How To Get Out of a Bad Contract

I love contracts. Some might even snicker at how excited I get at the possibility of putting a big deal together and using some creative drafting to make sure everyone is happy with the Agreement. Yes, I am a bit of a contract nerd. Contracts are a beautiful thing. The ability for you to strike a deal with another business and have assurances that they will follow through with their promises is a wonderful thing.

But there are a lot of bad contracts and agreements out there. This might sound familiar to you: A business owner signs an agreement to sell machines he manufactures to a customer for 5 years. He is required to build and sell .so many machines per month and the customer will pay him a set price for each machine. In year 3 of the deal, the cost of the business owner’s raw materials drastically increases and if he continues to build and sell the machines under the agreement, he will lose money. How do you get out of a bad business contract? This is just one scenario. There are thousands of other ways to be tied up in a bad contract.

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Any party to an agreement that does not fulfill his or her contractual promise has breached the agreement. This basically means that if you do not live up to what was bargained for, you can be liable to the other party for any damages you might have caused. The damages arising from a breach can go well beyond the terms in the agreement.

Communication

A lot of small business owners are afraid of conflict. They believe it is better to stick their head in the sand, rather than meat the issue head on. If you are in a bad contract, it can be vital to keep an open line of communication with the other side.  You might be surprised at how they respond to you even by just keeping them abreast of the situation you are facing. Yes there are some bad apples out there that will exploit a situation but there are still a lot of good ones out there too that understand the situation you are facing and want to help generate a solution.

Walking Away

Walking away from a business contract is never a good idea. Maybe you get lucky and the party on the other side goes elsewhere and just forgets about you. And maybe you get really lucky and the other party comes back and is willing to negotiate a new contract. More likely than not, you are going to get someone on the other side that is angry. This leads to a true conflict and potentially costly litigation. Walking away will get you out of a bad contract, but your troubles will likely grow too.

Negotiate

Negotiating a solution is your best course of action. In the scenario described above, possible solutions could include paying a lump sum to terminate the agreement, shortening the duration, increasing the price to where the business owner at least breaks even, or a combination of these solutions. Remember, if you are forced to go out of business because of steep losses, that can have a big impact on your customer. It benefits your customer to keep you operational too. The other party chose to work with you for a reason. If they are forced to go to a competitor, they will not only be working with someone that was not their first choice but will be working under a contract that is negotiated on the current set of circumstances and not those when they originally agreed to terms with you. With a strong line of communication and if negotiations are properly conducted, the customer can continue to receive the same high quality products or services that you offer and you will not hemorrhaging cash.

Contracts are very useful tools but they are not written in stone. The contractual terms can be adjusted to fit changes in circumstances. It is important for you to plan when developing your contracts. While the security of a long term deal is appealing, a lot can change over the course of time. Having terms that automatically adjust or clauses that can be triggered by major changes need to be thought through.

The Business Law Group has the legal expertise to help your business get out of a bad contract but to also help you to avoid getting into one in the first place. Contact one of our contract attorneys today and find out what we can do for you.

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