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You are in a contract and want out. Ask yourself the basics: How, when, why and will it be worth the expense?
Ask these questions in reverse order.
1) Will it be worth the expense?
If a court finds that you breached or repudiated a contract, the court may 1) order you to complete the contract, 2) award the amount of benefit you already received to the non-breaching party, 3) award the amount the non-breaching party would have received in the contract, or 4) award the amount needed to return the non-breaching party to the same position it was in prior to the contract.
Most of the time, you will pay your own litigation costs.
In addition to these costs, assess other costs of breaching a contract. Will the breach cause:
- a marketing/publicity fallout?
- an insurance problem?
- problems with other contracts due to cross-default provisions?
- a conflict with who you are (as a person, a leader, a business)?
Keeping your “word” is worth a lot personally and in business. Following through on what you say sets the tone for ongoing business relations. Usually it is worth losing a bit of money to keep your good name. There are some exceptions. If you determine this time it is “worth it”, 1) address it early, 2) try to mitigate everyone’s damages, 3) put it in writing.
If it is worth it to get out, do you want out because the other party has breached, too? Was there a communication or mistake of fact between both parties? Are you unable to do what you promised?
If THEY do something wrong:
- Address it early: Early recognition of the problem gives everyone more time to make corrections which may solve the problem or at least mitigate damages. In most situations, parties have an obligation to keep damages as low as possible. Put another way, if someone sets your tablecloth on fire, you need to put out the fire, you cannot just watch it burn down the house and then say “your fault”.
- Put it in writing: It you get into a fight down the road, it will be easier to prove your position if you document the problem.
- Keep records: Proving expenses that need to be corrected is easier if you have accurate records.
If YOU do something wrong:
- Address it early: See above. Mitigation of damages applies to both parties. Again, this allows everyone to address a problem before it balloons and becomes too expensive.
- Decide if you can negotiate a forbearance or renegotiate the contract. If a business partner will not go broke renegotiating, you may find the best businesses will give up a little profit now to cultivate long term loyalty.
If there was a misunderstanding:
- Address it early: If the misunderstanding requires court intervention, it is tough to believe someone who waited too long to address a misunderstanding.
- Set out the misunderstanding in writing. Even if the original agreement is not in writing, documenting a misunderstanding will preserve information for later use. (Putting it in writing from the start can help avoid misunderstandings before entering into a contract).
If you CANNOT do what you promised to do
- Address it early: See above. Addressing it early allows everyone to mitigate damages, renegotiate and avoid further conflict.
Communicate with others in the contract as soon as you are aware of the breach, mistake or misunderstanding. See above. Mitigate.
By penalty clause: Look at the contract for specific breach ramifications. Some contracts (often phone contracts) have a liquidated damages or forfeiture clause. These set out a specific result for breaching the contract.
By legally voiding the contract: Even if you believe you have a legal defense to this contract, you still must go through the analysis of whether it is worth it to breach your contract and go to court. You may win a fight with an 800 pound gorilla but will walk away with some bruises.
Legal defenses include:
Impossibility/ impracticability of performance
Failure of consideration
Do not use an online dictionary to determine if you have a legal defense. There are many cases interpreting each of those terms. Also, there are many things that affect the interpretation of your contract. You must analyze not only the particular provision and other provisions that effect it, but you may also need to look at the circumstances leading up to the contract, the facts surrounding performance, and whether there is a statute or public policy governing the subject matter.
- If the contract is in writing.
- The length of the contract (does it span more than one year?).
- Whether the contract is for goods or for services.
- The total value of the contract.
By renegotiation: You may want to sit down and discuss options with the other side (informally or through a mediator). Open communication in the situation may bring about a creative solution. Perhaps you will be able to provide contacts to ease the burden on the other side. For example, a contractor who was unable to complete a job was able to get significantly discounted materials from a contact who had an oversupply. This allowed the other party to finish the job at approximately the same cost.
Getting out of a contract requires the same skills as getting into a contract.
· Read everything.
· Be thoughtful about what you put in writing.
· Be proactive in your approach.
· Look at the whole picture from marketing to business relations.
· Be honest.
Getting into the right contracts is a skill. Getting out of a contract gracefully is an art.
- Christine Branstad