The Costs of Contract Enforcement

Clients often ask me to draft "ironclad" or "bulletproof" contracts or contracts "without any loopholes." They want to make sure the other party can't "get out" of the contract.

Clients also ask me to stop the other party when it breaches the contract. They often ask me to confirm whether the breaching party can do what they are doing (they can't). They are incensed that the other party has breached when they "aren't allowed to" based on the terms of the contract. Many think that sending a stern letter will resolve the dispute. It rarely does (see this blogpost: https://www.joelankney.com/post/can-a-letter-from-a-lawyer-change-behavior).

In my experience, there are 3 phases of contract enforcement. Each is important. Each will incur legal fees. A party entering into a contract should be prepared to proceed through each phase and incur the costs in order to enforce a contract when it is breached. If a client is not willing to engage in a phase (e.g., because they don't want to pay the legal fees), the contract won't be enforced.

Phase 1: Contract Drafting: A lawyer is engaged to draft the contract. The lawyer should have an understanding of and experience with the industry of the contracting parties so that he/she is able to identify the significant issues and know how they are customarily addressed in the contract. A well-drafted contract establishes the basis for enforcement through negotiation or litigation if there is a problem later, but the contract alone will not resolve a dispute.

Phase 2: Breach Response: When a party breaches a contract, the non-breaching party needs to notify the breaching party of the breach as soon as reasonably possible. The contract will likely contain a notice provision that indicates how proper notice is to be delivered and what it should say (tip: emails, texts, and phone calls typically aren't proper notice under most contracts). The contract might also have a "cure" provision that gives the breaching party a period of time after notice in which to fix the breach. The notice letter alone probably won't fix the problem, but it's necessary because providing notice starts the clock on the cure period and avoids an argument that the non-breaching party lost its rights to enforce the contract because it waited too long.

Phase 3: Lawsuit and Negotiation: The notice letter might initiate negotiations to resolve the breach. In that event, it usually makes sense to proceed with negotiations to avoid the costs of a lawsuit. But in the event the breaching party won't negotiate or negotiations don't resolve the dispute, the non-breaching party should file a lawsuit. A lawsuit is the only way to truly enforce the contract. Filing a lawsuit usually provides the non-breaching party with more leverage to motivate the breaching party to negotiate a settlement. In fact, most lawsuits are settled out of court before going to trial. Filing and prosecuting a lawsuit is the most expense phase of contract enforcement because it starts a process of discovery and trial preparation. If a non-breaching party will not file and move forward with a lawsuit, however, the contract won't be enforced.

Contracting parties should take into account and resolve to be ready to incur and pay the costs of enforcing a contract, including the costs of preparing a well-drafted contact, the costs of responding to a breach, and the costs of filing a lawsuit and negotiating a settlement to the dispute. If a contracting party is not all-in on this approach to contract enforcement, no magic exists to enforce a contract regardless of how well it is drafted and how weighty a law firm's letterhead appears.