What to do if You Have Breached a Contract

Do You Need a Breach of Contract Lawyer?

Not infrequently, a client comes to me because he has been threatened with a lawsuit for his alleged breach of a contract.  The first question I generally ask my client is “Did you breach the contract?”  Few say “yes” – at least not right away.  But, after exploring the situation,

we sometimes get to that conclusion.

Now what?  Even when my client finally admits that he breached the contract, not too many offer to take responsibility.  This is where a lawyer has to gently guide his client to do the right thing.   But what is that?

First, I explain that contract law was developed with the basic premise that it’s okay to breach a contract.  The business world functions best when the player can reasonably predict the consequences of their actions.  For example, if I hire another employee, what are my costs and regulatory hurdles associated with the additional employee?  If I grow my earnings, what will be my tax bracket?  This is true for contracts.  Sometimes, the wisest decision for a business person is to breach a contract and accept the consequences – because the benefits of getting out of the contract exceed the costs (and I use the term “costs” very broadly) of breaching it.

For example, you may have entered into a binding agreement to purchase a house.  But, what if you discover a super bargain on another house; are you stuck buying the first house or can and should you back out and paid the damages?  Or, what if your company agreed to manufacturer widgets for a fixed price, but you later determine that you’ll lose money on the deal because your costs to manufacture are higher than you anticipated?

What is a Breach of Contract for Real Estate?

Second, to determine what to do, you need to analyze the costs of honoring the contract versus the costs of breaching it.  For example, does your contract contain a provision awarding attorneys’ fees to the prevailing party if you dispute the contract in court?  If so, and if you know you’ve breached the contract, then you have to estimate the amount of money you’ll pay your own lawyer, plus the money you’ll pay for the other party’s lawyer if you lose.

Also, some contracts (and I’d say a vast minority) have what’s called a “liquidated damages” provision which sets the amount of damages in the event of loss.  The real estate purchase contract in my example above will likely have a liquidated damages clause, for instance.  If so, that makes your decision easier because you won’t have to guess at the amount of damages you’ll have to pay for the breach.  Without that clause, you’ll have to estimate the other party’s lost profits or cost of finding someone else to do the work you agreed to do under the contract.  Those costs are usually subject to a wide range of calculations, so your estimate will be disputed and you will never be certain what amount the court will set as damages until you get to trial.

In some instances, your breach is simply a failure to pay what you owe.  Often, you think you owe one amount, but the other party says you owe more.  In those cases, it’s best to “tender” (offer to pay) what you think you owe – even if the other party will sue you anyway.  The reason is that, if your calculation is correct, you may be entitled to recover the attorneys’ fees you spent fighting the lawsuit even if you lose.  That’s because the law says that, if you offered to pay the correct amount and the other guy sued you anyway, you really were in the right all along.  Remember, the law does not deem you a bad guy for breaching a contract – so long as you’re willing to pay the damages you owe as a result.

As you can see, if you think it’s best to breach a contract, or if you’ve breached because you had no other choice, just own up to what you’ve done and figure out a fair resolution.  You’ll save money in the long run (vis-à-vis fighting a losing battle in court).  More importantly, you’ll honor yourself by maintaining your integrity by doing the right thing.