A breach of contract occurs when two or more people enter into an agreement, and at least one party does not fulfill their part of the contract by failing to meet the contract terms without a legal excuse. Once all parties reach an agreement, each one is under a contractual obligation, making the contract legally enforceable.
How do breaches of contract affect a company?
Breaches of contract can have significant and varied impacts on a company, depending on the nature and significance of the contract, the parties involved, and the terms of the contract itself. Here are some common ways in which breaches of contract can affect a company:
- Damages: A breach of contract may require the breaching party to pay damages to the non-breaching party. These damages could include compensatory damages to cover the actual losses suffered as a result of the breach, as well as potentially punitive or consequential damages.
- Legal costs: Pursuing or defending against a breach of contract claim can be expensive due to legal fees, court costs, and other associated expenses.
- Lost profits: Breaches can lead to lost business opportunities, revenue, or profits, especially if the contract involved a critical project or transaction.
- Trust and reputation: Frequent breaches of contract can harm a company’s reputation and erode trust with customers, partners, and stakeholders.
- Loss of business partners: If a company is known for not fulfilling its contractual obligations, it may have difficulty attracting or retaining business partners.
- Resource reallocation: Managing a breach of contract may divert resources and attention away from core business operations.
- Delayed projects: If a contract breach affects a critical project or delivery timeline, it can lead to delays, cost overruns, and customer dissatisfaction.
Legal and Regulatory Risks
- Litigation: Breach of contract disputes can lead to costly and time-consuming litigation, potentially resulting in unfavorable court judgments.
- Regulatory penalties: Breaches that violate industry regulations or legal standards may lead to regulatory fines or penalties.
- Stress and uncertainty: Ongoing contract disputes can create stress and uncertainty among employees, affecting morale and productivity.
- Job security: In extreme cases, if a breach results in significant financial losses, it may lead to layoffs or downsizing, affecting job security.
Loss of Future Opportunities
- Damage to relationships: Frequent breaches can damage relationships with customers and partners, making it harder to secure future contracts or partnerships.
- Exclusion from bidding: In certain industries, repeated contract breaches may disqualify a company from participating in bidding processes or winning contracts.
Breach of Covenants
- Breaching certain contractual covenants, such as non-compete or non-disclosure agreements, can have legal and financial repercussions, including injunctions or financial penalties.
- Repeated breaches of contract may lead to higher insurance premiums or difficulty obtaining insurance coverage.
Companies can mitigate these impacts by carefully drafting contracts, monitoring compliance, and seeking legal remedies when necessary. Additionally, establishing a culture of contract compliance and risk management can help reduce the likelihood and severity of breaches.
Breaching can happen easily
Managing your firm’s contracts is often difficult, so it is possible to breach a contract without realizing it. Contracts are growing more complex, leading to accidental breaches, such as missing a deadline, sending the wrong product, sending a damaged product, or submitting the incorrect payment.
For instance, your business may have different departments for coding and delivering software. If these departments are in different locations (possibly even different states), you could experience confusion over who has the correct contract with the terms of delivery dates. If you miss a delivery deadline, then you have breached the contract.
Breaches of contract can occur for various reasons and can be initiated by one or both parties involved in the contract. Here are some common ways breaches happen:
- Non-performance: This is the most straightforward type of breach. It occurs when one party fails to fulfill its obligations as outlined in the contract. This could involve not delivering goods or services, not making payments, or not meeting deadlines specified in the contract.
- Partial performance: Sometimes, a party might partially fulfill their obligations but not entirely. This can also constitute a breach if the contract explicitly requires complete performance.
- Delayed performance: Even if a party eventually performs, if they do so after the agreed-upon deadline, it could still be considered a breach unless the contract allows for some degree of flexibility or provides for remedies in case of delays.
- Anticipatory breach: This occurs when one party clearly communicates, either explicitly or through actions, that they do not intend to fulfill their obligations before the performance is due. For example, they might announce that they won’t be able to meet their delivery date.
