Patrick Lim
Partner at Raj, Ong & Yudistra

In our last article, we explored some examples of challenges that companies have faced where there is lack effective corporate governance, of which legal audits are a significant part of.

Here we explore whether not having controls such as legal contract audits in place can lead to companies inadvertently breaching other contracts.

The answer is “yes”. If a company does not conduct regular legal contract audits, it is possible that the company could inadvertently breach other contracts. This can happen if the company is not aware of all of the terms and conditions of its contracts, or if it fails to comply with those terms and conditions.

Single Breaches

For example, if a company has a contract with a supplier that requires the company to place a certain number of orders within a certain timeframe, and the company fails to do so because it was not aware of this requirement, it could be in breach of the contract. Similarly, if a company has a contract with a customer that requires the company to maintain certain quality standards, and the company fails to do so because it was not aware of this requirement, it could also be in breach of the contract.

Conducting regular legal contract audits can help a company avoid these types of situations by ensuring that the company is aware of all of the terms and conditions of its contracts and is in compliance with those terms. This can help to prevent the company from inadvertently breaching its contracts and facing potential legal challenges or damage to its reputation.

Multiple Breaches

In addition to the risk of inadvertently breaching individual contracts, it may also be at risk of multiple breaches, which occur when a company breaches multiple contracts as a result of a single event or course of conduct.

For example, if a company has multiple contracts with different customers that all require the company to maintain certain quality standards, and the company fails to do so because it was not aware of these requirements, it could be in breach of all of those contracts. Similarly, if a company has contracts with different suppliers that all require the company to place a certain number of orders within a certain timeframe, and the company fails to do so because it was not aware of these requirements, it could also be in breach of all of those contracts.

Multiple breaches can be particularly problematic because they can expose a company to legal challenges and damages from multiple parties, which can be costly and time-consuming. Conducting regular legal contract audits can help a company avoid cross breaches by ensuring that the company is aware of all of the terms and conditions of its contracts and is in compliance with those terms.

Cross-Breaches

It is also possible for a company to inadvertently breach one contract while trying to comply with another contract. This can occur if the terms and conditions of the two contracts are incompatible or in conflict with each other.

For example, if a company has a contract with a customer that requires the company to maintain certain quality standards, and the company has a separate contract with a supplier that requires the company to purchase a certain type of raw material, but that raw material does not meet the quality standards required by the customer contract, the company could be in breach of one or both contracts.

In these types of situations, it is important for a company to carefully review all of its contracts and ensure that it is in compliance with all of the terms and conditions. Conducting regular legal contract audits can help a company identify any potential conflicts or incompatible terms and take steps to mitigate the risk of breach. This may involve negotiating changes to the contracts, seeking legal advice, or taking other appropriate steps.

In the next article of this volume we will be exploring other risks and negative exposure that a company may face if there is a lack of legal contract audits.