The ramifications of a breach of contract in a strategic and/or complex project/service delivery relationship can be significant to your organisation, your supplier’s business, and for everyone who is relying on the completion of the project you’re working on or the delivery of services that you’re responsible for.
Therefore, the purpose of our article is to explain, in clear and direct terms: 1) what a breach of contract is, 2) how to take reasonable steps to avoid you and your supplier breaching your agreement in the first place, and 3) what to do if, despite your best efforts, they still do.
What is a breach of contract?
As the term would suggest, a breach of contract is when one or more parties to a legally enforceable agreement don’t deliver or act with what was agreed in line with the rights and responsibilities they signed up to in that agreement. This may include issues such as the fitness for purpose of the supplier’s advice, quality of delivered work, non-payment of an agreed sum or significant project and/or service delays meaning delivery is outside of the agreed schedule.
A breach can typically be classified in one of four ways:
- Minor Breach. Failure to fulfil a minor obligation or fulfilling that obligation in a way that’s outside of the specifics of the agreement. Importantly, it is likely these types of breaches do not have a materially adverse impact on the project or service being delivered.
- Material Breach. Failure to fulfil an important obligation under the agreement which is likely to have a materially adverse impact on the benefit the other party expects to achieve or receive.
- Anticipatory Breach. A party presents an intention (through word or actions) to fail to fulfil its obligations under the agreement at some point in the future.
- Repudiatory Breach. A party’s actions make future obligations to achieve the whole of the benefit of the contract unlikely to be fulfilled. This breach may be so serious that it goes to the root of the agreement.
Any party to a contract can cause a breach and that breach can be in part of an obligation or a whole obligation that they signed up to.
It’s important to note that often ‘it takes two to tango’. It may be argued by the other party that something you did, or did not do, directly or indirectly, impacted on their ability to perform their duties. It is, therefore, vital that, should you believe a breach has occurred, you undertake a thorough audit of your own team’s actions so you can a) identify any opportunities for the other side to make such a true and valid claim, b) promptly remediate any of your own performance issues, and c) where your independent audit of your own actions evidences that there is little or no merit in the other side’s argument, then to clearly present that evidence in order that the other side can evaluate it, as well as d) determine whether the pursuance of a breach of agreement claim would be a worthwhile exercise to undertake.
Seven actions you can take to avoid a breach of contract
We’ve put together our top seven suggested actions to take to avoid a breach of contract in the first place and what to do if the time for prevention has passed and you need to know what to do next.
How to avoid having your supplier breach your contract in the first place
We have already written an article on the key steps to a remediation process, so we thought it might be useful to offer a few suggestions for steps to take in the hope of sidestepping that particular pitfall.
Action 1: Collaborative behaviour-oriented contracts
A ‘fit-for-purpose’ contract is one that both clearly defines and articulates the outcomes a supplier should be delivering and one that is drafted to drive truly collaborative behaviours. The former offers insights into the destination, whereas the latter provides clear mechanisms through which the right behaviours are rewarded, and the wrong ones are realigned, based on a deeper understanding of your strategic partner and their triggers and motivations.
To expand on this, a fit-for-purpose contract usually contains:
- A clear definition of the broad ‘future state’ you are looking to achieve
- Quantifiable business objectives the project was initiated to achieve
- Specific responsibilities and behaviours expected of all parties
- Realistic, achievable and reviewed KPIs to measure performance and progress
- Language that minimises misunderstandings and maximises potential for collaboration
- A clear escalation and remediation process
- At least a twice-yearly review and refine process to identify opportunities for improvement in the agreement.
Action 2: Documents required to monitor contractual progress
The risk of a supplier breach can be significantly reduced if all parties have crystal clear clarity about what’s expected of them and progress towards those goals can be regularly monitored. The four primary documents in your strategic relationship which promote effective contract management are:
- Operations manual. It’s a reference guide to all the information you’ll need for the day-to-day management of your contract – it needs to be updated with any significant project changes and should be reviewed regularly.
- Monitoring calendar. For maintaining a record of progress for all parties, and their subcontractors, against their contractual responsibilities.
- Financial monitors. Maintaining a dedicated system to monitor all your financial transactions within the project. On more complex financial projects, such as PFIs, you would also have, as a minimum, your sinking fund tracker, monthly unitary charge profile, variations register and end-user contributions profile.
- Risk register. A record of all the risks identified within the project/relationship and the preventative actions that could be taken to mitigate them.
Action 3: Standard filing structure for ease of access
Complex strategic relationships are managed by a significant amount of documentation. The easier you make it for parties to access the contractual and progress information they need, when they need it, the more likely and able they are to keep up with their obligations under the contract. This can be achieved through:
- The use of a standardised filing structure
- Meaningful titles to simplify access
- Current and non-current files should be kept in separate folders
- A register of all correspondence
- Copies of key emails saved to relevant folders.
