the trial portion and because of this lawsuits are costly (time and money wise). Arbitration, acts like a faster version of court, condensing things that may take months into an abbreviated period.

Arbitration functions like an informal court proceeding. On the one hand it is more formal than mediation, but less formal than going to court. It is usually faster and cheaper than a lawsuit because it eliminates many of the processes of formal litigation and trial work. Everything is sped up.  Typically, the arbitrator is a former judge, but has extensive knowledge in your trade and industry.  They will take in witnesses and evidence, and then issue a written decision. More often than not this decision is binding on the two parties; if you lose in arbitration, you may not be able to go to court even if you disagree with the outcome. Usually, to be binding, you and the other party has put in the ADR clause that arbitration will be binding.

Last Word: Partnership Agreements, Operating Agreements, and Bylaws are Contracts!

I think one thing I want this post to impart, and the fact that I did a Basics on Contract Law talk and have a Business Entity Formation talk coming up is that people who join together to start a business is that the internal document that guides the arrangement, whether a partnership agreement, operating agreement, or the bylaws, they are contracts.

Why is this important? Because many times the owners of a business get into arguments or disagree, and sometimes there is a breach of the internal agreement. At that point you have to ask yourself: Do you want to sue your business partner?

Sometimes, the answer is yes, but sometimes the answer is ADR is the better solution and remember you can always use ADR clauses or agreements to force everyone into this less costly route than a suit. You may save money and your business venture.

*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.

No Draw the Law, But Come to my Contracts Talk Tomorrow!

Join me at the Greenhouse Innovation Hub with startup Docracy next week Wed., July 25th from 6-7pm.

Sorry, there will be no Draw the Law, as I work on finalizing the talk and closing a business deal.  Today’s post, was supposed to be on alternative dispute resolution in a breach of contract situation, but guess what?

I will be talking about that tomorrow at The Greenhouse Innovation Hub, I will be discussing ADR, what is a contract, answering your questions, and I along with Docracy, the NYC startup trying to make using legal agreements user-friendly, will be using sample agreements to walk you through basic contract law.

The information is as follows:

Hope to see you there!

-RKH