When organizations negotiate contracts with suppliers, vendors, service providers or independent contractors, they typically rely on those outside parties to follow through on their promises. Unfortunately, violations of agreements and overt contract breaches are relatively common.
Issues ranging from inadequate communication prior to signing the contract to changes in the working relationship between the parties might lead to a substantial breach of the initial agreement. In a breach of contract scenario, it may be necessary to take the matter to court. Litigation can result in compensation for damages in certain circumstances.
How can businesses determine how much impact a breach of contract could have on a company’s finances?
Look at disruptions to operations
Frequently, breach of contract issues become problematic because they impact company operations. If a vendor fails to deliver structural steel, a construction project may end up delayed by weeks. Determining the duration of operational interruptions and the costs incurred because of that delay can help businesses quantify the harm caused by a breach of contract.
Include penalties from the initial contract
In addition to factoring in any operational disruptions, the plaintiff organization may need to review the initial contract for penalty clauses. Imposing penalties for delays and project completion or non-performance is a common practice. In some cases, those penalties may accrue on a per diem basis. Other times they may reflect a percentage of the contract’s overall value. The contract may even include terms related to liquidated damages based on likely losses a violation of the agreement could cause. Penalties provided for within the initial agreement can contribute to the overall value of the breach of contract lawsuit.
Determine the cost of resolving the issue
Organizations may have to make a quick decision in a breach of contract scenario. They may need to hire another contractor or obtain supplies from a different business. In such scenarios, they may pay far more than they would have if they had an opportunity to negotiate. The pressure that a breach of contract can put on a company to resolve the issue quickly may lead to numerous secondary losses and higher expenses. Those costs can contribute to the total damages sought in the lawsuit.
Organizations that review their contracts and financial records carefully with a skilled legal team can work to optimize their recovery in a breach of contract lawsuit scenario. Demanding the maximum amount of compensation at issue can minimize harm caused to a business and serve as a deterrent for future contractual violations.
