At some time, issues with vendors or customers may escalate to the point where you need to claim a breach of contract. And as you know all too well, legal battles can be extremely costly.
But knowing and educating your finance team on the finer points of these claims will serve you well in the event you do need to address such an issue.
What constitutes a breach?
According to the experts, a breach of contract happens when one party:
- refuses to perform its contractual obligations (e.g., won’t honor an agreed-upon discount)
- does something prohibited by the contract (e.g., doing business with another company if there’s an exclusivity clause), or
- prevents another party from performing its contractual obligations (e.g., doesn’t send the product, so A/P can’t pay the invoice).
What are the levels of severity?
You’ve likely encountered both small hitches and major problems. Likewise, a breach of contract can be immaterial or material, explain the experts at Vethan Law Firm.
An immaterial breach is less serious – and doesn’t “irreparably break” the contract. Here, you and your trading partner may be able to sort things out on your own. A material breach is more serious – and is good cause to take your case to court. Perhaps you tried to resolve the issue to no avail, or both parties believe the other is in the wrong.
However, even if the matter is serious, sometimes courts will excuse a material breach for one of the following reasons:
- The breach stemmed from a “mutual mistake” regarding a contract term.
- A party didn’t have the “authority or capacity” to sign the contract in the first place.
- A party entered the contract due to fraud.
- The contract is totally unfair or unacceptable.
- The contract pertains to illegal activities.
How can Finance avoid them to begin with?
Being prepared for a breach of contract is great – but you know it’s even better to avoid one altogether.
What’s usually the cause of these claims? Miscommunication, the experts say. From the start of every vendor relationship, you’ll want to be sure A/R, A/P and Purchasing clearly communicate:
- both parties’ individual obligations
- when and how obligations must be changed/delayed, or
- when obligations can’t be met.
In addition, Vethan Law Firm offers these tips to steer clear of issues:
- Know the contract. As mentioned, A/R, A/P and Purchasing should all have a strong understanding of exactly what’s expected from both sides in every contract. If something’s unclear, it should be addressed immediately. And it’s a good idea to have staffers ask if the other party has any questions or needs clarification, so you can avoid “but we thought…” or “we didn’t know…” conversations.
- Follow the contract. It seems rudimentary, but it’s worth reiterating: The more closely your staffers stick to the terms, the more favorably a court will look on your company.
- Document communications and activity related to the contract. Anything in writing is fair game to be used in court, the experts say. That’s why having a documentation trail of everything – contract drafts, emails, etc. – is essential. You may even want to record and transcribe meetings or phone calls if you foresee future problems with a trading partner, experts recommend.