All contracts involve rights and obligations of parties. If everything goes right and both sides stick to the terms of contract, all of them benefit. But that’s the perfect situation. In real life, a lot can occur such as delays, financial problems, unfair partners, or other unexpected things. These issues may lead to an inability to comply with contract terms, which can trigger judicial proceedings.
The legal term for such scenarios is called a “breach of contract”. We’ll discuss the reasons, possible outcomes of breaches, and how not to be the breaching party.
Breach of Contract Definition
When parties enter into a contract, they agree on certain obligations. When one of them fails to fulfill those obligations, it is called a “breach”. According to Investopedia, the definition of breach of contract is as follows:
A breach of contract is a violation of any of the agreed-upon terms and conditions of a binding contract.
It seems that to avoid breaches, you just need to stick to what’s written in the contract. But managing that can be difficult, so sometimes you might not even realize that some agreements were broken. For example, you can accidentally miss a deadline or make an incorrect payment. As contracts are binding, breaches have their consequences. That means both sides will have to deal with it somehow.
Ways to Deal with Breach of Contract
The process of dealing with such a situation may be indicated in the contract itself. For example, it may be paying a fine or providing an additional service. If the contract doesn’t contain information about the remedy for a specific violation, parties may resolve the issue by creating another contract or taking the matter to court.
In court, it’s necessary to prove that the contract exists and is valid. Usually, if there’s a written document signed by both parties, this is sufficient proof. Additionally, the plaintiff has to prove that the defendant failed to meet the requirements.
Remedies
When agreements are violated, the affected party is entitled to a remedy according to the law. There are three main remedies for a breach of contract:
- Damages. This is a payment for damages and it’s the most common solution. These payments may be a sum that compensates what the injured party lost or could lose, or a fine determined by a court or contract.
- Specific performance. If damages don’t cover all losses, or the subject of a contract is special, the party that breached the contract may be ordered to deliver stipulated goods or services.
- Cancellation and Restitution. This requires the cancellation of the contract and returning the non-breaching party into the position it was before signing the contract. In this situation, both parties are freed from all contractual obligations, and all benefits that were received should be returned.
To know how to deal with breaches, you should also know their types.
Main Contract Breaches
If a contract was breached, your next step should be to evaluate the specific type of breach that occurred. This will help you determine the appropriate legal response. As there are a wide variety of contracts, there are many kinds of breaches. But nowadays, the law recognizes four main types. There’s also a special kind of breach that is used from time to time.
Minor
Also called a partial breach, this happens when a specified product or service is delivered, but some part is not. For example, if you ordered a dresser with a brown frame, but it was delivered with a gilded frame instead. If all other contractual requirements except this one were satisfied, this would be a minor breach.
Material
This breach occurs when the perpetrator delivers something completely different than what was expected. In most cases, the non-breaching party has a right for a remedy if this happens, and it doesn’t have to fulfill its obligations anymore.
Anticipatory
If one party understands in advance that the other party will fail to perform their obligations, it has the right to terminate the contract. In this case, the non-breaching side has the right to file for a remedy.
Actual
This breach happens when one party refuses to fulfill their part of the contract by the due date or fulfills it incompletely.
Mutual
Sometimes, both parties may want to breach the contract. It may be due to certain circumstances, such as major market changes. If this happens, partners can cancel the existing contract and create a new one.
Why Does This Happen?
Contract breaches are an unpleasant situation and something that everybody would like to avoid in most cases. Nobody may plan for it, but still it happens. The reason is that it’s not easy to stay on top of all the contracts you have in your business. That’s why poor contract management is often the culprit.
Contracts stored across multiple locations
To meet deadlines and obligations, you have to track them. But when your documents are stored across different locations (including drawers, computers, and emails), it’s not an easy task. If you fail to find the contract and get necessary details fast, it may lead to a breach.
Lack of compliance
As they work on a contract, departments may see things differently. This means they can phrase the same things in a different way while writing the contract. As a result, this leaves room for interpretation and a possible breach. And you won’t even realize it!
Not building on previous experiences
Sometimes the same breach can occur more than once. If you don’t properly analyze similar agreements where another party failed to meet their obligations, this may result in another breach. Without properly reviewing your legacy and archived contracts, you might overlook a mistake or unclear wording that should be avoided.
Not tracking each party’s contract performance
To avoid a breach of contract, it’s important to monitor how both parties are delivering on their obligations. It may help you spot any issues before they occur, allowing you to act preemptively. This protects counterparties from breaches and costly lawsuits.
Contract terms that are not possible to follow
Both parties should carefully consider whether they can fulfill their obligations. For example, if a supplier promises to provide 100 tons of grain, yet they can only deliver 50 tons, a breach is bound to happen. Another case might be if a counterparty must violate their security rules in order to get a job done. The best way to avoid such a situation is to simply not enter such agreements. Instead, analyze previous agreements to see what’s possible and what’s not.
Example Breach
Let’s imagine you’re an owner of a retail chain. You have an agreement with a supplier to deliver goods to your store. One day, you received your delivery and found that one of the products was damaged. This is a material breach as you were given something different than what was agreed.
Normally, there is a statement in a contract regarding how to settle this issue between you and the supplier. You can check your contract storage and quickly find the necessary document. Most likely you won’t have to fulfill your obligations for this particular product (payment) and you can expect a remedy (i.e. an unbroken product supplied for free).
In the event things go to trial, you will need to prove the product was already damaged when you received it.
Conclusion
Contract breaches can happen even to the most responsible of companies. And sometimes they are the breaching party. Moreover, if your business doesn’t use a contract management solution for all departments, you might accidentally breach a contract without even realizing it.
Digitizing contract workflows can minimize the risk of breaches considerably. With a proper CLM, you can easily track all changes and collaboratively redline while drafting a contract, and you can always make sure you have the right version of the contract.
Template and clause libraries, as well as regular updates, can help ensure compliance, and scheduled reminders will keep you from forgetting key dates. And of course, centralized storage provides quick access to any data you need to check, while keeping all information secure.
If you want to learn more about how a CLM platform can improve your contract management workflow and save you from contract breaches, just drop us a line or book a demo with AXDRAFT. We’ll be glad to help.
A breach of contract is a situation when one party fails to fulfill any of its contractual obligations. It can occur when a party bypasses key dates, fails to abide by terms of the agreement, or does not perform contractual obligations at all.
There are four main types of contract breaches recognized by law today:
- Minor (partial) breach. It happens when the contractor delivers all of what was requested, except for one or two minor issues.
- Material breach. A material breach happens when a party delivers something completely different than what was expected according to the contract.
- Actual breach. It occurs when one of the parties refuses to fulfill their obligations by the due date or performs its duties incompletely.
- Anticipatory breach. This type of breach happens when it becomes understandable that one of the parties of the contract won’t perform their part of the contract in the future.
- You’ll need to establish whether a valid contract exists between you and the other party.
- You’ll need to demonstrate that the defendant breached the contract.
- You’ll need to showcase the damages the breach led to.
According to the law, if one party is guilty, they must remedy the breach.