There are several reasons why businesses facing a major breach of contract may decide to take legal action. Establishing clear expectations for parties that contract with the business can be a good reason to go to court. Employees, suppliers and service providers may be less likely to violate contractual agreements when they know there are clear consequences for doing so.
Breach of contract lawsuits can also help limit the financial consequences that result from another party violating a written agreement. The courts can award damages in a breach of contract scenario where a business has suffered economic losses as a result of a breach.
How can a business calculate the economic impact of a contract issue?
Quantifying operational losses
Breach of contract issues can be expensive because they disrupt operations. The failure of a vendor to provide key supplies might result in a business idling its factory. It may have to pay workers for hours where they did not provide any labor, which can be a very expensive disruption. A service provider failing to complete a project could also cause a major disruption to business operations. A facility may sit vacant for weeks, preventing the company from doing business as normal. Determining the costs incurred and the loss of profit that result from a breach of contract can be a good starting point.
Estimating secondary damages
Companies affected by a breach of contract may need to review other contracts and consider reputation damage. When a business cannot operate as normal, it may fail to meet its contractual obligations to others. It may also be at risk of reputation damage because of those operational disruptions. Finding a way to convert the loss of contracts and goodwill with the community to a set amount of money can be difficult, but those losses are an important consideration when establishing how a breach of contract may have harmed a business.
Enforcing penalty clauses
Agreements with outside parties may include penalty clauses. Businesses may have assessed certain fees for delays and project completion or other contractual violations. Reviewing the agreement and determining what, if any, penalty clauses the breach of contract triggered can help an organization enforce those penalties when taking the matter to civil court.
Requesting an appropriate amount of damages can reduce the negative impact that a breach of contract has on a business and can serve as a powerful incentive for outside parties to uphold their contracts with the business in the future. Damages are only one of several forms of recourse available when businesses must initiate litigation over significant contract issues.