A contract serves as a means of clarifying obligations between multiple parties and formalizing business agreements. Organizations sign contracts when they hire new staff members, make arrangements with new vendors and agree to complete projects for clients.
Most business contracts lead to their anticipated outcomes, with all parties fulfilling their obligation to the others. However, there are some businesses, contractors and customers who fail to follow through on their contractual obligations. They don’t send payment after receiving services. They don’t show up to work on a project or they fail to deliver goods needed for an upcoming production run.
Breach of contract claims can lead to civil litigation and damages for the party affected by the breach. With that said, it is usually better to avoid a contract issue than to have to deal with the stress of holding someone accountable for causing one. Considering a contract inclusion may help to significantly reduce the likelihood that a major contract issue will occur in the first place.
Businesses often add non-performance or delay penalties
There is an implied consequence in any contract. Those who do not fulfill their end of the bargain could face litigation and numerous consequences, including responsibility for any damages suffered by the other party as a result of their failure.
However, some parties will take the gamble of losing a case in court because they know that many parties will not seek to enforce a contract after a breach. Including penalty clauses that impose financial consequences for delays in delivery or payment can help keep people in compliance with a contract. After all, they will have to pay more if they delay the fulfillment of their obligations.
There can also be cancellation penalties assessed in a situation involving outright nonperformance. One party can impose a penalty and even invalidate the contract based on the nonperformance of the other. When there is a set financial cost that someone must cover after breaching the contract, they may be more likely to follow through with the agreement.
In theory, those penalties will only add to the financial consequences of a contract breach and could increase what a judge awards in a successful lawsuit. Including thoughtful terms in every contract will both reduce the chances of business litigation and increase the value of any lawsuit filed related to contract breaches. Seeking legal guidance concerning contract construction can be helpful for these reasons and more.
