Understanding the 5 Most Frequent Causes of breach of contract and How to Prevent Them
Business agreements are built on contracts, which ensure all parties are on the same page. However, disagreements often occur for a variety of reasons. Even though this is not ideal, it is a fact that frequently results in legal disputes. Here are a few of the most typical causes of breach of contract and the best ways to prevent them.
1.Misunderstandings and Ambiguities in Contract Language
When parties disagree on the meaning of contract terms or phrases that initially seemed crystal clear, it can turn into a legal puzzle. The court’s primary role in such disputes is to decipher and enforce the intentions of the parties at the time the contract was formed. The contract’s language is typically the best indicator of these intentions, but it’s not foolproof.
Ambiguities in Contract
Clarity is paramount when it comes to contracts. When a contract is unambiguous, the court’s role is straightforward; it relies solely on the actual words in the contract and excludes any evidence that is not part of the written terms. This preserves the parties’ freedom to define their rights and responsibilities without court interference. Moreover, determining ambiguity can be a contentious issue in itself. A contract is considered ambiguous if its provisions conflict or if a term can reasonably be interpreted in more than one way. Ambiguities can be patent (arising from unclear language) or latent (related to how terms apply). It is up to the court to make this determination.
When ambiguity is found, the court’s task shifts to uncovering and enforcing the parties’ original intent. This often involves looking at the circumstances surrounding the contract’s creation and its apparent purpose. Extrinsic evidence, such as prior actions and statements, can aid in resolving ambiguities. For contracts tied to specific industries, industry practices are considered persuasive evidence of intent.
Solving Misunderstanding and Aumbiguities in Contracts
To interpret ambiguous contracts, courts employ traditional rules, such as reading the contract as a whole, giving meaning to each word, and avoiding strained interpretations. Specific terms usually take precedence over general ones, and the same words in different sections are typically given the same meaning. Courts may even resort to grammar rules to decipher intent.
2.Failure to Perform on Time
If time is of the essence, according to the contract, it signifies that rigorous adherence to the deadline is essential. Any delay—no matter how minor—is a violation of the agreement. You have the option to acknowledge this violation, end the agreement, and potentially claim compensation.
Delays and Their Impact on Contractual Obligations
When a contract specifies a deadline but doesn’t make clear that time is of the essence, missing the deadline nevertheless constitutes a violation. It does not, however, give you the authority to end the agreement. Instead, you might ask for compensation for any losses brought on by the delay.
In cases where the contract stipulates performance within a reasonable time, the definition of “reasonable” becomes a subject of debate. Factors like the nature of the item involved can influence what’s considered reasonable.
Strategies for Meeting Timelines and Deadlines
Contract termination due to delays is a risky and challenging step. Without the legal authority to do so, you may find yourself in a vulnerable situation and open to potential damage claims if you opt to terminate a contract. To prevent a breach of contract and complicate an already difficult position, it is advisable to get early legal guidance before taking such an action. Understanding your contract’s terms and your rights within those terms is essential for dealing with delays effectively and minimizing the risks involved.
3.Non-Compliance with Contractual Terms
Non-compliance is more than just an inconvenience. It can be a costly affair for your business. When you overlook the importance of contract management, you open the door to various risks.
Risks of Ignoring Contractual Obligations:
- Money slips through the cracks when contracts aren’t closely monitored.
- Disputes with suppliers can strain your relationships and hamper your business operations.
- Non-compliance can lead to audits and potentially legal actions, further draining your resources.
Ensuring Adherence to Agreed-Upon Terms
To safeguard your business from non-compliance, you need a well-structured approach:
- Automatic renewals may seem convenient, but they often result in financial loss and reduced flexibility. Don’t let contracts renew on their own; renegotiate for better terms and savings.
- Auditing your contracts is essential. Determine the scope of the audit, specify objectives (like process improvement or fraud detection), and ensure both you and your supplier are on the same page regarding dispute resolution.
- Maintain consistency by implementing a documented and easy-to-follow contract review process. Define roles, and make sure every team member knows what’s expected.
4.Inadequate Performance or Quality
If you have signed a contract for a project or service, and it’s clear that the quality of work or deliverables doesn’t match your expectations, how do you identify it?
Recognizing Subpar Work and Deliverables
First and foremost, ensure that your contract clearly defines the standards and expectations. What exactly do you require in terms of quality, quantity, and timeliness? Specificity is your best friend here. On top of that, stay proactive by consistently monitoring the progress and quality of the work. Don’t wait until the project’s end to realize there’s a problem. In addition, implement quality metrics that objectively measure the quality of deliverables. These metrics should be agreed upon by both parties and serve as benchmarks.
Maintaining Quality Standards and Expectations
Maintain open and honest communication with your contracting party. If you have concerns or encounter issues, address them promptly and constructively. It’s often a lack of communication that leads to subpar work.
Schedule regular performance reviews to discuss progress and quality. These reviews can help identify issues early and provide an opportunity to make corrections. Also, implement quality assurance mechanisms within the contract. This could include inspection and testing procedures to ensure the work meets the agreed-upon standards.
If you realize that the original terms and standards need adjustment, don’t hesitate to amend the contract. It’s better to be flexible and realistic than to stick to a flawed agreement.
5.Financial Issues and Insolvency
The state of the global economy is increasingly uncertain, with recessionary fears on the rise. In such circumstances, how can businesses ensure that their contracts stand strong?
The Impact of Financial Instability on Contracts
Price review clauses, found in many supply contracts, offer a lifeline for suppliers to adjust prices when faced with rising manufacturing and supply costs. These clauses often have specified timeframes for price adjustments, and it’s crucial to ensure compliance with these provisions to enforce cost increases effectively.
Termination provisions can be a lifeline for businesses. They typically allow one or both parties to exit the contract with proper notice, especially if the other party materially breaches the agreement. Breaches may include financial difficulties, failure to provide necessary information, non-payment, or actions jeopardizing the other party’s rights. Ensuring compliance is essential to avoid termination that can disrupt cash flow.
Mitigating Risk in Financially Uncertain Times
Amidst financial turbulence, businesses need to take proactive measures to safeguard their contracts and relationships. Here are some options to consider:
- Regularly review your contracts to ensure you’re not in breach of any provisions. A breach could provide the other party grounds for termination, causing cash flow problems. Conversely, avoid terminating contracts without valid grounds to prevent costly lawsuits.
- Force majeure clauses typically cover unforeseen events like natural disasters or war but often overlook financial crises. It’s advisable to revisit your contracts and see if they include protection for scenarios like a recession or financial hardship.
In these unpredictable financial times, it is crucial for businesses to assess their contracts, stay vigilant about key dates, and ensure compliance. By doing so, you’ll be better equipped to navigate economic uncertainties and protect your interests.
Preventing Breach of Contract by Arbitration with THAC
At the Thai Arbitration Center (THAC), we provide a state-of-the-art procedural framework for dispute resolution by arbitration for various issues.