In Short
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A contractual undertaking is a firm promise to perform or refrain from a specific act, essentially a binding obligation.
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Breaching that undertaking can trigger serious consequences: termination, damages, specific performance or injunctions, depending on the contract’s terms.
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To manage risk, ensure obligations are clear and achievable, monitor performance closely and get legal review of your contracts.
Tips for Businesses
Keep obligations realistic and clearly drafted, and track performance and document progress. Build in cure-periods and dispute-resolution steps so you can fix issues before they escalate into costly legal claims.
Table of Contents
When you are trading as a small business supplier, you may face several legal and commercial risks that can harm your business and its reputation. Contracts are crucial risk-prevention tools for small-business suppliers across all industries. Robust, bespoke contracts can help your business manage customer-related risks, protect your interests, secure key remedies and both deter and manage disputes. However, commercial agreements must be drafted with care and precision, as the contractual assurances you provide will create legally binding obligations. Business owners need to understand the implications of agreeing to ‘undertake’ and the risks a breach could carry. This article explores the importance of robust contracts, the concept of undertaking breaches in a contractual context and practical strategies you may wish to adopt to protect your small business from contractual risk.
Understanding Commercial Contracts and Breach of Contract Risk Issues
Commercial contracts should be a key business priority, setting out the terms that define the relationship between your business and its customers.
A bespoke and well-drafted agreement can provide both parties with certainty, allocate risk, and help prevent disputes. Conversely, however, vague or poorly drafted contracts can lead to confusion and costly disagreements. Disputes can often arise where key terms (such as pricing, delivery dates or performance standards) are unclear. To minimise risks, it is vital to ensure that your contracts use unambiguous, legally sound wording and that any obligations you agree to are achievable, to avoid your business falling into breach.
A breach of contract occurs when a party fails to perform a contractual obligation, for example:
- missing a delivery date;
- not meeting a quality standard; or
- failing to protect confidential information.
Even accidental failures can amount to a breach.
If your business does not meet its contractual obligations, customers may have various remedies depending on the nature of the breach, the terms of the contract and the remedies available at law. Serious breaches may entitle the customer to terminate the agreement, claim damages or in some cases seek equitable remedies such as specific performance or an injunction. Customers may also rely on contractual rights like withholding or setting off payment if the contract permits. Less serious breaches may be addressed through corrective action where allowed.
The legal consequences depend on the wording of the contract and the particular breach, so it is important to obtain legal advice if your business faces a breach of contract claim.
Download this free Supplier Contracts Checklist to ensure your contracts will meet your business’ needs.
Understanding Undertakings in the Context of Contracts
An undertaking is generally viewed as a contractual promise in respect of future conduct, to perform or refrain from performing a specific act. This differs from a warranty, which is typically a statement that a fact or condition is true.
In commercial contracts, undertakings may include to:
- meet specific project deadlines;
- comply with particular security standards to protect data; and
- always follow specific laws and regulations.
When negotiating a contract, you will need to carefully consider whether you should give such assurances. If you agree to them, you must ensure they are realistic and achievable. Although the word ‘undertakes’ may appear formal, it is generally the same as ‘shall’ or ‘will’.
Given the complexities of breach of contract claims, you should seek legal advice to understand which remedies may arise.
It is also important not to confuse the meaning of an undertaking obligation. The term undertaking also appears in other legal contexts, such as solicitors’ undertakings and undertakings given to a court. These are distinct and carry a unique legal meaning, so they should not be misinterpreted.
Continue reading this article below the formTaking Proactive Steps to Avoid Contractual Risks as a Small Business
To manage contractual risk effectively, your business should focus on preventing breaches before they occur, including compliance with both your undertakings and all other contractual obligations.
Key steps you can take to prevent risk include:
- ensuring all obligations in your contracts are clear and use specific terminology to avoid ambiguity. Ambiguous or overly broad clauses can lead to disputes. Also, ensure you are clear on what obligations particular contractual clauses carry, such as the word ‘undertakes’ and its legal meaning;
- monitoring progress closely, tracking milestones and maintaining accurate written records of decisions, instructions and any variations. Comprehensive documentation may strengthen your position in the event of a dispute and help demonstrate compliance with contractual obligations; and
- include contractual measures that help mitigate risk. These can consist of dispute-resolution clauses that encourage negotiation or mediation before legal proceedings and cure-period provisions that allow your business to remedy breaches before customers can take action. These clauses must be expressly negotiated with customers.
Seeking Legal Advice on Your Contracts and Potential Breaches
It is crucial to make sure you are fully confident in respect of your contractual documents and all obligations therein. Working with a commercial solicitor can help your business understand the legal meaning of obligations (such as any contractual undertakings) and the specific risks that can arise if they are breached. A commercial solicitor can help ensure your terms are both commercially workable and legally sound.
If a potential breach of contract scenario arises, however, it is important to take appropriate steps to address it promptly. If a customer alleges a breach of any contractual term, you should seek prompt advice from a dispute-resolution solicitor who can assess the situation and advise on the most appropriate course of action depending on the circumstances.
Key Takeaways
A breach of contract arises when a party fails to fulfil its contractual obligations. The impact and relevant remedies depend heavily upon the contract’s language and the nature of the relevant breach. An undertaking is a promise relating to conduct, and suppliers should be confident and precise about any undertaking obligations included in their customer agreements. Working with a solicitor can help ensure your contracts are accurate and reduce risk.
If you need help understanding whether you are in breach of a contract, contact our experienced contract lawyers as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 0808 196 8584 or visit our membership page.
Frequently Asked Questions
A small business should adopt robust contracts as a crucial risk-prevention tool when trading. Agreed contractual terms can clarify what you and your customer have agreed, provide legal protection and remedies. Clear written agreements can also help to reduce misunderstandings, manage expectations and protect your business interests.
Allegations of breach of contract can lead to serious financial and legal consequences. A dispute-resolution solicitor can assess the situation, determine whether a breach has actually occurred and advise on the most appropriate steps to take.
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