Nothing can bring your production to a stand-still like a dispute with one of your vendors or suppliers. Unlike the days of stocking your own materials for months, today’s just-in-time manufacturing and production environment mandates smooth relations, quality materials, and on-time delivery from every company that supports your business.
What are your options when one of your suppliers stops supplying? What evidence do you need to take a vendor to court so you can be compensated for lost sales and business?
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Vendor Relationship Overview
What is a vendor? A vendor sells or rents you materials, supplies, parts, services, equipment, and anything else you need to produce your product or service and operate your company. Vendors are your second largest expense behind labor.
Your relationship with your vendor is governed by a contract that states what the vendor will do for you and how the vendor will be compensated. It should also state what will happen if the vendor fails to do those things. The contract creates a legal relationship between you and your vendor that can be litigated if necessary to enforce the contractual stipulations.
Breach of Contract
Breach of contract occurs when one or more parties to the contract does not perform as promised within the stipulations of the contract. A contract is broken when:
- A party refuses to perform promises under contract
- A party does something prohibited by contract OR
- Prevents another party from performing its contractual obligations
You can have a material or immaterial breach of contract. The former is considered a total breach, which is very serious, while the latter is a trivial breach that does not irreparably break the contract or defeat its purpose.
Material Breach of Contract
A material breach of contract is a completely irreparable contract and is a cause for litigation in court. If one of your vendors commits a material breach of contract, you can go to court and seek damages to cover economic losses. It also means you are no longer responsible for your part of the contractual promise.
A material breach is occasionally excused by the court, generally stemming from one of several things:
- A mutual mistake was made regarding an essential fact in the contract
- One party lacked the authority or capacity to agree to a contract
- One party entered into the contract as a result of fraud
- The contract is grossly unfair or unconscionable
- The contract is for activities that are illegal
Non-performance refers to the failure of one party to fulfill its contractual obligations. However, the obligation to act may be tied to a particular action on the part of the other party; therefore the first party cannot perform until that action has occurred.
An example is payment for delivery of materials. If the contract is written such that you are not required to pay the vendor until you receive delivery, then you cannot perform your obligation until delivery is made. If you then decide not to pay, you will be in breach of contract for nonperformance.
What Your Attorney Needs to Bring to Court
There are several items your attorney will need to litigate a breach of contract case successfully. Most, if not all of these items should be present in the contract.
- Specific examples of the material breach of contract
- Specific examples of the damages
- A definition of performance standards
- Written notice of breach of contract
In most cases, breach of contract is a process. Correspondence that shows all parties have been made aware of the breach and documentation of any actions taken to correct the non-performance are essential for determining who is at fault.
How to Avoid Breach of Contract With Your Vendors and Suppliers
Most breach-of-contract cases involve miscommunication. Therefore, the best way to avoid a breach of contract is for all parties to communicate with one another clearly. Communication problems are especially prevalent in contractual partnerships where one party is unfamiliar with what the other party is required to do.
For example, if you have a contract for IT services, it may be difficult for you to understand the exact obligations the IT company has toward your business if you do not understand information technology yourself.
Each party should communicate clearly about the obligations due in a contract and let everyone know ahead of time when the obligations must be changed or delayed, or when they cannot be met.
To avoid a breach of contract, you need to:
- Understand the contract
- Follow the contract
- Create a documentary trail of communications and activity
- Be careful when creating documents, including email
Anything in writing can be used in a breach of contract case. Make sure everyone in your company understands this before they commit anything to paper or computer screen. Recording meetings and phone conversations can be helpful as well if you feel that a breach of contract is on the horizon.
Disputes with your vendor or supplier are no fun. With open communication and a will to both understand and be understood, most of your disputes can be resolved before a breach occurs. At most, you may suffer an immaterial breach that can be corrected easily.
However, for those times when a material breach occurs, a tight contract, a history of clear communication, and the existence of written documentation can help you and your attorney litigate your case to a positive outcome.