As your business scales and your contract volumes increase, managing contract obligations can be a challenge. Without a robust system of record for contracts, key dates can be missed and deliverables can be forgotten, occasionally resulting in a breach of contract.
Breaches of contract can cause relationship breakdown between parties, but they can also come at a significant financial cost. This Juro deep-dive explains exactly what a breach of contract is, why they’re happening and how implementing a contract management solution can help your business to prevent them.
What is a breach of contract?
Breach of contract definition
A breach of contract is an instance where one or more parties to a contract either actively breaks or fails to fulfill the terms outlined within a legally binding contract.
A contract breach can broadly be defined as a violation of any agreed-upon terms and conditions, so the scope of a contract breach can cover everything from late delivery of certain goods or services to missed payments.
Breach of contract elements
Another way to understand what a breach of contract is is to understand the various elements of a contract breach, and when a business’ action or inaction falls into the definition of one.
Firstly, the contract must have existed and been legally binding between the parties. If there wasn’t a contract in the first place, then it is impossible for there to have been a breach.
Next, you’ll need to be able to prove that specific terms within a contract have been breached. For this, you’ll need to be able to demonstrate, using evidence, that certain obligations existed under the contract and that these obligations were either not performed or have not been delivered to a satisfactory standard.
What causes a breach of contract?
A breach of contract is caused by a contracting party’s reluctance or inability to fulfill the terms they originally agreed to within the contract. This results in certain contractual obligations going unmet, and the promises made within a contract being undermined.
Unfortunately, it’s not rare for breaches of a contract to happen. They can happen for a number of reasons:
🤝 Reliance on third parties
One example is where a contracted supplier has failed to deliver certain goods to a business, which can result in the buyer being unable to fulfill the contractual obligations they owe separately to another business.
This is common in supply chain contracts and procurement contracts. There could even be other external circumstances that make it challenging to deliver certain goods and services in a timely fashion, like outages or technical difficulties.
💬 Poor communication
Alternatively, there could be a misunderstanding between different departments within a business about what the obligations actually are.
Whilst most commercial agreements are drafted and agreed by in-house legal teams, it’s often the sales, customer success, and business operations teams that are responsible for performing certain tasks under the contract.
If these aren’t communicated effectively between departments, these duties can be missed, resulting in a breach of contract.
🗂️ No contract tracking system
It’s also possible that contract obligations just haven’t been tracked effectively by a business, meaning that dates to pay invoices, deliver onboarding and arrange certain goods or services get missed altogether. This is common in companies without a single system of record for contracts, as important contract data gets trapped in static files and so isn’t tracked.
The risk of this happening only increases in scaling companies that manage fast-growing contract volumes. If you’re a fast-growth business seeking a more secure and efficient way to manage your contracts and compliance, hit the button below to find out more.
Commonly referred to as a partial or immaterial breach of contract, a minor breach of contract is used to describe situations where the main deliverables of a contract have mostly been achieved, but not to the specific standard outlined within the contract.
This might occur when a good or service has been substituted with an alternative, for example. It can also be used to describe when something has been slightly delivered later than outlined within the contract terms.
Since most minor contract breaches won’t substantially change the output of a contract, parties will usually have to show evidence that the breach has been detrimental to them in some way in order to seek certain remedies. This typically means the business will have to show that the breach resulted in a financial loss of some sort.
2. Material breach of contract
A material breach of contract occurs when terms within the contract are breached and this breach results in a substantially different result to what was originally specified in the contract. Usually, this means that they have received significantly less value from the contract than they were promised.
A good example of this is where a party has failed to perform their obligations within a contract altogether, or they fail to deliver these on time and it has had knock-on implications for other business transactions. Whether the breach is perceived as material or not will often be left to the interpretation of the courts, and they will consider the following things:
How much benefit the non-breaching party did receive from the contract
The extent of performance by the breaching party, and whether any negligent or willful behavior occurred on their part
How likely it is that the remainder of the contract can be fulfilled
Whether there’s a fair and suitable way to compensate the non-breaching party for their losses
If a party can prove that a material breach of contract has occurred, they can typically sue the counterparty for any direct and indirect losses they suffered as a result of this breach.
3. Anticipatory breach of contract
Another type of breach of contract is an anticipatory breach. This is when the breach hasn’t actually happened yet but one of the parties expresses their intention to breach the contract’s terms.
Usually, an anticipatory breach of contract occurs when a breaching party notifies the counterparty about their decision not to fulfill the obligations. This decision can be intentional or because they are physically unable to. But it can also occur when one of the parties’ actions suggests that they won’t fulfill their obligations, without them explicitly voicing this intention.
An anticipatory breach of contract turns into an actual breach once the date certain obligations were due to be performed has passed.
