Contract Problems

What happens when there is a contract problem?

Most of the time when there is a problem the parties to the contract will meet to try to resolve the problem amicably. If they are unable to do that and there is a dispute resolution process agreed in the contract, they may submit the issue to dispute resolution process.

If there is no dispute resolution process that has been agreed the non-breaching party will need to determine their course of action. On review of the facts they could decide that an issue is not worth pursuing; it’s worth continuing to try to negotiate; or it’s worth fully litigating. The breaching party will need to determine their potential course of action. In both cases both parties will go through a similar process to help determine the direction they will take.

A good example of a flow chart of what each would consider can be found at law.upenn.edu.groups under the file name “Contracts_flow_chart_1.doc”. It represents the legal reasoning a lawyer would go through in reviewing the agreements and the facts to determine the answers to the following basic questions:

1. Is there a contract?
2. Is the contract enforceable?
3. Was there a material breach?
4. Is there anything that could void the contract?
5. Is there anything that changed the commitment such as a modification or waiver?
6. What are the remedies?
7. What damages would be available?
1. Types of damages.
2. Limitations or caps on damages.

In addition as part of the determination a number of business considerations will also be taken into account by both parties to determine the final direction.

1.     What is the relationship we have with the other party?

2.     Do we need or want to continue to do business with them?

3.     How many resources and of what types will it require to pursue the claim?

4.     What will it cost to pursue the claim?

5.     Do we have the right to under contract to recover legal fees if successful?

6.     What is the degree of confidence that we will be successful?

Sometimes there are lawsuits that are based on principle only where even after being advised of the chances of winning, the cost and the potential for recovery they will still proceed. Many times both parties may come to their own similar decision that it’s in their own best interest to try to settle things without litigation.

While I’m not a big fact of alternative dispute resolution such as having things be submitted to an independent arbitrator, one of the things I do think should be in every agreement is a formal management escalation process for problems. Many times the individuals that are “in the heat of the battle” may not be thinking clearly or may be taking things personally, so its best to have the ability to have the issue escalated up on both sides to people who can weigh the pros and cons from a simple business perspective.