Breach Of Commercial Contract Explained — What Business Owners Should Know

From construction operations to large-scale manufacturing corporations, commercial contracts are the backbone of business relationships, ensuring that agreements between parties are clear and enforceable. These commercial contracts cover various aspects, from the supply of goods and services to complex distribution and manufacturing agreements. 

In this blog, we’ll outline the common reasons for disputes in commercial agreements and explain common remedies for a breach of contract so that you can navigate these issues with confidence. 

Five common reasons for commercial contract disputes 

While no business wants to find itself in these situations, contract breaches appear all too often. In most cases, these disputes can be resolved quickly and amicably, benefiting both parties. Let’s examine the common instances of commercial contract disputes: 

• Non-performance or delayed performance 

One of the most common reasons for commercial agreement disputes is the failure to perform obligations on time or at all. This could be due to delayed deliveries, incomplete services or consistent failure to meet agreed standards. 

For instance, in a supply agreement, if the supplier fails to deliver goods within the agreed time frame, it can disrupt the buyer’s operations, leading to a breach of contract. Non-performance can also occur in service agreements when a provider does not deliver the promised services, causing operational setbacks and disrupting cash flow. 

• Defective goods and services

Another frequent issue is the supply of defective or substandard goods or services. In manufacturing agreements, for example, if the products delivered do not meet the specified quality, it can lead to significant financial losses and breach of contract claims. This can be particularly detrimental in industries where quality control is critical, such as pharmaceuticals or high-tech manufacturing. Defective services can also cause considerable harm to the business, especially if they lead to a chain of operational failures.

• Disagreement or misunderstanding in terms 

Sometimes, parties may interpret previously agreed-upon contract terms differently, leading to disputes. This is particularly common in complex agreements like distribution agreements, where the terms might be subject to varying interpretations. Ambiguities in contract language can lead to misunderstandings, with each party believing they are entitled to different rights and obligations. These disagreements can escalate quickly if not addressed promptly and clearly by legal professionals.

• Financial issues 

Financial difficulties, such as insolvency or cash flow problems, can prevent a party from fulfilling their contractual obligations, resulting in breaches. In service agreements, a company facing financial strain might be unable to pay for services rendered, leading to disputes. Financial instability can also cause a cascading effect, where one breached contract causes further financial troubles, leading to more breaches and disputes.

• Sudden changes in circumstances

Unforeseen circumstances such as natural disasters, changes in law or market conditions can affect the ability of parties to perform their contractual obligations. For example, a sudden change in import regulations might impact a supply agreement, leading to a breach.

Similarly, natural disasters can disrupt supply chains, and changes in economic conditions can alter the feasibility of contract terms. These factors, often beyond the control of the contracting parties, can significantly impact a party’s ability to fulfil their obligations. 

Process for resolving breaches of commercial contracts

Should you find yourself in the middle of a contract dispute, understanding the next steps is essential for a successful outcome. Here are some formal and informal remedies you may undertake for your case:

• Negotiation and mediation — Typically, the first step in resolving a breach of contract is a negotiation between the parties involved. Having a legal professional oversee this process is highly recommended, as it can help clarify misunderstandings and reach a mutually acceptable solution without escalation. Mediation, involving a neutral third party, can also be an effective way to resolve disputes amicably and can save time and costs associated with formal legal proceedings, keeping the case outside the courts. 

• Review and amendment of contract terms — If the breach is due to unclear or disputed terms, reviewing and amending the contract can help prevent future disputes. This process involves revisiting the contract terms, clarifying any ambiguities and ensuring that both parties agree on the revisions. Regular commercial contract reviews can also help ensure the revised terms remain relevant and practical for both parties.

• Arbitration — In some cases, commercial contracts may include an arbitration agreement, requiring disputes to be resolved through arbitration rather than court litigation to preserve confidentiality for the involved parties. Arbitration is generally faster and more cost-effective than court proceedings and involves an arbitrator who makes a binding decision on the dispute.

• Settlement agreements — Parties can also choose to settle the dispute out of court by entering into a settlement agreement. This agreement outlines the settlement terms, including any compensation to be paid and any actions to rectify the breach. 

• Formal legal action — When all non-escalating remedies fail, formal legal action may be necessary. As it can be costly and time-consuming, formal legal proceedings are generally viewed as a “last resort”. This involves setting up a case for the breach of contract, where the aggrieved party seeks compensation for damages caused by the breach. The court will examine the contract terms, the nature of the breach and the evidence presented before making a ruling. 

Don’t do it alone — choose ADVIILAW to manage your commercial dispute case

Whether negotiating settlements, amending commercial, business or property contracts or confidently representing you in court, look no further than the capable team at ADVIILAW. We are a trusted partner for many businesses in managing and resolving commercial contract disputes, ensuring operations continue to run smoothly and efficiently. To discuss your commercial contract dispute, please contact us today.