Enforcing Contracts: Key Considerations for Business Owners

Contracts are the foundation of trust and clarity in business. They establish expectations, responsibilities, and remedies when things go wrong. However, when one party breaches a contract, the non-breaching party faces a tough choice: enforce the contract or walk away?

This decision is rarely straightforward. Enforcing a contract can involve litigation, legal fees, and time away from business operations. It can also strain relationships and lead to uncertain outcomes. Conversely, walking away might result in lost revenue and diminished credibility.

So, how can business owners decide whether enforcing a contract is worth it? In this blog post, we explore the key factors influencing this decision. We provide real-world examples and a framework for evaluating whether legal action is the right move.

Understanding the Basics of Enforcement

Enforcing a contract typically means compelling the other party to fulfill their obligations. It may involve seeking compensation for their failure to do so. Enforcement can occur through various methods:

• Negotiation or mediation

• Arbitration (if stipulated in the contract)

• Litigation in court

  
  

Each method varies in terms of cost, time, and potential outcomes.

The Hidden Costs of Enforcement

Many business owners underestimate the costs involved in enforcing a contract. These costs can include:

1. Legal Fees

Attorneys typically bill by the hour. Litigation can easily cost tens or even hundreds of thousands of dollars, depending on the case's complexity and duration.

2. Opportunity Cost

Time spent in depositions, court hearings, and legal strategy meetings takes time away from growing your business. This disruption may impact revenue, customer satisfaction, and innovation.

3. Emotional Toll

Legal disputes are inherently stressful. The tension, frustration, and uncertainty can weigh heavily on business owners, managers, and employees alike.

4. Damage to Relationships

Even if you win, you may lose a valued customer, vendor, or business partner. Enforcement often signifies the end of a working relationship.

5. Reputation Risk

In some industries, word spreads quickly. Being seen as "litigious" may deter future partnerships and highlight issues in your contract practices.

Benefits of Enforcing a Contract

On the flip side, enforcing a contract can yield significant benefits:

1. Recovering Financial Losses

A successful lawsuit or settlement can help restore financial stability to your business.

2. Setting a Precedent

Taking a firm stance may deter future breaches by demonstrating that your company takes agreements seriously.

3. Protecting Business Interests

Certain breaches put proprietary information or brand reputation at risk. Enforcing the contract might be necessary to safeguard these assets.

4. Fulfilling Fiduciary Duties

If you have investors, enforcing contracts may be part of your responsibility to act in their best interests.

Real-World Examples

Example 1: The Unpaid Invoice

A marketing agency delivers a six-month campaign for a mid-size client. The contract includes payment milestones. After sending the final deliverables, the client refuses to pay, citing dissatisfaction.

Options:

• Write off the invoice and move on.

• Hire an attorney to pursue payment, risking legal costs and reputational fallout.

  
  

Outcome:

After a demand letter from legal counsel and brief mediation, the client agrees to pay 80% of the outstanding invoice. The agency decides to tighten its future contract language and upfront payment terms.

Lesson:

Not all enforcement leads to court. Sometimes, a firm but professional approach resolves the issue quickly.

Example 2: The Broken NDA

A software development firm partners with a startup under a strict NDA. Months later, the firm discovers the startup shared its proprietary source code with another vendor.

Options:

• Let it go and compete on better service.

• Take legal action to stop further distribution and seek damages.

  
  

Outcome:

The firm files for an injunction to prevent further use of its code and initiates arbitration. The startup agrees to a settlement, pays a licensing fee, and issues a public apology.

Lesson:

When core intellectual property is at risk, contract enforcement is often non-negotiable.

How to Decide: A Practical Framework

Before deciding to enforce a contract, business owners should consider these questions:

1. What are the financial stakes?

Compare the lost or owed amount to estimated legal fees and disruptions. Is the payoff worth the risk?

2. Can the other party pay or perform?

Enforcement is only valuable if the breaching party has the means to comply with a judgment or settlement.

3. What alternatives exist?

Could mediation, renegotiation, or a payment plan resolve the issue without court intervention?

4. How strong is your case?

A qualified attorney can evaluate your potential for success after reviewing your specific contract and circumstances.

5. What’s the impact on your business operations?

Will pursuing enforcement distract from key projects, damage morale, or harm customer experience?

6. Is there a bigger principle at stake?

Sometimes, enforcing a contract is about more than money. It may involve trust, deterrence, or protecting your brand.

Proactive Measures to Minimize Future Disputes

Regardless of your decision, contract disputes offer valuable learning opportunities. Use these experiences to strengthen your contract practices:

• Work with experienced legal counsel to draft or review agreements.

• Define terms clearly (payment, deliverables, timelines, breach remedies).

• Include dispute resolution clauses (mediation, arbitration, jurisdiction).

• Document everything (emails, payments, delivery confirmations).

• Set expectations early with clients, vendors, and partners.

  
  

Final Thoughts: Know When to Walk Away

Enforcing a contract is sometimes the right move but not always the smart move. Successful business owners know when to push and when to cut losses.

If you're unsure what to do, consider consulting with a qualified business attorney. They can provide tailored advice and help you weigh the costs and benefits.

At Bailey and Peterson, PC, we assist small businesses in resolving contract disputes efficiently and strategically. Whether facing a breach or wanting to strengthen your agreements, we're here to help.

Need advice on a contract issue? Reach out today to schedule a consultation.