How to Properly Break a Contract

When you’re in business, you have contracts. If you don’t, you’re probably doing something wrong. More importantly, when you enter contracts, you intend to keep your side of that contract and you surely expect the other side to keep its end of that promise. However, business is money and money drives decisions. That’s why there are no punitive damages for breaking a contract. That said, you should consider the consequences because there likely are going to be consequential damages. Consequential damages are those money damages that stem from breaking a contract. For example, say you have a contract with a vendor that supplies you with certain products each week. You sign a two year contract that provides very low costs. Well, these contracts tend to be low because the money for your vendor is made over time. If you break the contract early, then the vendor loses money. Therefore, they will seek those damages from you in order to be made whole, so to speak. Also, your reputation is also your business. If you get a reputation for breaking contracts, you could get a reputation and that may affect negotiation. So, let’s look at what to do if you want to break a contract.

The first we’ll tell you is to do your homework. As part of that homework is to seek the counsel of an attorney so that he or she can fully explain your legal consequences. This is not the time for self-help. With that, run the numbers. And to do this accurately, you need to know your contract. There should be some termination clauses. Take a look and see what it says. Is there a damages clause? What are the notice requirements? You will need to follow these. If there is a damages clause then you are able to predict what you’re going to spend to get out. You need to know your return on investment. What benefits are you getting from this contract? Then look at what you’re going to pay versus what you will get out of breaking the contract. If it is for a new vendor, make sure you’ve done your homework so you know that you aren’t just getting a better price, but that you are going to get the proper quality of product and service. In other words, you need to understand the totality of costs, risks, and benefits.

Once you’ve finished your analysis and spoken with an attorney so you know your legal footing, you can take the next step… and for many this is a very difficult step, but it needs to be done with precision. Generally, the best step is to have an open conversation with the other party. Particularly when the decision is based on costs, you may be able to renegotiate the costs. Even if it is a problem with quality or service, you may be able to ease those concerns. And if you’ve done the leg work, you should be able to make thoughtful decisions and not ones that are knee-jerk or based on emotion. Just like any break-up, you need to be prepared to hear “I can change,” but you also need to be prepared that it will go badly quickly. Be prepared, but be practical, logical, and cool-headed. If you do and you are prepared for the costs and legal consequences of breaking the contract, you should be able to avoid having to argue in court. The time and monetary investment that goes into doing your homework will allow you to keep your focus on your business and not on meetings with your business litigation attorney. We’ve heard more than once ‘it’s the principle of the thing.’ While sometimes that may be where the chips fall, generally it only means more work for us, more money in our pockets, and more stress for you. Be a businessperson, not a Defendant.