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As the economy continues to founder, it is becoming increasingly common for many businesses, however well-intentioned, to renege on contracts simply because they lack the liquid capital to honor those contracts. This leaves the savvy and proactive small business owner facing a critical question:
What can - or should - I do when the actions or inaction by the other side to this agreement make it apparent that they will breach the contract when they - at least techincally - still have time left to perform their obligations under the contract?
This situation, which in legalese is referred to as "anticipatory breach of contract," has a number of important ground rules. Here's a summary of some of the more important ones under New York law:
- If this is a long-term contract involving the sale of commercial goods, the Uniform Commercial Code (UCC) has specific provisions dealing with how to handle an anticipatory repudiation or breach of the contract, including a "demand for adequate assurance."
- The question of what constitutes an anticipatory breach of the contract varies widely depending on the nature of the contract. For purposes of illustration, some of the more significant examples include the repudiation of a real estate sales contract, the breach of a commercial lease or the agreement between two utility companies for providing electrical power at certain pre-determined prices over a 25-year period.
- As a general rule, the non-breaching party has the following two (2) choices:
- Deeming the other party in breach of the contract early on, and deeming void its own obligations under the contract (thereby limiting the amount of damages that can be recovered, but also limiting the amount of money and other resources that the plaintiff commits to fulfilling its end of the contract); or,
- The non-breaching party may continue to fulfill its end of the contract as if no breach of the contract by the other side was impending, and then seek to recoup the full amount called for under the contract.
Naturally, each choice presents its own calculated risks, particularly, but not limited to, the measure of damages that the non-breaching party, may incur and/or be entitled to recover, however.
While there are many instances that do not require the assistance of a lawyer, given the complexity, sensitivity and importance of this issue, it certainly pays to consult an attorney if you are confronted with an anticipated breach of your agreement.