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Breach of Contract: Consequences and How To Avoid Them

Three words no legal team wants to hear: breach of contract.

It’s an event that creates challenges and frustration for everyone involved.

It’s what happens when someone doesn’t live up to their end of an agreement, and the fallout can be pretty awful. 

In this post, we'll examine what a breach of contract is, the types of breaches that can occur, the consequences that may follow, and most importantly, best practices to prevent them from happening in the first place.

TL;DR 

  • A breach of contract can happen for several reasons.
  • The consequences of a breach can be severe.
  • Contract management software can help minimize the risk of a potential breach of contract. 

What Is a Breach of Contract? 

breach of contract occurs when one party fails to fulfill its obligations under the terms of a legally binding agreement. 

This can include things like: 

  • Failing to meet deadlines
  • Not delivering goods or services as promised
  • Violating specific terms and conditions of the contract

…or anything else that may have been included in an agreement. 

breach-of-contract-definition

What Happens When a Contract Is Breached? 

When a contract is breached, the person at fault may have to pay monetary damages or even face legal consequences.

Some consequences may include:

  • Restitution
  • Compensation 
  • Punitive damages
  • Liquidated damages

The remedy will depend on the terms of the contract, the severity of the breach, and the laws in the state or country where the contract was written.

It's important that both parties know their rights and obligations under the contract to make sure they can take the appropriate steps if a breach occurs.

Types of Breach of Contract

Not all breaches are created equal. While none are ideal, some are a little worse than others.

Here are the six types of breach of contract:

Type of Breach Description
Minor breach A minor breach occurs when someone doesn't fully meet a minor promise in the contract, like being a few days late on a delivery. These breaches typically don't lead to severe consequences.
Material breach A material breach occurs when someone fails to fulfill a significant promise in the contract, like not delivering the product at all. Material breaches can lead to more serious consequences and may give the non-breaching party the right to terminate the contract.
Actual breach An actual breach occurs when a party doesn't fulfill their obligation by the agreed-upon date. This breach may vary in severity depending on the importance of the obligation and how late it was fulfilled.
Anticipatory breach An anticipatory breach occurs when a party signals they won't be able to fulfill their obligation before the agreed-upon date. In this case, the non-breaching party may have the option to terminate the contract or seek remedies before the breach occurs.
Repudiatory breach A repudiatory breach occurs when a breach is so significant that it gives the innocent party the right to refuse the terms of the contract altogether. This type of breach is severe and often leads to contract termination and legal action.
Mutual breach A mutual breach occurs when both parties agree to breach the contract, typically due to a mutual understanding that the original agreement is no longer viable or beneficial. In these cases, both parties may agree on new terms or dissolve the contract altogether.

By understanding the different types of breaches of contract and their implications, you'll be better equipped to handle them or, better yet, prevent them altogether. 

What Causes a Breach of Contract?

There are all kinds of reasons a breach of contract might occur.

Here are some everyday situations that could lead to a contract breach:

  • Miscommunication: Communication is key in any relationship, and it's especially important when dealing with contracts. Misunderstandings about the terms or expectations can lead to breaches — which is why it’s so important to have a single source of truth for all your contract communication.

  • Missed deadlines or obligations: When you’re dealing with high volumes of work and not enough reminders, deadlines sometimes slip through the cracks. But in a contract, missing a deadline or not fulfilling a promise can lead to a breach. 

  • External forces: Life can be full of surprises, and sometimes unexpected events can cause a contract breach. This could include anything from natural disasters to sudden changes in the market.

  • Poorly written agreements: Clarity is everything when it comes to a contract. If it’s too confusing or the terms are unclear, it could lead to misunderstandings. 

  • Lost or misplaced documents: Keeping track of contracts can be a challenge, especially when you’re juggling multiple agreements across a number of companies. But losing one can lead to missed obligations and, in turn, a potentially costly breach of contract.

  • Manual contract management: Working with multiple contract templates, formats, or third-party contracts can make it easy to miss small but essential details. Manually managing many types of contracts could result in terms not being met and, of course, a breach of contract. 

what-causes-a-breach-of-contract

How To Prevent a Breach of Contract

Taking steps to reduce the risk of a breach of contract can save you time, money, and stress in the long run. 

