A Guide to Contract Disputes
A contract outlines the terms of a legally binding agreement between two parties. Ideally, it covers exactly what each party is responsible for and the consequences if one side doesn’t hold up their end of the contract.
Unfortunately, even with a solid contract in place, both parties don’t always agree on the terms and conditions. When this happens, one of the parties may dispute the contract.
What Are Contract Disputes?
A contract dispute is a disagreement over how parties interpret or carry out the terms of a contract. It often occurs over issues related to the following:
- Fulfilling contractual obligations
- What specific terms mean
- The standards of performance in a contract clause
Most Common Types of Contract Disputes
Contract performance disputes can pop up regarding any element of a contract. But, the most common types of disputes occur because of the following reasons:
Breach of Contract
A breach of contract occurs when one party doesn’t carry out their obligations according to the contract. It can refer to any part of the contract and usually falls into these categories:
- Material breach: A material breach is severe enough to render the entire contract useless. It’s also called a fundamental breach, as it defeats the entire purpose behind making the contact. An example of a material breach is if a person hires a company to cater an event, but they don’t show up. If one party commits a material breach, the other party can end the contract and seek damages.
- Minor breach: A minor breach of contract is also called a partial or nonmaterial breach. This type of breach is less significant. It also doesn’t completely defeat the purpose of the contract. A good example of a minor breach is if a web developer builds a website but delivers it two days later than promised. In case of a minor breach, the non-breaching party can seek compensation for damages related to the breach.
- Anticipatory breach: An anticipatory breach, or repudiation, happens when one party lets the other know that they’re not going to fulfill the terms of the contract. It can happen through words or actions. For example, someone may have a contract to buy a house in 60 days, but the owner sells the house to someone else before then. In this case, the non-breaching party can treat this as an immediate breach and seek damages.
- Actual breach: An actual breach occurs when one party fails to perform their duties or does so incorrectly. Unlike an anticipatory breach, an actual breach has already happened. And once it happens, the non-breaching party can seek damages.
Unclear or Ambiguous Contract Language
Vague language in contracts is a frequent source of contract disputes. Some words mean different things to different people. For example, two individuals can interpret “reasonable effort” in two ways.
The more clearly the party expresses the terms, the less room there is for misunderstandings. If the parties don’t include how they’ll handle specific situations, it can lead to disputes. Another way ambiguity can cause disputes is if conflicting clauses don’t state which should have a higher priority.
To avoid contract disputes from unclear or ambiguous language, do the following:
- Use clear and precise language: Avoid using vague terms people can interpret differently. Define key terms so there’s little room for confusion.
- Be consistent: Check the contract thoroughly for any inconsistencies. Make sure terms and expectations are the same in all sections and clauses.
- Take a collaborative approach: When drafting the contract, take input from all parties so everyone is on the same page. A collaborative process can cut down on possible misunderstandings and disagreements.
- Seek professional help: Seek contract examples and templates for your situation. Have a contract lawyer review contracts for unclear terms that could lead to disputes.
Errors and Mistakes
Errors and mistakes in contract terms can lead to disputes and legal issues. They can cause misunderstandings about the contract’s requirements. Some common missteps in contracts include the following:
- Clerical errors: Mistakes in data entry, arithmetic, and writing are clerical errors that cause disputes. For example, one party can enter the wrong date in the contract.
- Misunderstandings: Misunderstanding can sometimes cause one or both parties to make an error. For example, the contract may call for a supplier to deliver batteries of a specific wattage to a manufacturer. However, the manufacturer may believe they need a lower wattage than they do. That misunderstanding can lead to the delivery of useless batteries.
- Drafting errors: The contract can sometimes fail to reflect what the parties agreed upon. It usually happens because of a breakdown in communication during the drafting process.
The Contract Dispute Resolution Process
Going to court isn’t always necessary to resolve contract claims. Many contracts outline a process for resolving disputes. In that case, the parties have to abide by the dispute resolution terms included in the contract.
Typical contract law dispute resolution measures include the following:
Negotiation and Communication
Contract negotiations and communication are the first steps for alternative dispute resolution. They come before one party decides to escalate to more formal legal proceedings.
For example, if one party commits a minor breach, the non-breaching party may suggest a solution on how to remedy the situation. The breaching party may counter with another offer. The process may continue until both parties reach an acceptable solution.
Negotiating is voluntary and non-binding. At least until both parties reach an agreement and sign it. It also allows the people involved to have more control over the outcome. With negotiations, they can tailor the new conditions to suit their primary interests. Negotiations can also remain private and confidential. This can be important when dealing with intellectual property.
Effective communication and negotiation eliminate the need to involve mediators and courts. By doing so, they also reduce costs for everyone involved. However, if the parties can’t agree to fix the problem themselves, they may have to use an impartial third party.
Here are some tips for effective negotiation and communication:
- Prepare well: Everyone should know their rights and obligations under the contract. They should also consider what they need to make the new terms work for them.
- Listen actively: Be open to what the other party is saying. Try to understand their perspective and needs. Even if the parties disagree, they can get closer to agreeing if they both understand the other’s position.
- Communicate clearly: Each party will get the best results by clearly communicating, particularly about what is and isn’t possible. Emotions can run high during critical negotiations, but being respectful and calm will help avoid conflicts that could break down communication.
- Look for win-win solutions: Neither party will agree to terms that go against their interests. Since negotiating is voluntary, each side needs a reason to participate. Although one party may be the injured party, negotiating a resolution is often best for both sides. If the non-breaching party uses litigation, they’ll have less control over the outcome.
- Know when to quit: While negotiating can be effective, sometimes both sides can’t agree. If both parties have put forth a good-faith effort and can’t reach an agreement, it’s time to escalate. If one side isn’t willing to negotiate, the other must move to the next level.
Mediation
Mediation goes a step beyond negotiation by involving a neutral third party. It’s a middle ground between negotiating and more formal legal proceedings such as arbitration or litigation.
A mediator works with both contracting parties to help them reach an agreement for contract dispute resolutions they can both agree to. Like negotiation, mediation is usually voluntary. It aims to create a cooperative environment.
In mediation, the parties involved control the outcome. Neither side has to agree to a solution the mediator suggests. Mediation is often more flexible than formal proceedings, which can benefit both sides. Mediators can help the parties come up with solutions that are more customized than what a court will offer. It’s also usually less expensive than going to court since you don’t need a contract dispute lawyer.
Arbitration and Litigation
If the parties can’t voluntarily agree to a resolution in a contract dispute through negotiation or mediation, they’ll need to go through a more formal process for the dispute claim. Arbitration and litigation are the methods for resolving contract disputes through the legal system.
Arbitration is similar to mediation in that the conflict goes to a neutral third party. However, the decision an arbitrator makes is legally binding. The arbitrator assumes the role of a private judge. They look at the contract and listen to each side before they decide on the outcome.
Although the process is more formal and binding, the parties still have more control over arbitration than with litigation. They often have a say in choosing the arbitrator, who may be an expert in a relevant field.
If a contract dispute goes to litigation, each party will need lawyers for contract disputes. A judge or jury will listen to the case and make a binding decision. Formal legal rules govern litigation, and the court enforces the results.
Litigation is the most expensive and time-consuming option for contract dispute cases, so it’s a good idea to exhaust all other options first.
Future-Proof Your Contracts With the Right Tool
The best way to prevent mistakes that can lead to costly legal disputes is to draft your contracts carefully. The good thing is that tools such as contract management software can help. You can use them to create business contracts that will protect your interests in case of contractual disputes.
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