4. Actual breach of contract
An actual breach of contract is used to describe the failure to perform certain contractual obligations after the date they were due, or failure to perform them to a sufficient standard by this date.
Actual breaches of a contract can be either material or minor, and there are usually an array of remedies available to the innocent party depending on the consequence of the breach for their business.
5. Repudiatory breach of contract
The most severe type of contract breach is a repudiatory breach of contract. This occurs when the breach goes to ‘the root of the contract’ and fundamentally undermines the purpose and performance of the contract.
Usually, a repudiatory breach of contract will result in the breakdown of a contract in its entirety, unlike a minor breach of contract. However, that doesn’t necessarily mean that parties will be entitled to terminate the contract in the event of a repudiatory breach. The parties may choose to affirm the existing contract instead.
Consequences of a breach of contract
The consequences of a breach of contract will almost always be feelings of frustration and inconvenience. This is often true regardless of the severity of the breach.
However, the specific consequences of a breach of contract will depend entirely on the nature of the contract, the severity of the breach, and what the parties had agreed in advance.
In fact, when drafting a contract, most parties will describe the consequences of a breach within the contract itself. For example, businesses could negotiate and agree on a penalty charge for late payment. They could even outline opportunities for early termination if certain promises go unmet.
There’s also a range of remedies available to the innocent party, depending on the severity of the breach. These include damages to compensate the business for their financial losses, specific performance to ensure that the obligations are still performed, or termination of the contract to end the commercial relationship altogether.
As damages can be both compensatory and punitive, the cost of breaching a contract can be significant for small businesses. It can also result in reputational damage if they choose to sue your business publicly for their losses, rather than settling it privately.
So what can you do to prevent your business from ending up in a similar position? There are a few things you can do to ensure contract compliance.
Firstly, you should ensure that your contracts are robust. This means ensuring that they cover all of the terms and conditions necessary to protect your business from unexpectedly breaching the contract.
This can be challenging in businesses where contracts are drafted freely in Word by commercial teams using static contract templates. Without sufficient oversight from legal, these contracts can omit important exclusion clauses, use incorrect contract terminology and compromise on certain positions to get over the line.
Businesses can avoid this by setting up dynamic automated contract templates instead. Using a contract automation tool like Juro, legal teams create contract templates with conditional logic that can trigger certain contract terms to be added for certain types of business contracts, or for contracts in certain jurisdictions or with a certain value.
You can even use Juro’s integrations to pull data directly from your systems of record into the relevant part of the contract using contract smart fields. Legal teams can even determine which parts of a contract commercial teams can edit and which parts remain fixed.
By automating contracts using pre-approved templates, you can enable your business teams to self-serve on contracts without needing constant input and approval from legal teams. But most importantly, legal teams can rest assured knowing that these contracts are watertight and can help to alleviate the risk of a breach.
2. Improve transparency around who is responsible for what
Another way businesses can avoid a breach of contract is to ensure that each department is familiar with their specific responsibilities under a contract. If they aren’t, these obligations will go unmet.
The simplest way to do this is to ensure that all commercial teams have access to relevant contracts. When contracts are scattered across email and shared drives, it can be difficult for sales, HR, and finance teams to find and view these.
Doing this provides departments with a birds-eye view of their responsibilities and flags the contracts they need to monitor the performance of. As a result, teams become more accountable for certain deliverables and can avoid a breach of contract.
3. Capture and track important contract data
Finding a reliable way to capture and track important data points from your contracts is another effective way to keep on top of your contractual obligations. This process will make it easier to identify the effective date of a contract, contract renewal dates, contract values and other information that establishes which responsibilities need to be managed and when.
This information can then be collated into an excel spreadsheet or a contract dashboard for full visibility of upcoming deadlines. Even better, if you use a contract tool like Juro, you can integrate the software with other project management tools like Monday.com, Greenhouse or Workday to trigger different tasks and actions based on this contract data.
4. Set up reminders to track contract obligations
It’s also a good idea to set reminders for different contract obligations. These notifications can be set throughout the duration of a contract to ensure specific deadlines are met for payment, delivery and other commitments made within the agreement.
These key contract milestones could be tracked manually, with the legal team issuing alerts when certain deliverables are due. Alternatively, you could automate the entire process and free up your legal team’s time to focus on higher-value tasks.
By adopting a contract automation solution like Juro, you can set contract reminders that auto-alert your team well in advance of upcoming deadlines. This means there’s no excuse for missing important dates and breaching your existing contracts.
Manage your contract obligations with Juro
If you’re finding it difficult to manage your contracts as you scale, and you’re looking for a more efficient way to track your contract obligations, why not try Juro?
Instead of switching between different tools with no visibility or control over upcoming contract deadlines, Juro helps visionary legal counsel and the teams they enable to agree and manage contracts obligations in one unified workspace.
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