- Fundamental breach: Some breaches are considered fundamental, which means they go to the heart of the contract and substantially deprive the other party of the benefits they expected from the contract. Fundamental breaches typically give the non-breaching party the right to terminate the contract and seek damages.
- Impossibility of performance: If circumstances arise that make it impossible for a party to fulfill their contractual obligations, it can be considered a breach. This might include situations like natural disasters, government regulations, or the death of a key person involved in the contract.
- Misrepresentation or fraud: If one party makes false statements or conceals critical information during contract negotiations, and the other party relies on these misrepresentations to their detriment, it can lead to a breach of contract.
- Inadequate resources or capacity: If a party lacks the necessary resources or capacity to perform as agreed, it can lead to a breach. For example, a supplier might promise to deliver a certain quantity of goods but later realizes they can’t meet the demand due to limited production capacity.
- Change in circumstances: Sometimes, external factors or changes in circumstances can lead to breaches. This might include economic downturns, changes in market conditions, or shifts in regulatory requirements that affect the feasibility of contract performance.
- Disagreements over contract terms: Conflicts or disputes over the interpretation of contract terms can also lead to breaches. Parties may have different understandings of their respective obligations, leading to non-compliance.
It’s essential for parties entering into contracts to carefully draft and review the terms, consider potential risks and contingencies, and communicate effectively throughout the contract’s life to minimize the likelihood of breaches. Additionally, contracts often include dispute resolution mechanisms, such as mediation or arbitration, to address disagreements before they escalate into breaches.
Consequences of a breach
When entering into a legal agreement, parties will often include the consequences of the breach of contract within the contract itself. For example, one party may pay a 10% penalty or a $500 fine for a breach. Other consequences could be more creative, like a party providing you extra technical support if they delivered software to you late.
If a breach occurs, you and the other parties may come together and create a new contract or a solution to the breach. If a new agreement fails to materialize, the next course of action is to appear in court or arbitration.
The most common remedies for breach of contract are:
- Damages—can be actual or punitive if bad faith is involved
- Specific performance—ordering a party to fulfill the contract
- Canceling the agreement with a return of any benefits received
The 5 types of breaches of contract
Just as there is a wide array of contract formats, there are also various ways to breach them. Here are five of the most common types of breaches of contract and what follows the breach:
With a minor breach, one party delivers the goods and services, but not on time. A serious problem occurs if a contract specifies “time is of the essence,” and you miss the deadline. The general solution to this breach is delivering on the original agreement and paying back any damages caused by the delay.
In a material breach, one party violates a significant term of the contract. The broken part must be at the heart of the contract and irreparably break the contract. For example, perhaps you ordered reams of paper and received boxes of staplers instead. In this case, the other party could have ignored the contract altogether, sending you different items than what was agreed upon.
An anticipatory breach occurs when one party knows in advance that they will not fulfill their part of the contract. In such cases, the other party doesn’t have to take any other actions under the contract. The breaching party has to pay for any damages caused by this type of breach.
An actual breach is when one party completely fails to meet the terms of the contract. If you are the other party, then you decide what course is best for your business:
- Use the remedy written into the contract
- Agree to create a new contract
- Go to arbitration or mediation
- Bring the matter to court and sue for damages
- Cut your losses and learn from the bad experience
There may be times when both parties want to breach the contract. For example, if the underlying markets change substantially, or the companies find themselves in changed circumstances, all parties may choose to create a new contract and void the old one. In a case like this, a contract breach is desirable to everyone.
Reasons leading to a breach of contract
Piles of contracts
Where are they? Are they in file drawers? Are they on different computers and in different formats? Keeping track of contracts is difficult. Making sure that you don’t breach the contract—or the other party doesn’t breach—requires finding the contract first.
Every department handles contracts differently
When you look at the contracts, you’ll see that each department writes its part differently. For example, perhaps one department meant for their terms to mean the same thing as another department, but that intention failed to make it onto a page. One department may have created its spreadsheet system for the contracts and archived the original copies. Without a secure contract management system utilized by all departments, you could breach a contract and not even know it.
