How Common Are Contract Violations and How Much Do They Cost?

No matter your industry, your business works with third parties. It’s completely impossible not to, and there’s a good chance you have contracts with each of those parties. They’re standard procedure, and they exist to help everyone involved. What might surprise you is that even with contracts in place, companies violate terms on a somewhat regular basis. It’s not necessarily malicious, but contract violations are a normal thing, and they can cost you a lot of money. Learning about the violations and how to deal with them can lead to big changes in your financial statements.

Contract Violation Statistics

Let’s paint this picture with some numbers. According to the Bureau of Justice, there are more than 27,000 contract violations that go to court every year in the United States. This applies to multiple forms of breaches, and it largely impacts small businesses and individuals (although medium and large businesses are far from immune). Almost 20,000 of these issues go to jury trials every year. On average, plaintiff winners are awarded $1 million and up. On top of that, juries favor plaintiffs a little more than 50 percent of the time. That means that every year, courts award more than $10 billion in contract violations. That’s a big chunk of cash.

It’s also important. Contract violations almost always cost the victim money. These awards help to offset those losses and remedy situations that can be pretty bad for the affected.

Common Types of Violations

With contract violations costing so much money, it’s important to understand a little more about what they are and how they can be classified. According to Rocket Lawyer, contract breaches can be split into four groups: actual, anticipatory, minor and material. Let’s look at what these terms really mean.

Actual Breach

An actual breach occurs when a party outright refuses or fails to honor a contract or component of a contract within the specified time frame. That sounds pretty open-ended, so consider an example. Say you have a contract with an IT company to repair hardware problems that afflict your business. Let’s also say that the IT group certifies their repairs for 90 days. Now, you have something fixed and it breaks before that time limit is up. If the IT company doesn’t honor their warranty, then this is an actual breach.

Anticipatory Breach

An anticipatory breach is similar in principle to an actual breach. The primary difference is that an anticipatory breach occurs when the contracted party announces its intention to violate the contract.

If you hired an MSP to handle major software deployments, they would probably schedule a set time (maybe a full weekend), to roll out a significant deployment and possibly test it. They’ll usually want to do this when the downtime will minimally impact business, so you’ll work with them to schedule the deployment ahead of time. If they back out of their commitment before the scheduled date (maybe they accidentally overbooked a weekend), they have committed an anticipatory breach of contract.

Minor Breach

Contrary to the name, this does not signify that the breach had a minor impact. Instead, it means that the contents of the contract are delivered, but some component is neglected or incorrect.

You probably have a contract with a telecom company for internet services. Let’s assume they promise 95-percent up time on those services (real promises are often higher, but this is a simplified example). If you track downtime and find that you’re only getting 90-percent uptime, you have found a minor breach.

What’s important to understand is that the missing five percent can be extremely important. If you’re having internet outages during peak business times, you could be losing a lot of money. Minor breaches are often big deals.

Material Breach

The fourth category occurs when the executor of the contract outright fails to deliver what is promised. They might deliver something, or they might completely flake on the contract, both are violations.

Let’s say you purchase a subscription to new accounting software. The promise is that the new software comes with advanced billing features that allow you to make deposits and withdrawals within the application itself. After you use the software, you find that it has nice spreadsheets and good tools, but it doesn’ support deposits and withdrawals at all. What you have is not what you were promised. It’s a material breach.

Dealing With Violations

Now that you know so much about contract violations, you need a plan to resolve them. This usually comes in two stages. The first stage is identifying the breach. This is more than just noticing something is wrong. It’s a process of meticulously documenting the problem and appropriately informing the other party of dissatisfaction. A TEM audit is great for this. In going through all of your contracts, the audit will analyze the performance of vendors and third parties to ensure that they are living up to their contracts. If not, the failures will be properly filed.

The second stage is pursuing recompense. Corrections to the violation and concessions can often be negotiated without having to go to court. If you find a satisfactory resolution, that’s the end of it. In extreme cases, a lawsuit may be necessary to recover damages. TEM can help you in either case. They can try negotiating a resolution on your behalf. If that fails, they can help you pursue legal action. The systematic documentation of your TEM services will prove invaluable in the case of a trial by jury.

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ABOUT THE AUTHOR: VICTOR H.

Victor brings nearly ten years of enterprise and SMB sales experience in the information technology and software space. Prior to joining Valicom, he served as regional channel sales manager working for one of the industry’s largest enterprise labeling software companies. With a focus on great customer service in helping channel partners grow their businesses, Victor joined the Valicom team in late 2015 after relocating to the Madison area. Victor holds a bachelor’s degree in Communication from UW-Milwaukee, and when he’s not in the office he enjoys exercising, travelling abroad, and spending time with his growing family.