Contractual disputes are a regular part of doing business but this fact is rarely recognized by business owners. This is because the vast majority of disputes are resolved informally before attorney involvement becomes necessary. Every time discounts are offered because of delayed delivery or because a product is defective, every time a partner agrees to sell his interest in a business because the partners want to take the business in different directions or every time a commercial lease is renegotiated because of a problem between the landlord and tenant, contractual disputes are resolved. The list of examples is endless. The lesson is that most business owners are reasonable and seek efficient solutions to problems and in fact reach efficient solutions. This is because experienced business owners understand that litigation is time consuming, emotionally draining, risky and expensive. The purpose of this article is not to dissect the legal elements of a breach of contract cause of action. Rather, its purpose is to provide some guidance to business owners faced with a breach of contract while simultaneously conveying some of the pitfalls inherent to contract litigation.
It is common for business owners to call their attorneys abruptly with a passionate plea for justice relating in great detail just how badly they have been wronged. Attorneys listen of course because they know it’s good for their clients to vent. However, attorneys are internally sizing up the practical realities of the case. Attorneys ask themselves very simple questions. What are the damages (how much money is involved)? Playing devil’s advocate, what will the other side claim? Is this situation specifically addressed in the contract? How much will it cost my client to fight this battle? In fact some lawyers make it even simpler. They only want to know what the damages are. If the damages are small, then it is likely that their client will have to spend more money litigating the case than they can win – assuming they can and will win. Unfortunately, even the most practical business owners sometimes find themselves faced with a breach of contract that cannot be worked out despite significant efforts.
While every situation is different and consultation with a business litigation attorney is best, the following serves as a helpful guide in deciding how to proceed when a contractual dispute arises:
1. Determine how much money is involved. If it is less than $10,000, pursuing a small claims action in California is probably your best bet. However, even small claims actions require some commitment from the business owner. If the damages are a couple of hundred dollars, it’s probably better to send letters and continue to pursue the matter informally. The “I am not going away” tactic is often successful. If the amount is greater than $10,000 but below $25,000, consider consulting with a lawyer about an aggressive letter and phone call campaign. This can be done for a relatively low cost and is often successful. Depending on the circumstances, this tactic can be extended into filing a civil complaint for breach of contract. The purpose is to put pressure on the other side hoping that it brings them to the negotiating table. If it doesn’t, you can instruct your attorney to dismiss the case before it costs you more than $25,000 in attorney fees and litigation costs. Ultimately, the advice you receive will depend on the strength of your case.
2. Forget about Punitive Damages and Contingency Fee Agreements. It is only in extraordinary cases where independent torts exist (fraud, physical harm, etc) that punitive damages are awarded. If the actual damages are high and the case involves egregious actions you will certainly want to discuss the potential for punitive damages with an attorney. If litigation is pursued in high damage cases, attorneys will plead numerous causes of action seeking all potential relief. However, most business disputes do not rise to this level and even if punitive damages are sought, they are rarely awarded in disputes between businesses. It might be different of course if you were harmed by Microsoft and can show egregious action but this is not the typical scenario that is the subject of this article. The same is true regarding contingency cases. Attorneys will rarely handle business disputes on a contingency basis. If they do, it’s because the case is extremely valuable and the facts are so one-sided that they have high confidence in winning and collecting. It cannot be stressed enough that these types of scenarios are rare. It doesn’t hurt to consult with several lawyers, but it is better not to expect that a lawyer or law firm will assume the risk for you.
3. Consider your opponent’s arguments. Underestimating an opponent’s arguments is a serious and common mistake that often leads to defeat and considerable expense. Listen to your attorney. If he or she tells you that Argument “A” has some merit, believe it. Even in cases where you are certain that you are in the right, litigation remains risky. Even if you do win, the damages are often much less than expected and in many cases impossible to collect because your opponent is judgment proof. Factor in these real risks as you negotiate.
4. Negotiate, negotiate, negotiate. It is rarely true that all efforts at negotiation have been exhausted. The belief that all efforts have been exhausted is usually driven by an unrealistic assessment. After all, if a customer owes you $50,000, he owes you $50,000. Case closed. However, there is some reason he is not paying. Perhaps because he doesn’t have the money. If so, what are the chances of ever getting paid (whether or not you spend $50,000 suing him)? Or does he believe that he did not get what he bargained for? If so, will he ever change his mind. Is he willing to fight you to the end on principle? Remember, he will have to make similar “litigation” decisions if you sue him. Accepting $20,000 to avoid $40,000 in litigation expense makes economic sense. Whatever the value of the case, continued negotiation is wise.
5. Consider your ability to collect. In some cases, business owners are trying to collect legitimate debts but the debtor is insolvent and/or on the verge of bankruptcy. These legitimate debts are well documented and winning is a near certainty. The debtors will often throw their hands up and say, “go ahead and sue me” leaving the business owner without a true remedy. In other cases, defaulters are hiding their ability to pay but want to avoid the debt at all costs because the amount owed will create economic difficulty. Knowing whether a judgment will be collectible is difficult to determine. Even defaulters who have the money to pay will look for ways in the end to hide the money from judgment collectors. Attorneys will often test the waters during negotiations asking the defaulter to provide accounting and tax records evidencing an inability to pay. Once a defaulter provides complete accounting information, the business owner can better evaluate the risk of litigation. When considering a breach of contract case, perform a cost benefit analysis factoring in everything you know about the defaulter’s financial condition. Be mindful that you cannot squeeze blood from a turnip. It’s an old cliché, but one that works here.
6. Consider the expense. Finally, consider the cost of litigation. Pursuing the simplest breach of contract case through a jury trial can easily cost between $30,000 and $50,000 for attorney fees alone and this is a very conservative estimate. In addition, the actual costs (court reporter fees, filing fees, expert witness fees, deposition fees, etc.) can easily add well over $20,000 to the bill. If the battle is over $50,000, it doesn’t make much sense economically to pay $50,000 for that chance of collecting $50,000 down the road. Before moving forward with any litigation, business owners should have an exhaustive conversation with their attorney regarding the potential costs.
In short, be conscious of the costs and risks associated with pursuing a breach of contract case. Consult with a business litigation attorney to ensure that you make the right choices, and heed your counsel’s advice. The goal is to make the best economic decision. It may not be the fairest result, but it is best to leave emotion out of the process.