Entrepreneurs have a lot of things on their minds and the risk of contract breach to their small business is rarely one of them. They want to keep things simple. That’s great. But when it comes to your contracts, simple could mean vulnerable. Business relationships tend to be casual until there’s a problem. Here are our tips to make sure you are doing everything you can to reduce the risk to your company.
Small Goof-Up, Big Problem: Contract Breach for Small Business
When we ask small business owners what they love about their jobs, they usually say the same things:
- I like to be involved in day-to-day operations.
- I don’t like to be too corporate; too stuffy.
- My team is like family (and sometimes, they actually are family)!
They’re admirable goals. But let me tell you that if you don’t get #1 right, you might not have a business to run. Small business owners sometimes avoid detailed contracts because they prefer a “handshake agreement” or an “email contract.” They don’t want to seem stuffy, or they don’t want to get mired in details.
That seems fine until something goes wrong. Then the details matter.
DMSHB business litigation attorney Matthew Schaap says small business owners often fail to take contracts seriously. He says many treat them like most consumers do: When presented with a wall of text, they sign what they are given. Of course we’ve read 98 pages of terms and conditions in three-fourths of a second, right?
“Over time, business owners develop anecdotal evidence that reading contracts is not important. In other words, if the failure to read contracts does not result in a tangible consequence, for example, a lawsuit, business owners reason that their relaxed contract practices must be satisfactory,” he writes
“This logic tends to prevail over better judgment, right up to the point when contract litigation begins. It is usually at that stage that regret takes hold, and questions begin.”
For some small businesses, the costs of breaching a contract can be astronomical. It’s not just the cost of the contract in play but potential damages and legal fees, which your company could be expected to pay if found to be in breach. Together, they can put your entire company at risk. You might find yourself without a day-to-day operation to run, or a team to call family.
Poor contract management can also put you at risk personally. If it’s not clear that you’re signing on behalf of your company or if you eschew certain corporate formalities, the creditor can go after your personal assets as well as your business.
What are the Most Common Contract Breaches for Small Businesses
There are four main types of contract breach and they diminish in severity:
A material breach is a failure to perform the duties set in the contract. For example, say you run a company that makes uniforms. You have signed a contract to produce 100 uniforms comprising black pants and a light-blue shirt with the company’s logo on them. If you don’t make the uniforms, or deliver them late without a contract amendment, your company has made a material breach.
A fundamental breach happens before the deadline when one party can see the contract going off the rails. Say your designer sent samples of an early version to the client but they were the wrong fabric, the wrong color, and the wrong company logo. Should negotiations break down at this point, the client could sue your company to make sure it delivered what your contract promised.
An anticipatory breach allows one party to say the contract is unfulfillable, and sue for damages. For example, if it’s less than one week out from the deadline before your company even engages a designer for the uniforms, the client could claim you couldn’t possibly fulfill the contract (though they would have to prove it).
A minor breach is one that doesn’t put the entire contract at risk. If you delivered the uniforms to the client’s head office instead of the one in the contract, that would be a minor breach. Even if you picked them up again and delivered them to the right place, you may be up for damages because of the client’s wasted time and energy. One important thing to note is that one man’s minor fudge is another man’s major disaster. The difference between pearlesque snap closures and buttons might not matter to you but it might to your client. And it will be your contract that a court uses to decide who is right.
How Small Businesses Can Avoid Contract Breach
That’s all bad news, right? So what can be done to avoid contract breaches for small businesses like yours? The best protections are to have good contract lifecycle practices and tools that support a 360-degree view of your contracts.
Good Contract Management Practices
The best way we have found to mitigate problems down the line is to have a good contract process from the start. The Contract Management Lifecycle establishes a one-way path that we know from experience is the best way to manage contracts for small businesses. It goes from request through review, redlining, approval, to execution, storage, audit, and renewal.
Get a 360-Degree View of Your Contracts
Remember when you said you wanted to be involved in the day-to-day? That’s great but what happens when you can’t be? Docusign figures show 65 percent of businesses say poor contract management caused delays closing deals, and 37 percent reported those deals were more expensive as a result.
Your company needs tools that give you and your team visibility to what contracts you have, what is required of you, and how fulfillment is going. Contract management platforms, like Anapact, will keep you on track with a single source of truth about the state of your contracts.
Anapact comprises a contract repository, redlining and collaboration tools, role-based permissions for security, and the ability to automate and integrate workflows with your ERP tools. It was built by a small business for small businesses like yours. Get a demo.