Navigating breaches of technology and commercial contracts

For businesses, these agreements can include sale of goods contracts, services contracts, terms and conditions, software licensing agreements, hardware supply contracts, IT outsourcing arrangements, IT consultancy contracts, systems integration contracts and cloud computing contracts.

Contracts and agreements serve as the foundation for collaboration between tech companies, developers, suppliers, and consumers.  They define rights and responsibilities, give frameworks to IT projects, mitigate cybersecurity risks and help safeguard data and intellectual properties.

However, in the realm of rapid technology advancement, even the most meticulously drafted contracts may not address the shifting regulatory landscape and other unforeseen business challenges.  When breaches occur, they can derail critical projects, disrupt operations, and, in some cases, lead to litigation or arbitration.

What constitutes a breach of contract?

A breach of contract occurs where one party, the defaulting party, fails to perform its contractual obligations.  The failure may arise from either:

• An actual breach, where the defaulting party fails to perform its contractual obligations entirely or delivers a defective performance, for example if a vendor missing deadlines for hardware repair or delivering software that does not meet agreed requirements;
• An anticipatory breach, when the defaulting party refuses to, or otherwise makes it clear that it will be unable to, fulfil his contractual obligations, for example if a cloud service provider refusing to provide the agreed cloud storage capacity before the due date.  It should be noted that an anticipatory breach occurs before the fixed time for performance; or 
• A repudiatory breach, when either an actual or anticipatory breach may constitute a repudiation of a contract, which gives the innocent party a right to elect whether to bring the contract to an end or to affirm the contract and continue.

Common breaches of contract include the failure to meet development milestones in software projects, failure to deliver goods by deadlines, deliberate refusal to make contractually agreed payments, deployment of defective or non-compliant technology solutions, unauthorised or excessive use of licensed technology, disputes over stipulated service levels, quality of system performance and inadequate cybersecurity protections leading to data leakage.

Types of terms and their remedies

Consequences of a breach is wide-ranging and depend on the nature of the breached term. Contract terms generally fall into three categories:

Conditions

These are essential terms that go to the core of the contract, and the breach in question deprives the innocent party of its substantially the whole benefit of the contract.  A breach of a condition, like failing to deliver a functional software product where time is of the essence, entitles the non-breaching party to claim damages and terminate the contract.  

Warranties

These are minor terms and do not compromise the entire contract.  A breach of warranty, such as a minor software glitch that does not affect the overall functionality, allows the innocent party only to claim damages, but not to terminate the contract.

Intermediate terms

These intermediate terms, which are neither a condition or warranty, are to be assessed based on the nature and effect of the breach at the time it happens. If the effect of the breach substantially deprives the innocent party of the whole of the benefit of the contract, then it is a serious breach and the remedy is as for breach of a condition.  Otherwise, the remedy is the same as for a breach of a warranty.

The classification of terms may be determined in the contract.  Courts may also interpret a specific term with respect to the intention of the parties and the surrounding circumstances as a whole.

What to do when there is a breach? 

When a breach of contract occurs, affected parties must act strategically to protect their interests and enforce their rights.  Key steps include:
Firstly, gathering the facts. This involves collecting all relevant information and facts relating to the performance of the contract, such as communications between key parties, payment records, complaints or feedback on specific incidents and engaging with key stakeholders to develop a clear understanding of the breach.  Do not rely on a single source of information during this step.  

Secondly, documenting the breach in clear details. A detailed record of the breach should be maintained that includes any damages or losses sustained.  In particular, technology disputes often involve complex technical and factual issues and a failure to document performance expectations or address issues in writing may delay or complicate the enforcement of the contract. 

Thirdly, careful review the contract terms. Understanding contractual rights and obligations is essential and any in-house legal team and professionals should be consulted to review the relevant contracts and analyse the exact terms at issue, alongside considering any rights to remedy breaches and the relevant steps required. 

Fourthly, seek external legal advice. Experienced legal counsel can help assess the breach’s implications and explore resolution strategies, including negotiation, alternative dispute resolution, or litigation.

Finally, the business impact and commercial resolution options should be assessed. The broader business consequences of pursuing legal action versus resolving the dispute amicably through renegotiation or mediation should be considered. In many cases, a pragmatic, commercially viable solution may be preferable.

Companies that prioritise well-drafted contracts and strategic dispute resolutions can effectively reduce risks and protect business interests.  

Proactive contract management should be viewed as an ongoing responsibility rather than a one-time task. Changes in scope, performance expectations, and regulatory requirements must be continually monitored and recorded to prevent misunderstandings and potential contractual disputes.