What to Do When the Other Party Breaches a Contract

When the other party breaches a contract, the instinct is to call them, stop paying, and threaten to sue, usually in that order. Each of those steps can weaken your position if taken before you have read the contract. Most commercial agreements require written notice to a specific address, give the breaching party a period to cure, and limit the damages you can recover. Skip the notice and you may be the one in breach. Stop performing and you may have excused their breach. The steps below are the ones our executive counsel team walks clients through in the first days after a breach, before any decision about litigation.

Confirm it is actually a breach

Start with the clause the other side failed to honor and read it against what actually happened. Many apparent breaches are not. A late delivery may fall within a grace period. A “failure” to perform may be excused by a condition that you had not yet satisfied, such as providing materials, approvals, or payment. A force majeure clause may cover the event. And your own past conduct matters: if you accepted late deliveries for a year without objection, the other side will argue you waived strict compliance, and a court may agree unless the contract has a non-waiver clause and you reinstated the deadline in writing.

Then classify the breach. A material breach goes to the heart of the bargain and may allow you to terminate and sue for damages. A minor breach entitles you to damages but not to walk away. Guessing wrong in the direction of termination is the costlier mistake, because terminating over a minor breach is itself a material breach. If the other party has told you it will not perform, that is anticipatory repudiation, which lets you act before the performance date, but only if the statement is unequivocal.

Read the notice and cure provisions

Almost every negotiated contract has a notice clause that says where notices go, how they must be sent, and when they are effective, and a cure clause that gives the breaching party a stated period after notice to fix the problem before you may terminate. These provisions are enforced as written. An email to your account manager is often not notice under the contract. A termination letter sent before the cure period runs is often an invalid termination.

Send the notice the way the contract requires, describe the breach specifically with reference to the clause, state what cure you expect and by when, and reserve all rights. The reservation matters: continuing to accept performance after a breach, without stating that you are reserving your rights, can be read as a waiver. If the contract has a dispute resolution clause with an escalation step, such as a meeting between executives, note that too, because it may be a precondition to any later claim. The review method in how to review a contract before you sign it is the same one you now use in reverse, to find the clauses that govern the exit.

Document and preserve everything

Build a timeline of what was promised, what was delivered, and what was said, with dates. Collect the contract, every amendment, every statement of work, and the correspondence around the breach. Instruct your team in writing to preserve relevant documents and messages, including chat and text, because deleting them after a dispute is foreseeable can lead to sanctions later. Start a record of the costs the breach is causing you, as they arise, with invoices and internal time.

Internal messages speculating about fault, and external messages that concede points or propose compromises without being marked as settlement communications, will be read by the other side’s lawyer if the matter proceeds. Keep communications factual and route anything substantive through counsel once a dispute is likely.

Mitigate your losses

Contract law expects the non-breaching party to take reasonable steps to limit its damages. If a vendor fails to deliver, you are expected to find a replacement at a reasonable price, and the measure of your damages is usually the difference in cost, not the full value of what you expected. If you sit on the breach and let losses mount, the portion you could have avoided may not be recoverable. Keep records of your mitigation steps and costs, because reasonable mitigation expenses are recoverable.

Decide whether to keep performing

Stopping your own performance, including withholding payment, is a decision with consequences. If the breach was material and you have properly terminated, you may be excused from further performance. If the breach was minor, or if you have not yet terminated, withholding your performance can make you the breaching party and hand the other side a counterclaim. Some contracts allow suspension of performance or withholding of disputed amounts under stated conditions; use those mechanisms if they exist. If they do not, the safer course is often to keep performing under reservation of rights while the dispute is resolved. This is the kind of judgment call our strategic legal guidance practice is asked to make quickly, because the business cannot wait for a lawsuit to decide it.

Choose the remedy that fits

The remedies are negotiation, a formal dispute process, or a lawsuit, and the contract decides which are available in which order. Many breaches are resolved by an amendment: a revised schedule, a price concession, a credit. That is often the best outcome when the relationship has value. If the contract requires mediation or arbitration, that process controls, and filing in court anyway will usually get the case dismissed or stayed.

Before committing to any formal claim, read the limitation of liability clause, because it caps what you can recover and may exclude the lost profits you are most concerned about; we explain how in how limitation of liability and indemnity clauses work. Check the limitation period as well. In the firm’s jurisdictions, the time to sue on a written contract ranges from three years in the District of Columbia to five in Virginia and six in New York, with a separate four-year period for most sales of goods under the UCC, and a contract may shorten these further. Our post on business litigation describes what a commercial lawsuit involves if it comes to that, and CLP’s commercial litigation and dispute resolution team handles the claim from demand through judgment or settlement.

If a counterparty has stopped performing and you need to know what to send, what to preserve, and whether to keep paying, Capitol Law Partners can advise within days and position the matter for a resolution or a claim. Schedule a consultation.

This article is for informational purposes only and does not constitute legal advice. No attorney-client relationship is formed by this communication.

Attorney Cagatay Ersoy. Practical strategy for founders, investors, and growing companies.

Need help with this topic? See our contract dispute advisory page or schedule a consultation.