How to handle a breach of contract should it occur
Even with the greatest of care, a breach can occur, though what led to that breach, the significance of it and how you take move forward from this point, will all have a hand in determining the seriousness of the situation you now find yourself in.
Action 4: Gather evidence of a breach of contract
Whether you are looking to resolve the matter through negotiation, use your contract’s remediation process or terminate your contract early, you will need objective evidence of your supplier’s breach. This can be obtained in five steps:
- Breach basics. What was it that the supplier did to breach the contract, when, how many times and what have been (or are expected to be) the business/operational/financial consequences of that breach?
- Contract basics. Are all of the terms you’re relying on to evidence a breach – such as quantified benefits, implementation plans, time schedules and so forth – expressly documented within your agreement or are they implied?
- What has it cost you? What benefits were you expecting, what evidence have you that those benefits were observed by your supplier within the process, and what losses have you suffered as a result of the breach. Keeping a tally of all additional work, workarounds and costs is important.
- Who is responsible? Thoroughly review your contract to determine who was responsible for what, what your supplier did and did not complete, taking into consideration any change requests, and assessing if you contributed in any way to their lack of delivery?
- Duty to warn. Can you evidence that your supplier had ‘expert responsibilities’ that they did not execute? Did you rely on their advice and did your supplier execute their duty of care to you as they would be expected to do as experts in their field?
Action 5: Check your business case for early termination
Do not jump to exit your contract without first checking the risks and costs of doing so even if a breach has taken place and you have the evidence you need to terminate early. Essentially the rewards of doing so must outweigh the risks, so far as they can be estimated.
- What does your contract say? Are you terminating ‘for cause’ or ‘for convenience’ and are there provisions within your agreement to allow for whichever is your course? How do the terms of your contract drive your relationship as it goes through the termination process to smooth the transfer to another supplier or in-house.
- The detail of your termination terms. How well you constructed your contract will determine the convenience with which you are able to terminate your agreement – information transfer, access to premises, access to supplier personnel who have been working on your project, access to software and equipment post termination, and so forth.
- Financial considerations. Does your supplier have the assets or appropriate insurances to cover the claims you might make against them and what sort of claim would you make – reliance losses which would put you back in the position you would have been in if you hadn’t undertaken the project in the first place, or expectation losses which put you in the position you would have been in if the supplier had delivered as expected.
- Other considerations. There are many other issues to consider before determining whether to terminate your contract, including what would happen if your supplier refused to cooperate during the termination period, whether the views of all stakeholders on the project do not align, and so on. It is vital that not only immediate impacts, but also the domino effect of a termination are considered in developing your business case for an exit.
Action 6: Communicating your wish to terminate with your supplier
You may have determined, given all the factors in the development of your business case for it, that an early termination is the best course of action. However, how you proceed from here will define whether your supplier becomes a collaborative partner in the process or an obstacle that will cost you far more than you’d expected. It’s important to:
- Follow formal contract termination process
- Take appropriate legal advice
- Initially send a ‘letter before action’ outlining the expectations and issues
- Speak to your supplier – do not let your termination letter arrive ‘cold’
- Maintain evidence of termination letter being sent and received.
Action 7: Negotiating an early termination
While there may be times when the termination of a relationship may be greeted with relief by a supplier, the majority of the time it will be something they may resist or react defensively to. It is, therefore, important to approach your early termination negotiations with them in the right way.
- Know your audience. Who will be in the room, what are their thoughts, feelings, motivations? The more you know before your meeting the better you can prepare.
- Prepare your case. This is not a time for accusation and counter accusation. You want to present clear evidence (as much as possible) and an independently validated case, one they will have to consider carefully on its merits. So, gather your evidence, check your facts and cover all bases.
- Prepare for the counter-argument. Your supplier is likely to push back; they may have evidence that your team’s actions have contributed to where you find yourself. Check and double check your own actions to consider any counter argument in advance.
- Control your emotions. The likelihood is that the room will be emotionally charged. Do not add to this. Keep calm, nerves may be frayed on both sides, but remain professional, and remember that your goal is not to blame, it’s to pragmatically assess the validity of all appropriate evidence and find an amicable way through.
- Agree timeframes and milestones. If you can get your supplier onboard with the exit, you should look to agree the date of exit, the way all parties should approach the transition process, your supplier’s handover responsibilities to the new team, costs all parties have agreed and confidentiality, should certain conditions be met.
A contractual breach may be insignificantly small or catastrophic for your project. So, from start to finish it is vital to prioritise a thorough analysis of what has happened, the ramifications of action and inaction and the processes built into your agreement for dealing with such an event.
Equally, your response to the breach of contract should be appropriately measured to achieve the goal you set for the future of your relationship with this supplier – to adjust and realign or to exit at a pace that leaves you with a safe landing.
Should your organisation require guidance on any of the points above or if you see value in a confidential (no obligation) chat about your project, call 0845 345 0130 or you can book a call directly with Allan Watton (BPG’s CEO) using the calendar feature here.