News & Information

Somewhere along the line, every business finds itself in a contract that is unprofitable or undesirable. When that happens, the party to the agreement may find that it is much more difficult to get out of the contract than it was to form the contract to begin with, hence the old adage: “a bargain is a bargain.” Indeed, once a contract has been formed, there are generally only two ways to get out of the contract: (1) renegotiate the contract, or (2) break the contract.

Many undesirable contracts arise because of hurried or less than careful drafting and can most often be avoided by attention to detail. While this may seem like an obvious proposition, the current economic downturn has led many businesses to follow a course that may compromise this attention to detail. Indeed, many businesses are attempting to draft their own contracts, and with many having been forced to curtail staff, the responsibility often falls on an overburdened workforce. While this course may save money for these businesses in the short term, it is likely to lead to problems down the road. The prudent course is to retain a lawyer to draft the contract, or to at least review the contract before it is signed because, as the saying goes, an ounce of prevention is worth a pound of cure.

Once a contract is formed, your options may be limited if that contract turns sour. If your business finds itself in this position, you should contact a lawyer to review the contract and counsel you as to your best options. Your best option might be to renegotiate the contract. Businesses should always consider whether they are in a position to renegotiate a contract before breaking it. Various circumstances will dictate whether the other side will be willing to renegotiate. First of all, does your business have the leverage to make the request? For example, is it probable that your customer can find an alternate source of supply in the needed timeframe if the business relationship deteriorates? Timing can also be crucial in other respects. For example, it is usually preferable to approach a client with regard to renegotiating a contract shortly after your business has performed an outstanding service on that client’s behalf. Not all circumstances, however, can be controlled or managed. Even where circumstances are not conducive to renegotiation, the likelihood that the other side will be willing to renegotiate will almost always be greater if the business relationship remains amicable. Thus, it is generally advisable to avoid the blame game, even when the other side is clearly at fault.

When renegotiation is not an option, the other option for getting out of a contract is to break the agreement. The obvious downside of breaching a contract is that the other side may sue to enforce the contract and/or for damages arising out of the breach. If your business is contemplating breaching a contract, you should consult an attorney to get an idea of your exposure and of the cost of litigation should the other side choose to sue. Having consulted with an attorney, you may determine that given the cost of breaching the contract, it would be better to ride out the remaining life of the agreement. Even if you determine otherwise, by consulting with an attorney, you will at least have made an informed decision, which will allow you to prepare accordingly.