Today’s Biz Ladies post comes from attorney Jeanette Park. Jeanette specializes in small businesses and non-profit corporations in the Bay Area and has generously offered us some fantastic tips on what to do when something goes wrong with your contracts. From negotiations to filing a claim, Jeanette outlines the basics of resolving contract issues. Thanks, Jeanette, for this valuable information! — Stephanie
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As a small-business owner, you’ve undoubtedly entered into a contract of some sort, whether it’s to purchase products, lease space or perform services. Ideally, you’ll have taken those oft-repeated precautions before entering into a contract: making sure that you understand all the terms of the contract; putting all the terms of the contract and any changes you want in writing; clearly spelling out any points of confusion or potential conflict. Even so, sooner or later, every business owner — and probably every person — is bound to face some form of contract dispute. What do you do when someone doesn’t fulfill his or her side of the contract?
In legalese, this type of dispute is called a “breach of contract.” Figuring out what to do in a breach of contract is highly dependent on the specific facts and, depending on what’s at stake, it could be wise to get a lawyer involved. In this post, I won’t dispense any legal advice, but I will talk generally about possible channels of resolution in the event of a breach.
First, pull out that contract to determine what contract terms have been breached. Has the other party failed to pay for services by a promised date? Or has the party delivered damaged goods? It’s a good exercise to highlight the relevant terms of the contract and then write down the details of how the other party has failed to fulfill those terms. The more details, the better. It’s also helpful to have evidence of the breach, such as a bounced check or the damaged goods.
Once you’ve detailed the nature of the breach, you should check the contract to see if there are any terms that prescribe methods for resolving disputes. Many standard contracts, such as leases or equipment sales, will include language noting that disputes must be resolved in a certain way, such as through arbitration. This is the “dispute resolution” clause.
Even if your contract specifies a method of resolution, the simplest and most direct way of dealing with a breach of contract is to reach out to the other party and negotiate. In negotiation, both you and the other party voluntarily try to work out the dispute and arrive at a conclusion that is satisfactory to you both. However, before you contact the other party and let them know that they’ve breached the contract and you want to negotiate (or take any of the other actions described below), you should make it clear that you are not waiving any of your rights under the contract. Stating this up-front allows you to rely on the dispute resolution clause or any other remedies provided in the contract if negotiation doesn’t work out. Hopefully, your relationship with the other party is such that he or she will voluntarily work out the dispute with you. The benefits of negotiation are that it preserves your working relationship with the other party, avoids the expense and emotional energy taken up by going to court and is often the quickest resolution method. Also, you might be surprised at how willing the other party is to repair the damage done.
If the negotiation doesn’t go anywhere, refer to your dispute-resolution clause in the contract. If there is no such clause, then consider other ways of getting the breach remedied, such as mediation or arbitration. In mediation, you and the other party call on a neutral third party (the mediator) to help you arrive at a satisfactory solution. Like negotiation, the solution is up to you and the other party; the mediator just helps you get there and puts it in writing. A more formal route to dispute resolution while staying out of court is arbitration. Here, you and the other party present your dispute to a neutral third party (this time, the arbitrator) and let him or her come up with a binding, final resolution. Mediation and arbitration come in different styles. Your local bar association website (similar to the American Bar Association (abanet.org)) probably provides good primers on both. The benefit of mediation and arbitration, like negotiation, is that you save yourself the cost in time, money and relationships. Also, unlike a lawsuit, both are usually confidential, so your dispute will not become public record.
Of course, there’s always the option to file a claim against the other party. Many small business owners find themselves going to small claims court, a special court that hears cases where the amount of money disputed is relatively small. The rules vary from state to state, so you should check your state’s small claims court website to find out the monetary cap for small claims cases. Here in California, individuals can’t ask for more than $7,500 in damages, while corporations and other organizations can’t ask for more than $5,000.
The filing fee depends on how much you’re claiming, but generally ranges from $30 to $75. The rules and procedures are simple enough that most people don’t hire a lawyer and, depending on your state, you might not even be allowed to bring a lawyer with you into the courtroom. Most state court websites have a self-help center that will walk you through the process of filing a claim in small claims court. Alternatively, if your damages exceed the cap, you can file a claim at the appropriate civil court. This is far more complicated but, if you have the time and the energy, it is possible, though not necessarily recommended, to do it on your own without a lawyer.
There’s plenty more to be said about business disputes and breaches of contract, but hopefully this post was a good jumping-off point. Also, all of the above is helpful to keep in mind if someone tells you that you’ve breached a contract. Ask for details. Reach out to the other party. Consider other options before you find yourself facing off in court.