Here are some strategies to help you avoid contract breaches:

how-to-prevent-a-breach-of-contract

Write Clear Contracts and Automate Them

Creating and reviewing well-written contracts is crucial to avoid misunderstandings and potential breaches. 

Follow these steps to make sure your contracts are crystal clear before signing on the dotted line:

  • Use simple language: Keep your contracts easy to understand by discussing ambiguous language to ensure all parties agree on its meaning.

  • Include important details: Make sure your contract covers all essential elements, such as deadlines, payment terms, and specific obligations.

  • Be specific and concrete: Clearly define each party's responsibilities to avoid any confusion about what’s expected from everyone involved.

  • Get signatures: Create an approval workflow to make sure all internal stakeholders are aware of and have committed to their obligations. Once the contract has been approved internally, then use an e-signature generator to create the requisite signatures.

Contract management software can be a valuable tool for writing clear contracts. 

It offers templates with pre-approved fields and clauses, streamlining the process and reducing the risk of human error.

Assign Roles To Build Accountability

Building accountability is essential in preventing breaches of contract. 

One effective way to ensure everyone is on track with their responsibilities is to clearly define each person's role. 

Make sure they know exactly what they are responsible for and what they need to do to fulfill their obligations under the contract. This clarity helps reduce confusion and keeps everyone focused on their assigned tasks.

It's also important to be proactive in identifying and addressing any concerns that could lead to minor or material breaches. By staying ahead of potential issues, you can help minimize the risk of a breach of contract. 

To maintain a smooth working relationship with all parties involved, regularly check on their progress with assigned tasks. In addition to making sure everyone is aware of key dates as they approach, regular follow-ups and open communication can address any issues early on, ensuring everyone stays on track and accountable for their commitments.

Review Contracts Carefully 

This may go without saying, but before you sign a contract, it's essential to look it over closely and ask any questions you have.

Contract management software can be a legal team’s best friend on this front.

The software offers several valuable features including:

  • Streamlined contract review: The ability to search for and find key clauses or terms and conditions using optical character recognition (OCR) technology can help simplify the review process, ensuring no details are missing and important obligations are clearly outlined.

  • Efficient approval process: Swiftly share contracts with other stakeholders for their evaluation, negotiation, and approval, promoting a more efficient and cooperative process.

  • Redline capability: Highlight areas that require modifications or revisions directly on the contract, providing clear indications of your suggestions.

  • Annotation tools: Attach comments or clarifications to specific sections of the contract for improved understanding and communication.

  • Comprehensive version tracking: Maintain a complete record of all contract versions, offering transparency and easy access to the document's history so you have a dedicated single source of truth.
  • Reminders: Make sure dates are never forgotten by adding date reminders to any email address, as far in the future as you need.

  • User permissions: Keep everyone on the same page and only give access to the right people, while also providing stakeholders with instant access to critical details.

Make the Most of Technology 

Keeping track of milestones and making sure all your t’s are crossed and your i’s are dotted is key in avoiding a dreaded breach of contract.  

One helpful tool for this is contract management software.

Not only does it centralize all contract-related information, it also provides stakeholders with instant access to crucial information — right when they need it. 

This transparency allows for better oversight and control over obligations. 

Additionally, contract management software automatically extracts crucial data such as dates and counterparties. This information can then be displayed on your dashboard, providing an at-a-glance view of upcoming obligations and deadlines.

Contract management software can also automate alerts and reminders based on the extracted data or any redlining or edits that have been made. This helps keep everyone informed and reduces the chances of missed deadlines or obligations.

Additionally, contract management software can streamline the approval and review process by sending notifications to the responsible parties, all while making sure everyone is working from the same document.

This can make the entire process more efficient and help prevent breaches caused by miscommunication, incorrect versions, or missed deadlines. 

Long story short: Contract management software is a lifesaver when it comes to the review process. 

ContractSafe Can Help 

With ContractSafe's cutting-edge contract management software, you can stay on top of all your agreements and take steps to prevent breaches.

ContractSafe's user-friendly platform allows you to centralize all your contracts, automate key processes, and streamline communication between parties. 

And with features like OCR technology and a cloud-based repository, you can easily locate and access critical information to ensure all parties fulfill their obligations under a contract. 

Plus, with real-time dashboard and email notifications, you'll never miss an important deadline or event again.

Sign up for a free demo of ContractSafe's contract management software today and experience peace of mind knowing your legal documents are in safe hands.

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