A breach of contract is a risk for either party while executing a contract. More complex is the contract; more are the chances of breach of contract by either party. Large contracts like construction contracts are more susceptible to breach because of high complexities involved in the contract. Let us first understand, what is breach of contract?
Breach of contract is simply the violation of terms of contract as agreed between two parties. If a party doesn’t fulfill their obligations under the contract, it is a breach of contract.
The contract is a legal document and there are provisions in the contract to claim for the breach of contract by the other party. But to claim against the breach, it is necessary to prove that the breach has occurred.
There are many types of breach of contract, which are discussed as below:
Material Breach of Contract
It is the most severe type of breach of contact. This occurs when the key element or the key obligations of the contract have not been fulfilled by a party. In the complex contracts, such as construction contracts, it is generally defined, which activities are breach of contract but in small contracts it is not defined.
Example 1: If in a construction contract, the contractor does not renew performance security (bank guarantee or any other security submitted to ensure performance of the contract), it is a material breach of contract.
Example 2: If you enter into a contract with a software firm to make a software program for your company and the firm does not deliver the software within stipulated time, then it is also a material breach of contract.
Minor Breach of Contract
It is also called an immaterial breach of contract and it occurs when any party fails to fulfill small part of its obligations. In this case, major parts of the obligation are received and only minor parts are missing. The party that have suffered the breach may seek for legal remedy if they can prove that the breach has occurred. In most of the cases it is hard to prove that the minor breach has occurred.
Example 1: If you have purchased a refrigerator and you have well received it with all the accessories but the instruction manual is missing, then it is a minor breach.
Example 2: If you have ordered some goods but your received them late then it is also a minor breach but it is difficult to claim legal remedy for this until you prove that you suffered financial loss due to the late arrival of the goods.
Anticipatory Breach of Contract
Anticipatory breach occurs when a party realizes that they cannot fulfil their obligations under the contract and notifies other party regarding this. It is the least common type of breach but it entitles the party suffered the breach to seek legal remedy.
Example: A contractor has taken up some construction work but after performing some of the part of work, he slows down the progress and put all the resources into other projects then it is an anticipatory breach of contract.
Actual Breach of Contract
This type of breach occurs when a party does not fulfil its obligation fully or partially. In other words, we can say that the actual breach of contract refers to a breach which is actually occurred.
In this case the party that has suffered the breach may pursue legal remedy. The remedy they may seek may be compensation for the damage due to financial losses.
Example 1: If a supplier has not delivered a good ordered by a customer or delivered the wrong item, then it is an actual breach of contract.
Example 2: A residential society has paid advance to install firefighting equipment but the vendor fails to install the equipment, then it is n actual breach of contract.
Reducing the Risk of Breaching a Contract
Although it is very difficult to completely eliminate the risk of breaching the contract by the other party, because you cannot control or predict the actions of the other party, it can be minimized up to a certain extent by taking some precautions.
Drafting the Contract Carefully
One way of doing it is by drafting your contract very carefully. The provisions of the contract should be meticulously chosen and should be in accordance with the potential risk that may occur during the contract execution. One most important thing is that the contract should be made in such a way that it has balanced provisions for both the parties so that no party may think of breaching the contract. The proper remedy, in case of breach by a party should also be incorporated in the contract. The experience of contract management team and the organization is also helpful in it. Proper analysis of past contracts should be made to find out, which clauses can reduce the vulnerability the most. Analyzing the previous case studies of breached contract may provide clear insight and wisdom to create new contracts. Provisions for proper legal remedy to the party suffering the breach has to be given in the contract.
Involve Every Team Member from the Beginning
It is also to be taken care that the team who is involved in contract formation and negotiation should also be involved in the contract administration later on. If everyone is involved in the contract execution from both the parties, less will be the chances of misunderstanding and errors and hence less chances of breaching the contract.
Establish Monitoring System
A proper contract monitoring plan, milestones and clearly defined performance metrics help a lot reducing the risk of contract breach by giving proper indication of any potential breach. If a breach is about to occur or is being occurred by any party, the other party may take remedial or preventive measures to stop the breach.
Ensure Easy Availability of the Contract
Ensuring the easy availability of your contacts is another way of reducing the risk of breaching. If the contract will be readily available and you will refer the relevant clauses frequently, you will have a better contract management. You can take proper measures on the actions of other party and may also warn them against any potential breach.
Establish Alarm and Communication System
A well-established alarming, monitoring and communication system may also be of great use in reducing the risk of contact breach. Suppose you have a system in place which can alarm you in advance before expiry of performance security and also send mail or message to all the stakeholders, this type of breach can be prevented. Similarly, if a system is regularly reporting the progress to all the stakeholders, then everybody in the team is in alert mode and knows what is going in the project. In such a case, the chances of breaching the contract by any party are minimized.
Eliminating the breaching of contract completely is very difficult because the actions of other party cannot be anticipated. However, the risk of contract breach can be minimized by taking the above mentioned measures. Provisions for proper legal remedy to the party suffering the breach should be made available in the contract.