- 10 min read
- BETHANY MULLINIX
Introduction
There are three words no legal team ever wants to hear: breach of contract. Thankfully, breaches are preventable if you’re careful about your contracting methods.
By taking a proactive approach to your contract management processes and carefully tracking obligations, you can ensure all parties hold up their end of the deal.
Keep reading to get a clear breakdown of what you must do to prevent breach of contract lawsuits and avoid heavy penalties.
What is a Breach of Contract?
A breach of contract occurs when a party violates the agreed-upon terms and conditions of a legally binding agreement. The degree of breach can vary depending on the violation and what category it falls into.
Breaches are typically considered minor or major.
- Minor breaches occur when you don’t receive an item or service by the contracted due date.
- Major breaches occur when you receive something entirely different from what you agreed.
Contract breaches also fall into two categories.
- Actual breach occurs when one party refuses to fulfill the terms of a contract.
- Anticipatory breach occurs when one party notifies the other in advance that they cannot fulfill the contract obligations.
Remember that while a breach of contract is not considered a crime or tort, you can still face penalties if a court finds you liable for breaching a legal agreement. These can include:
- Compensation for damages related to the breach
- Additional financial payments for expenses connected to the breached contract
- Reputational damage and potential loss of future business
Even the largest enterprises can find themselves in hot water when breaching a contract. Walmart was fined $19M in damages after a jury found them liable for a breach of contract with a hand sanitizer distributor. Eastern Airlines is facing a $22M lawsuit from The New England Patriots over an alleged breach of contract.
No enterprise is safe from the consequences of a contract breach. But you can take steps to prevent breach of contract lawsuits from landing on your desk.
How to Prevent a Breach of Contract Lawsuit
Keep Contract Wording Clear
Confusion over contract obligations can quickly spiral toward a breach.
When entering into a contract negotiation, closely review the agreement and ensure the language in your contract is clearly defined. From there, make sure every party understands the terms you’re agreeing to. This avoids miscommunication and friction that can lead to breach.
Set Realistic Deliverables
While it would be ideal to fulfill deliverables in a tight turnaround, agreeing to expectations that are too high can put your organization in a difficult spot.
Agree to obligations that both parties can achieve in the agreed-upon time. Sometimes, you’ll need to consult with your internal teams to get expert opinions on achievable timelines and outcomes.
For example, if you’re offering telecom services to a city, speak to your engineering teams to see how long it will realistically take to set up the proper infrastructure for the project. You may have to adjust your contract terms according to their answers to avoid a breach down the line.
Verify the Contract’s Legality
Courts can only uphold a contract that complies with governing laws.
Carefully review your contracts for language that does not meet applicable laws and regulations. If you find non-compliant clauses or unwanted deviations, adjust the language so that the agreement does not violate local, federal, or international laws.
Do Your Research on Other Parties
Knowing who you’re potentially working with can make a world of difference in preventing a breach of contract lawsuit. To this end, vetting your suppliers and vendors must be a core part of your contract risk management program.
Before signing on the digital dotted line, perform some due diligence on the party you’re entering into business with. Find out if they’ve:
- Been involved in a breach lawsuit before
- Failed to pay workers or vendors
- Have a history of not fulfilling obligations
You can save yourself a lot of headaches and trouble if you spot these red flags early on.
How an AI CLM Platform Helps Avoid Contract Breaches
As you work to protect your business from the consequences of a contract breach, AI and now generative AI gives you the power to:
- Centralize Your Contracts – Store and manage all your agreements in a digitized, hierarchical, fully auditable contract repository.
- Identify and Change Risky Language – Use AI to analyze drafts and highlight language that deviates from your company’s position for faster review and negotiations.
- Get AI-Suggested Alternatives – Draw on historical contract data to inform the AI and receive contract language and clause suggestions that improve authoring.
- Set Up Efficient Workflows – Automatically notify business users of upcoming or overdue tasks to keep all parties on track.
- Automate Obligation Management –Monitor performance against contracted milestones, deliverables, and regulatory requirements in real-time.
Optimize Your Contracting Practices to Uphold Your Contractual Obligations
More often than not, you can entirely prevent contract breaches. You just have to be more intentional about your contracting processes and the technology you use to manage your contract portfolio.
Sirion’s advanced AI CLM lets you review and manage your contracts with heightened speed and accuracy beyond manual methods. This way, you know exactly what’s in your agreements and what you can expect to get from them.
Reach out to our team to see how you can use our industry-leading AI to improve your contracting processes for stronger outcomes across your entire enterprise.
Additional Resources
14 Contract Negotiation Strategies and Tips to Empower Teams
6 Types of Risks In Contract Management And How To Mitigate
Managing Contractual Obligations: A Modern Overview
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