Different types of contracts
Your firm needs to organize and keep track of many different contracts for various products, whether you are the producer or consumer. These contracts include purchase orders for material goods (paper and ink) and services (janitorial and an outside accountant). Following that, computer contracts for software vary— you may purchase software to use for a year or to own forever. Just visiting a website often involves a couple more contracts. And then you have the contracts that your company needs to perform on. To avoid a breach, you need a system to stay on top of all agreed-upon terms and deadlines.
Protect your business with contract lifecycle management
Staying on top of all your obligations isn’t easy. You need to manage the dates, goals, and specifics of all the contracts in your system, whatever side of the contract you are on. Nobody wants to end up in court, but breaches may push you there.
Ironclad’s contract management platform provides a solution for integrating contracts (and breaches of contract) into your everyday business flow. This software can help avoid breaches by giving you a unified and centralized way to keep and use all your contracts, their dates, and penalties. It keeps track of contracts over their entire lifecycle, and its automation keeps things moving forward.
All contracts are in one place—your contract management software. Everyone can check on the contracts that affect them. For instance, one department may need contracts ordered in a list by the due date. Another department can pull up all the contracts with the same vendor. Your firm can have one authentic copy of the contract without the fear of losing it.
More than simply recording contracts, Ironclad’s program covers the lifecycle of contracts. Old ones can guide the creation of new ones. You can handle negotiations online with documents that everyone can use. Every person involved can receive reminders of events and due dates.
From negotiation to fulfillment, artificial intelligence will guide your office through the steps needed. Automation helps to keep track of potential breaches. The system notifies each party who needs to take action. Each party can checkmark their activity as “completed” and leave notes to alert Legal on any changes. Then, the contract moves on to the next party. Once completed, the system learns from your successes and suggests those terms for the next contract.
Benefits of digital contract management
A digital contract works differently than a paper contract. It allows people to work together in an organized way with an accessible signature collection. It stores contracts but allows past contracts to come back to inform future ones.
Collaborative problem solving
Ironclad’s software creates a chain that links all emails and documents related to the contract—all in native DocX form. This way, all parties can visit the documents in the Cloud while redlining and collaboratively editing contracts. When a party breaches a contract, you can find solutions that work well for everyone. Contract management keeps track of all notes and changes and even suggests several clauses that have been pre-approved by Legal.
The workflow designer makes it clear who has the contract now and who has the next step. All the stakeholders can add comments as you negotiate the breach. (And you will know who is behind and how much you can work around their tardiness.) Compliance becomes automatic and is worked into your daily practices over time.
Ironclad Clickwrap creates an easy way to gather everyone’s signatures. A single click becomes a legal signature. Even better, this entire mechanism is available to your clients, partners, and contractors on your website.
Dynamic data repository
Every contract is stored for posterity in a secure space, so now each party can look at the same authoritative document. In addition, contract data can be used as data themselves—helping you generate new contracts, see past trends, and solve problems before they happen.
Contract lifecycle management with Ironclad saves time while reducing your exposure to risks. It makes keeping up with a variety of contracts more accessible. When you fulfill all your contracts, your business reputation improves. Your contracts and deadlines are available to you at any time. You can quickly check the consequences if you or your supplier miss a deadline or breach a contract. Contract management brings a future with fewer breaches of contract.
- How do breaches of contract affect a company?
- Breaching can happen easily
- Consequences of a breach
- The 5 types of breaches of contract
- Reasons leading to a breach of contract
- Protect your business with contract lifecycle management
- Benefits of digital contract management
Want more content like this? Sign up for our monthly newsletter.
Ironclad is not a law firm, and this post does not constitute or contain legal advice. To evaluate the accuracy, sufficiency, or reliability of the ideas and guidance reflected here, or the applicability of these materials to your business, you should consult with a licensed attorney. Use of and access to any of the resources contained within Ironclad’s site do not create an attorney-client relationship between the user and Ironclad.