Contracts

When Can Your Business Sue for Breach of Contract?

Updated by Brian Farkas, Attorney

Broken contracts are perhaps the most common legal issue that businesses face. Most of your business's activity is likely based on contracts between you and other parties. Consider employment contracts, vendor contracts, and sales contracts, to name a few.

Dealing with people who fail to perform as promised is, unfortunately, part of doing business. To bring a business lawsuit against another party for breaking a contract, however, you must be able to prove certain relevant details about the arrangement. How do you know when you have good grounds upon which to sue?

Do Not Begin With a Lawsuit

First of all, a lawsuit should never be your first step in resolving a broken contract. Most lawyers will tell you that a lawsuit is often not the most efficient or economical method of resolving a dispute. Before you run to the courthouse, try reaching out to the other party with a telephone call, email, or letter. Put the other side on notice that you intend to take this breach seriously, and see whether it is willing to negotiate.

If that doesn't work (or you've already tried everything), perhaps it's time to hire a lawyer to send a demand letter to the breaching party. Sometimes, a letter from the lawyer will be taken more seriously than a letter from the business, since it shows that you are willing to invest money into the outcome of the dispute.

If the breaching party ignores your lawyer's letter, then perhaps it is the right time to sue. But do not sue you before at least attempt these steps at negotiation.

A Valid Contract Must Exist to Form the Basis of a Lawsuit

To sue another party for breaking a contract, a valid contract must exist in the first place. Part of proving that a contract is valid is establishing the basic features of a contract. A valid contract requires an offer made by one party that was accepted by the other party. Something valuable must have been given by both sides to demonstrate the parties' seriousness, known as "consideration." Consideration essentially means that each side must give something of value.

Finally, the other party must also have had the legal right to enter into a contract (for instance, the other party is not a minor). For more on the basics of contract formation, see Business Contracts.

The Contract Must Have Actually Been Breached

Typically, you must wait until the other party actually breaks the contract before suing. There are certain situations where you can ask the court to prevent the other party from backing out of a contract if you have a reasonable expectation of that happening and special harm may result (known as an "anticipatory breach"). However, an ordinary breach of contract case requires the other side to break the contract before you can bring the lawsuit.

You also have to prove that the other party was the one who broke the contract and that you notified the party of the breach.

Your Business Must Have Followed the Contract

In most cases, the law allows you to recover damages for a breached contract as long as you performed as promised. A person who materially breaks a contract first cannot later sue the other party for failing to perform as a result.

For example, imagine that your business entered into a contract to purchase a large piece of equipment. The contract required that you make a deposit payment of $10,000. You failed to make that payment. The seller then failed to deliver the equipment on the date specified in the contract. In this situation, you would not be able to sue the seller for failing to deliver the equipment, since you materially breached the contract by failing to make the deposit payment in the first place.

Damages Are a Remedy for Breach of Contract

You can ask the court to award your business money damages in a breach of contract lawsuit. Basic damages are designed to compensate you for your business's financial injury and the inconvenience that resulted from the other party's behavior.

Occasionally, a broken contract results in no actual injury to your business. In that case, the court may award a small amount as a gesture, sometimes called nominal damages. Some contracts contain a liquidated damages clause. This requires the party breaking the contract to pay a specific amount of money regardless of whether there's proof of actual injury.

You may wonder whether a court can order a breaching party to perform according to the contract. While courts do have the power to issue that sort of equitable relief, they are unlikely to do so in most situations. For example, a court is highly unlikely to order that an employee continue to work for your business against his or her will. Specific performance is a rare remedy; usually courts will merely award money damages.

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