The breach of contract in business is one of the most common disputes in our time.
It ruins a business relationship and leaves an empty bank account.
The worst thing about a business conflict is that they almost always arrive unexpectedly. The day before, everything is as if the business is running, and the next day, it just fell into a swamp that is tough to get out of.
Don’t you worry about it though!
Knowing how contract breaches work and what to do in this situation can save your business from incurring significant financial and relational damage.
Table of Contents
So, what will we be learning?
- What Is a Breach of Contract?
- Contract Breaches Have Damaging Effect On Business Relationships
- The Actual Price of Contract Disputes
- Solutions of Breach of Contract Problems
What Is a Breach of Contract?
As the phrase says, it is when one party of a contract fails to comply with it.
It doesn’t sound difficult right? It happens when a party promised to do one thing and did something else.
But here’s the thing…
Not all breaches are of the same level. There are two main types of business breaches:
Material Breach vs. Minor Breach: What Are They?
The first one is a material breach which is a complete failure in the performance. This means that it deprives one of the parties of the entire essence of the contract. Imagine a case where a supplier promised to deliver goods but never did. That would be a material breach of contract.
The second one is minor and means partial performance. In the case of a partial breach of a contract, that it mostly met but was not met entirely.
There’s a difference between the two as it will establish how a legal resolution of the contract can be possible.
When there is a material breach of contract, it usually leads to a breach of contract lawsuit.
In this type of lawsuit, the party that was damaged by the breach of contract and its effects will file a case to receive compensation from the other party.
Every business owner or manager should at least know the contract law basics. Not knowing these basics will leave a business vulnerable to opportunistic behavior by non-delivering partners.
Contract Breaches Have Damaging Effect On Business Relationships
Contract disputes create not only a legal headache for any business relationship.
These problems get to the heart of the agreement by damaging the trust one in the other.
Imagine this…
The company is depending on a vendor to provide them with some necessary materials in order to complete their project. The company is planning to finish the job and hand in the report to the client on a deadline. The vendor, however, did not provide these materials on time. The company couldn’t finish the work on time which, in turn, made the client mad.
Once the breach occurred, the following would happen:
- Trust that existed between the two parties immediately vanished. As one of them fails to keep their word, the business relationship is forever changed.
- Communication that existed will no longer be professional. Partners will turn their backs to each other. They won’t be collaborating anymore but rather they will be in a fight with each other.
- The future of a business relationship becomes blurry. If the news of the breach spreads, as it usually does, any future business opportunities will be gone.
- Time and money will be wasted. As the partners will get engaged in their dispute, they will take a lot of their focus and time from the actual work.
The relational damage of such a conflict often outweighs the financial aspect. Even if the problem was resolved, the business relationship will not return to its normal state.
The Actual Price of Contract Disputes
Contract breaches cost US businesses billions of dollars each year. And that’s the one that we are seeing.
If you decide to dig into it, the amount is really astonishing.
For example, research from ContractSafe reported that businesses spend $870 billion yearly on dispute resolutions.
Billion with a ‘b’.
A year.
Money that could be used for growing and expanding your business, improving your employees’ experience, and a lot of other things gets used in dispute resolution.
At the same time, the number of breaches of contract is also astronomical.
The research from The Zebra reported that 12 million contract disputes get filed in a year.
It’s a 12,000,000 per year across all industries. That’s a big number of business relationships with issues.
Business relationships have issues
And there are also the hidden costs of these issues.
The legal fees for an attorney, the costs of going to court, and the settlement sum all add up quickly. Smaller businesses get affected by it the most as all these combined can be enough to force their company to close.
Let’s not forget also about other types of costs such as the operational disruptions which is the time and money wasted on court cases and other disputes rather than on doing actual business.
There is also a reputational damage that no business wants to experience as going to the court in the public eye makes any of your customers, investors, and partners a little bit more doubtful in working with you.
Lost time in finding solutions, conflicts of interest, the staff that has to take care of all the court issues and a lot of other things that businesses are putting an investment in is lost business opportunities.
The more a business has to deal with breach of contract issues, the less time it gets to actually do the work.
Wrapping Things Up
One would think that the best time to deal with breach of contact issues is when it has not occurred yet.
It is true, however, it does not always work that way. But it would be a smart business if it did.
The easiest way to prevent this issue is to have clear terms and conditions in a contract and check them from time to time.
Let’s have a look at some strategies that could be also helpful.
- Use the clear language in the contract: Sometimes disputes start as simply as not a party understanding the other side of the contract.
- Have clauses that cover solutions of conflicts: Things can change even if your contract has really clear terms and conditions in it. Having a dispute resolution in a contract is just like having a hot hand in a relationship.
- Do a due diligence: In a contract and before a contract: A contract is one of the ways to check if the business you are about to work with is a reputable one. But to not be a business with a doubtful reputation, it is your responsibility to check the people you are about to sign the contract with.
- Document all the correspondences and the level of a performance: It can really make things a lot easier if you know how things were going before the breach of contract and the dispute itself. It is your proof in the matter.
- Regularly check your contracts: As the business evolves, the contract does the same. And keeping it updated is a must.
Final Thoughts
Contract breaches of the different levels are an unfortunate business reality that every business is to face.
They are damaging to the relationship, relationships are what your business is to make in a first place.
Contract breaches also eat into time and money as now all these resources that have to be used for actually doing the work have to be put into the dispute.
The business world will always have disputes. But smart business and business managers know how to prevent them and keep the loss at a minimum.
