Top 10 reasons to avoid breaching contract
1. If you breach a contract, you could be liable for damages to compensate the other party.
The basic remedy for breach of contract is damages. If you breach a contract, you may have to compensate the other party for the loss they incur as a result of your breach.
2. If you're sued for breach of contract, you could be liable for the costs the other party incurs to sue you.
When a matter is litigated in the courts, the losing party generally must bear some of the costs the other party has incurred in bringing the lawsuit, which can include a proportion of the cost of the other party's lawyers and other expenses.
3. If you breach a contract, you could be liable to pay liquidated damages.
Some contracts, particularly in areas like construction and information technology, include liquidated damages clauses. These specify that a party must pay the other party a specified sum of money as compensation for breaching contract. Frequently, these types of clauses are intended to apply when there is a delay. So, for instance, a building contractor may have to pay liquidated damages (or have them deducted from his fees) if a building contract is not completed by the date agreed in the contract.
The law requires, however, that liquidated damages clauses are only enforceable if they are for an amount that is a genuine pre-estimate of the non-breaching party's loss. A "penalty clause" calling for a payment that is more than any pre-estimate of loss generally will not be enforceable.
4. In an insurance contract, a misrepresentation could entitle the insurer to rescind and you will no longer be insured.
In general, if a person makes a material misrepresentation in a contractual relationship, the other party is entitled to rescind the contract. This applies with particular effect in insurance contracts, where an insurance company has the right to rescind an insurance contract if the insured party has obtained the insurance on the basis of a misrepresentation. Being uninsured may expose your business to significant financial exposure and risk.
5. If you breach a contract, you could, in some circumstances, be compelled to perform your obligations under the contract.
Where a person breaches a contract and damages are not adequate to compensate the other party, the court can compel the person who breached to perform his obligations. This could occur where, for instance, it would be simple for the breaching party to perform, but very difficult or impossible for the other party to find an alternative means of having the obligation satisfied.
6. A person who obtains a judgement against you for breach of contract could enforce it against your assets if you don't pay it.
If you have a court judgement entered against you and you do not pay it, the other party is entitled to have the court enter an order enabling the other party to collect it by attaching your earnings and/or bank accounts or even by having your house sold.
7. If you have a judgement against you for breach of contract, it may become part of your credit record.
Credit reporting companies can check court records and show judgements against you in your credit report.
8. Your breach of contract may trigger cross-default clauses in agreements that you have with other parties.
Commercial financing agreements with banks frequently include "cross-default" clauses. So if your loan agreement with Bank of Brookside has a cross-default clause, your breach of a completely separate loan agreement that you have with Coronation Street Bank will trigger the cross-default provision and put you in default with Bank of Brookside as well.
An event of default in a loan agreement ordinarily gives the lender the right to accelerate the loan and possibly even to take any security you have given for the loan.
9. If you have pledged assets to secure contractual promises you have given, your breach may entitle the other party to take the security.
This can occur not only in a loan agreement, but often the warranties that the seller of a business gives are secured by, say, a part of the purchase price that the buyer withholds for a period of time after the sale date.
10. If you breach a contract for which you have provided a performance bond, the other party may be entitled to collect on the bond.
Contractors in the construction industry, certain types of government contractors, and various others are required to provide performance bonds to secure their obligations under the contract. The bond is ordinarily underwritten by a financial institution, and under the bond arrangement the underwriter ordinarily has recourse against the contractor if it is required to pay out on the bond.
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