Curious how one little contract dispute can derail an entire small business?
It happens more than most people think. 12 million contract lawsuits are filed each year against small businesses in the United States.
The good news is legal professionals have a proven process for resolving these issues — and knowing it can save thousands of dollars and months of frustration.
But here’s the thing…
Until a contract dispute lands in their laps, most small business owners have no idea what to do.
They don’t know who to call. They don’t know what to expect. And that’s where smart small business legal counsel can help — before it’s too late. Whether it’s facing a vendor who didn’t deliver, or a client who refuses to pay, the right lawyers in Memphis can make all the difference to a business.
Let’s take a look:
- What Is a Contract Dispute?
- Why Small Businesses Are at the Greatest Risk
- How Legal Professionals Handle Contract Disputes
- The Most Common Outcomes to Expect
What Is a Contract Dispute?
A contract dispute arises whenever two or more parties disagree about the meaning, performance, or outcome of a legally binding agreement.
Contract disputes can stem from pretty much any scenario including:
- A supplier didn’t deliver goods on time
- A client refuses to pay for products or services rendered
- A vendor claims the contracted service was never performed
- A partner backs out of a deal halfway through
Sound familiar?
Contract disagreements can pop up seemingly out of nowhere. And they can drain profits fast. Businesses are spending $870 billion each year on dispute resolution. Fighting a contract dispute with knowledgeable legal help isn’t just important — it’s good business sense.
Why Small Businesses Are at the Greatest Risk
No matter the industry, small businesses have the most at stake during a contract dispute.
The reason? Smaller businesses don’t have internal legal departments to vet contracts and flag potential issues before signing. All it takes is one lawsuit claiming $50,000 in damages and a business is in jeopardy. The average liability lawsuit costs businesses at least $54,000 to settle.
But it usually doesn’t happen after a contract is signed. Nearly 70% of friction points occur before a contract is finalized. The best opportunity a business has to prevent disputes is before signing a contract — by negotiating terms with legal professionals on their side.
How Legal Professionals Handle Contract Disputes
Legal professionals have a 5-step process for working through disagreements surrounding contracts. Here’s how they do it.
Step 1: Review the Contract in Detail
Before legal professionals dive into resolving a contract dispute, they grab a copy of the contract and read it from top to bottom.
Seriously.
They’ll review every single clause, every definition, and every party’s obligations to confirm a couple of things:
- Whether a breach actually occurred
- What remedies are available according to the contract itself
- If any limitations or exclusions apply to the breach
Failing to read a contract completely is like running through life without insurance. Sure, things might be fine most of the time. But if something happens, it’s easy to wish the time had been taken. Review the contract in full before taking any other steps.
Step 2: Send a Demand Letter
Once the breach is identified and the legal professional understands the remedies available under the contract, it’s time to send a demand letter.
Think of a demand letter as a formal notification to the breaching party:
- What they did wrong
- How to fix it
- When a response is expected
Here’s the kicker… a well-drafted demand letter can solve a dispute without filing a lawsuit. Many attorneys will advise sending one to try and get the client to pay what they owe. Either way, it shows seriousness and a readiness to take action.
Step 3: Negotiate a Resolution
It’s surprising how many contract disputes are resolved simply through negotiation.
Whether through an attorney or directly, a business can and should attempt to negotiate some sort of reasonable settlement with the other party. Whether that means accepting half of the payment due now and the rest later, or working out a new deadline — it’s far better for everyone to reach some sort of agreement than to take things to court.
Negotiation is almost always the first step an attorney will take before filing a lawsuit. Most disputes can be solved with a simple conversation.
Step 4: Explore Mediation or Arbitration
Next on the list is alternative dispute resolution — also known as mediation or arbitration.
Both options involve bringing in a neutral third party to either mediate the disagreement (mediation) or provide a formal decision (arbitration). It’s essentially resolving a dispute without having to go to court. Not every contract dispute will need to go this far. But the contract may require it before any lawsuits are filed.
Many commercial contracts actually require disputes to be arbitrated before either party can file a lawsuit. If that’s the case, a legal professional will know ahead of time and plan accordingly.
Step 5: Pursue Litigation
Litigation is the process of taking a dispute to court.
If alternative dispute resolution fails and negotiations come to a standstill, it may be time to file a lawsuit against the breaching party. For most small businesses, this is where having competent legal counsel truly shines.
Going into court without legal representation is like stepping into a boxing ring without training. Don’t litigate a dispute without legal professionals in the corner. It’s as simple as that.
Businesses with valid written contracts win their breach of contract case three times more often than those who don’t. Something to think about.
The Most Common Outcomes to Expect
When following the above steps, most contract disputes can be resolved in one of a few ways:
- Financial compensation (damages) awarded to the harmed party
- Specific performance (completion of the contract)
- Contract cancellation (mutually agree to end the contract)
- Restitution (returning money or goods paid under agreement)
The outcome of every contract dispute will vary depending on contract terms, facts surrounding the breach, and legal strategy.
The Bottom Line on Contract Disputes
Few things will drain small business profits faster than contract disputes.
But there’s no need to dread them either. Working with knowledgeable small business legal counsel can help prevent contract issues before they arise. And knowing how to properly handle a dispute will save a business time and money down the road.
To sum it all up:
- Carefully read the contract and confirm the breach.
- Send the other party a demand letter requesting remediation.
- Always attempt to negotiate a resolution first.
- Try mediation or arbitration to avoid going to court.
- If everything else fails, litigate the dispute with qualified attorneys.
Handle the next contract dispute the smart way.
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