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FAQ: Business Organizations and Transactions

What should you know before you decide to breach a contract?

Every day, business owners, vendors, suppliers, customers and lenders create contracts, or agreements that one party will do something in exchange for the other's promise to do something, usually a promise to pay. For the most part, these agreements are carried out without problems, and if the parties do disagree, they can resolve the matter without too much trouble. On occasion, however, a party to a contract breaches, or breaks, the contract and the parties to the contract are unable to resolve how to proceed.

When a party breaches a contract, the non-breaching party may be entitled to damages because of the legal rights detailed in the contract. Even agreements that were discussed but never put into writing may be enforceable depending on the circumstances. Before you breach a contract, you should seek the advice of an experienced business law attorney. You should understand your rights and the other party's rights under the contract. You should also understand what damages you may be liable for under the contract.

How will your business reputation and relationships be affected?

 When people form a contract, they are relying on each other to live up to their promises. If you breach a contract, that means that you did not follow through on a promise, even if there was good reason to break the contract. The other party may feel let down and could be in a worse position because of your breach. The other party may even tell others in the business community that you are untrustworthy and you do not live up to your promises. In an environment where your business prospects can depend on your reputation for success, you do not want to take actions that could damage your reputation, both with the other party to the contract and in the business community as a whole.

What is the impact on your time and money if you are sued?

If you breach a contract, the other party may have legal rights under the contract that it wants to pursue. The other party may threaten or go through with a lawsuit to force you to do what the contract states that you will do. A record of the lawsuit may follow you longer than you intended. And, if sued, you could be forced to spend valuable time away from your business to respond to discovery requests, attend depositions and litigate the matter in court. Finally, if you are sued, you may have to obtain a lawyer to settle the matter or defend you in court.

What will happen if you lose a lawsuit for breach of contract?

If you breach a contract, you may eventually be ordered to do what you promised in the contract or pay damages to the other party for your failure to comply. A judge may order damages to put the other party in the position that it was in before the contract, and a judge may also order you to pay for damages if the other party took steps relying on you to perform your end of the bargain. Depending on the nature of the breach, you could be ordered to pay punitive damages, which are considered a punishment for your breach.

If you do not comply with the terms of a judgment against you, a court could hold you in contempt. You would face fines or imprisonment depending on the circumstances.

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