Your in-house legal team relies on contracts to protect your business, build relationships, and grow revenue—and a breach of contract can result in legal liability, high costs, and wasted time. The good news is, if you know what to look out for, you can work to prevent these breaches before they happen.
Breaches of contract are essentially the failure of a party to deliver what they agreed to deliver to another party. Because these deliveries are promised via contract, they are legally binding and enforceable. Making sure that your corporate contracts are easy to understand and provide realistic expectations up front make them more likely to be upheld and set your business up for success.
What is considered a breach of contract?
Some breaches are more costly and difficult to reconcile than others. Regardless of their consequences, you want to avoid issues from happening in the first place. The first step to avoiding breaches is being able to recognize them. Be on the lookout for these common types of breaches of contract.
Minor breach versus actual breach
A minor breach of contract, also known as a partial breach of contract, occurs when an immaterial term is breached by the other party. This term is set forth in the contract but it is not one that creates a significant issue if it is breached. In many cases, such minor breaches are accidental and inconsequential. Many business entities will simply work it out. However, a minor breach can still cause delays that affect your bottom line.
An actual breach occurs when a material term of the contract is violated. These terms are major parts of the contract, and violations of them significantly impacts the deal and may negate the agreement itself. In fact, it’s not uncommon for material breaches to have trickle-down effects, directly and indirectly influencing both parties’ finances and time. A major breach of this kind can result in significant litigation, lost deals, and major losses in revenue. The right review process and preparation can help avoid both minor and actual breaches of the contract.
Anticipatory breach
In contract law, an anticipatory breach is when the other party repudiates the contractual condition before the performance is due. A business that backs out of a deal before the date set in the agreement commits an anticipatory breach by doing so.
When this happens, the aggrieved party is often excused for any non-performance on their part. Anticipatory breach claims are often subject to lengthy litigation and the potential for financial liability. In either case, they result in wasted time and lost deals you would like to avoid.
Effective contract lifecycle management (CLM) software puts you in control of your processes to help avoid breach-of-contract problems, regardless of their classification. Manual contract review processes leave you open to potential contract violations that can be very costly. With a contract management software like Lexion, you can track contracts throughout the contract lifecycle, accelerate contract reviews, and look for issues at every step of the way (even before they happen).
How to avoid breach of contract
Contract management systems help you prevent a contract breach before it occurs. Here are three ways to prevent a breach of contract for your company:
1. Clarify wording in the original contract
An experienced legal team knows that you must review the wording of a contract and anticipate any issues. You want to ensure the language you use is clearly understood by both parties. You should know your objectives before you write the terms of an agreement. Doing so sets a firm goal for what the language is supposed to mean.
You can simplify contract negotiation to help clarify any wording in the agreement. Make sure to research contract laws and any standardized terms or provisions you use. Once a provision is thoroughly vetted, the right CLM system will be able to generate templated agreements with pre-approved language that is clear to all parties.
Another key component of this tip is effective redlining. With antiquated negotiation methods, these processes can be cumbersome and difficult. Instead, advanced technology makes it easy to:
- Review contract language
- Make modifications and review counterparty revisions
- Negotiate with counterparties in an effective way
- Maintain proper version control of contracts
- Discuss customized contract language to ensure both parties agree on its meaning before the contract is signed
These tips help clarify the wording of the agreement so there is no dispute later. A little extra effort now can save a fortune later. Contract management software can help with this process.
2. Agree upon realistic contractual obligations
When you agree to contractual terms, make sure you are able to comply. You also want to ensure your counterparty can actually deliver on their promises. Too many legal teams assume that their internal stakeholders know what they are agreeing to and can perform. Your focus is often on the language of the contract, not its actual performance. Speak to your other departments to address possible challenges that could result in a breach.
To help establish realistic obligations, your in-house legal team should:
- Consult your colleagues about the feasibility of the contractual promises
- Ask about potential issues that could create an accidental breach
- Discuss supply chain issues and potential timeline problems
- Address the issue of impossibility of performance with the counterparty and how it will be handled
- Build in contingencies if a delay should occur or deviation of contractual terms is necessary
Business managers and salespeople often get caught up in the potential revenue of their deal without looking at whether it is realistic. Your legal team can help rein in potential issues by how you draft the contract.
3. Research your party of interest and their contractual history
Take time to research your party of interest and how they have handled contracts in the past. Do they commonly breach agreements? Are they currently or have they recently been in breach-of-contract litigation due to their failure to perform?
Answering these questions can help determine if you should enter into an agreement in the first place. If you decide it’s worth the risk, build in detailed provisions regarding breach of contract damages and how a breach-of-contract case is to be litigated.
What happens when a contract is breached?
While the concept of breaching a contract is simple, the reparation process can sometimes get complicated. A breach of contract can be costly, taking up your time and your business’ money.
If your party of interest (or even you) miss a deadline, fail to meet a material or immaterial term, or deliver something wildly different than agreed upon, the contract you create ensures that anyone who has been wrong ends up in the same financial position they would have been had the contract been followed to a T.
Typically, a breach of contract warrants a lawsuit to make sure that all damages are paid (sometimes with additional compensation). While a breach of contract is not generally considered a criminal offense, sometimes there is fraud involved. Anticipating potential breaches before they happen is now easier than ever with the right contract management software and protects your corporate contracts from being breached.
CLMs can help you avoid breach-of-contract problems
In-house legal teams often face complicated deals with many moving parts. While manual contract review makes it more likely your team will miss a key issue that could be costly down the road, a contract management system like Lexion gives you the tools needed to avoid common breach-of-contract problems and streamline your entire contracting process.
Learn best practices for negotiating key clauses in SaaS contracts or reach out to see how Lexion can help your legal team.
