Whether you are running your first business or your fifth, it is critical to remember the importance of strong, effective contracts. From using clear, concise language to building in repercussions for missing deadlines, contracts represent the foundation of a successful organization. Unfortunately, no matter how well-designed the agreement, a business owner still faces the risk that the contract will be broken.
Here are four types of contract breaches that could negatively impact the efficient operation of a business:
- Material breach of contract: When one party receives significantly less benefit or a significantly different result than was agreed upon, it can be considered a material breach of contract. These breaches can include a failure to deliver or a failure to produce results on time.
- Minor breach of contract: Often called a partial or immaterial breach, a minor breach of contract refers to a situation where one party only delivers a portion of the terms of the agreement. Whether the delivery was late, a portion of the terms were breached or a different product was substituted, it can be said that the contract was violated.
- Anticipatory breach of contract: Although the breach has not technically occurred, one party has indicated they will not fulfill their obligations.
- Actual breach of contract: Conversely, an actual breach of contract occurs when the terms of the agreement were broken. In this scenario, numerous events could have triggered this result – one party refused to fulfill their obligations by the due date, or the party performed their duties incompletely or incorrectly.
Business owners can take numerous steps to reduce the risk they face. Unfortunately, there is no way to eliminate the risk altogether. The first step that many organizations take is to carefully analyze past contracts. It is important to look both at the contracts that were fulfilled with no issue and the contracts that were breached. By using these as guidelines, some parallels might be drawn from past contracts in the drafting of new contracts.
Do not hesitate to seek guidance when drafting, reviewing or negotiating a business contract. Whether it is a buy-sell agreement, lease agreement, employee handbook or vendor contract, it is wise to work with an experienced attorney.