When It Becomes Clear That Your Small Business’ Partner Is Going To Breach Your Contract Under New York Law July 22, 2009

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. Consequently, a critical question facing the savvy and proactive small business owner is this: 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, i.e., before their obligation to perform under the contract has come due?

As a preliminary matter, and at the risk of stating the obvious, every circumstance is certainly different, and therefore requires its own analysis. But in order to conduct a proper analysis of this issue under New York law, the following factors should be borne in mind:

• 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 option of deeming the other party in breach of the contract and deeming void its own obligations under 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. Each choice presents its own calculated risks, particularly, but not limited to, the measure of damages that you, the non-breaching party, may incur and/or be entitled to recover, however.

In short, although 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 this problem.

Jonathan Cooper is a New York Business Litigation and New York Commercial Litigation Lawyer with a focus on New York breach of contract and New York business fraud claims before the Nassau, Queens, Brooklyn, Bronx, Westchester and Suffolk County courts of New York State. For more information, feel free to contact his Long Island office at 516-791-5700.

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