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Are contracts really made to be broken?

Published On: Jul 22 2013 12:37:27 PM CDT
signing contract, pen, paperwork

iStock/Devonyu

By Brian Albert, THELAW.TV

It's one of the oldest clichés in the law: that contracts are made to be broken. Are they really? To find out if you can tear up that contract that's been bogging you down, THELAW.TV posed this question to some experienced contract attorneys. Here's the point and counterpoint.

Braden Perry:

Putting aside moral or ethical stigma that may arise from a breach of contract, it has long been a judicially acceptable principle that a party may intentionally breach a contract, even if motivated by economic self-interest. Of course, the breaching party will be liable for damages, but those damages are ordinarily limited to compensatory damages, which are aimed to put the non-breaching party in the same position had the breach not occurred, and only for those damages that were foreseeable at the time the contract was made.

The concept is simple: because the breaching party must compensate the other for damages, the breaching party will only breach if economically advantageous and will readily compensate the other party for damages. A breaching party rarely stands to lose as much by the breach than by performance. And, traditionally, the more deliberate the breach the more the breaching party has to gain.

These fundamentals are skewed, however, when breaching parties are not willing to readily compensate the other party for damages, or when the subject matter is rare or unique. The costs of litigation and/or specific performance of a breached contract alters the economic principles that a breach will result in a better position for the breaching party, without harm to the other.

Therefore, the law dictates that contracts can be broken. From here, it is a business/economic decision that will depend on the actions of the breaching party. The party will evaluate the economic gain to a breach, and weigh that gain against the potential reputational harm or stigma, the damages provided legally or through liquidated damages clauses within the contract, and if advantageous breach the contract and willingly compensate the aggrieved party.

Braden Perry is a partner with the Kansas City-based law firm of Kennyhertz Perry, LLC, a business, regulatory, and litigation firm that brings a unique mix of top law firm quality expertise, practical experience, and pragmatic business solutions. Perry says, yes, contracts are made to be broken.

Mark Mauriello:

Unequivocally and resoundingly -- NO. Contracts are made expressly to be kept. At least among the ethical and intelligent business people I work among. I find the premise posed for consideration to be among the most cynical and nonsensical points of view regarding enterprise. If we were to truly accept and allow callous disregard of binding agreement as an operating principle, all commercial activity would erode swiftly into disarray. Without balanced and honored agreements, the transactional landscape would be littered with wreckage and business would take on the attributes of the Wild West; lawless chaos. That's not to say parties cannot callously decline to keep a bargain. There's the rub.

In my more than 30 years' experience as a businessman and transactional attorney, I have come to believe strongly that good contracts are essential to a robust economy. Without them, or saddled with confusing, labyrinthine agreements in their place, the time wasted achieving the benefit of the bargain for both parties, or worse, the resources spent on attorneys jousting for advantage, will suck the economic life out of what is currently a still fragile economy.

I think there is a better paradigm for exchanging value, i.e. money, for something. Once the parties have had the opportunity to advocate strongly for the business elements most critical to their needs, then the resulting contract should be clear, enforceable, and express the best converging interest of the parties to the transaction, while still protecting against unintended but possible breach. The abjectly distasteful suggestion that it is OK to infuse a contract with camouflaged trip wires and buried Claymores stain all honest business and legal professionals. That this impression even exists is a failing of our culture.

You may call my point of view naïve. I call it serving a standard of excellence and the greater good.

Mark Mauriello is an attorney at Mark Mauriello, PC, a legal and business advisory practice in Bedford Hills, New York that guides small business owners through their transactional and general business challenges. Mauriello says, no, contracts should never be broken.

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