As business owners we sometimes get into sticky situations where we are considering breaching a contract simply because it isn’t in our businesses best interest. We may have not gotten the service that was outlined in the contract, may have had problems getting parts, or our business needs have changed. Before you cancel a contract understand its longer term implications.
Contracts are legally binding agreements that can have financial and legal repercussions if they are willfully and neglectfully broken. The damage that happens once these contracts are breached can be charged to the breaching party through the court of law. Thus breaches of contracts should not be broken without a thorough understanding.
There are number of considerations that a business owner should consider before breaking a contract. These include good will/reputation, the cost of lost business and liability. If a business owner looks at these three aspects he/she will have a better understanding of what to do.
Goodwill & Reputation: Breaking contracts doesn’t look good for your business. Imagine you are a cell phone carrier and you promise to replace any cell phone that breaks down. The customer pays a fee for this service. However, you decide that it is too costly to do so and when customers come to you with their broken cell phones you reject their requests. Will you get a bad reputation? Yes..and chances are this bad reputation will cost you future sales as these disgruntled customers tell others.
The Cost of Lost Business: There are two levels of impact. The first is the immediate impact of the loss of the contract. This might include loss of sales from the transaction. The second level is long-term impact and this can be trickier. You should consider losing business from this company you broke the contract with in the long term. If their frequency and amount of purchase was projected over 15 years you would find that it amounts to a huge amount of money.
Legal Implications: The cost of defending your breach and the cost of impact on the other company is a wild card. For example, if you shut down the operations in another company and they lose a half million dollars due to your negligence it is possible that you would become responsible for not only their loss but their legal defense. You should also not forget about your own legal defense cost.
If one were to add up the cost to their business in terms of legal costs, long-term loss of business and the immediate impact of the lost contract you would in most cases find that breaking a contract are not in your best interest. There is much more at stake that the transaction that is being made. Add up the costs and see what it will cost your business. It is sometimes better to lose a little money upfront then to lose a lot down the road.