'A client has breached their contract, but I’m worried it won’t be cost effective to take them to court. What should I do?'
Contract law is not straight forward, even when formal, written contracts exist. Small businesses frequently find it difficult to enforce contracts, resulting in having to accept a breach of contract, so you’re certainly not alone with this issue. But first you need to understand what type of contract breach you’re dealing with.
Types of contract breach
There are several types of breaches to contracts that can happen, including:
Minor breach – a minor breach would be something simple like supplying the wrong quantity of materials to the amount stated in a contract.
Material breach – a material breach is something that has serious implications for the completion of the contact, such as being unable to supply a product within a reasonable time but the contract can still be performed.
Fundamental breach – this is a breach that will result in the termination of the contract. An example would be if a company was no longer licensed for the product or service, they said they would supply or provide.
Anticipatory breach – an anticipatory breach is one where the company knows they are in breach and informs the other parties that they cannot meet the terms of the contract. One of the most common anticipatory breaches would be the failure to meet the contractual deadline.
Now you’ve established the types of contract breach’s possible, you now need to review your original contract and establish how serious the breach is.
Review your contract
You will need to review your original contract thoroughly and find out the following information:
How serious the dispute is - which clause in the contract has not been followed and therefore what has amounted to a breach of contract. Using the type of breaches set out above, how serious is the breach? This will give you an understanding on the types of damages or other remedy you can claim for and what type of dispute resolution you should use.
Is the contract signed – Whilst some courts may be flexible as to the evidence of the contract, it’s advised to have a written contract signed by both parties to record the terms which can then be used for evidential purposes.
Where your contract covers – If you’re dealing with an overseas customer it’s important, you’re aware of which country’s governing law applies to the contract. More specifically, which country or area does it cover?
Is there a binding Alternative Dispute Resolution (ADR) clause in the contract? - This type of clause will provide information as to which steps you and client must take to resolve the dispute before entering into court action and is one way of enabling you both to reach a consensual resolution of the problem.
Is there a binding decision (jurisdiction) clause in the contract? - This clause is a binding form of dispute resolution (referred to as ‘DR’), enabling you and your client to submit your dispute to a neutral third party to determine how it can best be settled.
Is there an escalation clause? - An escalation clause (otherwise known as tiered dispute resolution clause) is where you both agree at the outset of the contractual relationship to use your representative to resolve the dispute amicably through ordinary negotiations. The escalation clause also sets out the steps you both must follow before resorting to a binding decision process.
Now you have established the type of contract breach you’re dealing with, and the seriousness of it, and you’re aware of the contract clauses, you now need to consider the most cost-effective method of dispute resolution.
Alternative Dispute Resolution (ADR)
Litigation can be a drain on both your time and money. That’s why it’s important to consider alternatives to resolve your contract dispute and is what I would always advise to clients as a cost-effective dispute resolution.
Your contract may have either a binding or non-binding clause, setting out the process of how you and your client would intend to resolve a dispute.
This focuses on you both reaching a ‘without prejudice’ consensual resolution. The ADR process is flexible, inexpensive, and quick. Due to its ‘without prejudice’ nature, it does not compromise your position if a settlement is not reached, and you can decide to proceed with other methods of resolution.
ADR processes include:
Negotiation: - an attempt by your representatives to resolve the dispute in a neutral setting. This usually preserves an ongoing relationship between the parties.
Mediation - this is the process of using a neutral, trained mediator to assist with the resolution of the dispute. In short, this leaves it up to you and the other side to agree a resolution to your disagreement with the mediators help.
Early neutral evaluation (ENE): this is when a neutral third-party opinion is obtained to enable the parties to evaluate the likely outcome of the dispute before proceeding to trial.
If no way can be found to settle the contractual dispute via a non-binding option, the next step is to consider the binding option provided for in the contract. A binding option offers more structure, is generally less expensive and can be more informal than litigation.
The most common methods of binding options to litigation are:
Arbitration - this is wherethe dispute is resolved privately by an independent arbitrator (at the cost of the parties) instead of the court.
Expert Determination (ED) - this is a binding form of ADR and the parties get to choose a neutral expert with skills relevant to the dispute. ED is carried out privately and is designed to give businesses cheaper and faster solutions to commercial disputes.
Adjudication - this is a binding process specific to construction contracts.
It’s important to seek legal advice before deciding on which type of dispute resolution to take, in order for you to get the best outcome.
Court proceedings would generally be the last resort. Litigation involves a court trial, is binding and enforceable. It is also costly and a slower way to resolve a dispute however it may be the most effective method, especially if you and your client cannot resolve the contract dispute. Litigation is usually provided for in a jurisdiction clause, provided that you both failed to settle your dispute through other resolution methods. In the absence of any agreed alternative in the contract then litigation is the fall-back.
Will it be cost effective?
To decide on what best course of action to take with a contract breach, you should make careful considerations to the following:
- Does your client have enough assets to make the process cost effective? There is no point taking a small firm to court if they do not have sufficient of assets to pay for damages.
- How strong is your case and do you have legal support? You’re likely to waste time and money if you don’t have a strong case and professional legal advice.
- Have you exhausted all ADR options?
The general rule in litigation proceedings is that the losing party will pay most of the winning party’s costs. If you have a strong case, then going all the way to court might be an option. If you have a weaker case, seeking a quick ADR settlement might be more effective and less costly.
Seek legal advice
You should have a legal professional to support with commercial contracts and advice with contract agreements, but if you don’t you should certainly have legal support when dealing with a contract dispute.
We will help you decide if your case is worth proceeding with, and which form of dispute resolution to take. Having frank and simple advice at the start will likely save you time and money in the long run. Also, if you do take the case to court, we will be with you through the process to get you the best commercial outcome possible, whilst minimising costs and time.
You can find more advice Contract Dispute Resolution: An Overview and on ADR Types of alternative dispute resolution methods: choosing the best one for your business.