Contracts and violations are almost inseparable.
The increase in defaults by contracting parties can be attributed to a complex interplay of factors on micro / macro levels- these include psychological, economic, social, and legal aspects, among others.
Psychological Factors. From an individual perspective, the mentality or mindset of the parties involved can greatly impact performance. This includes over-optimism (overestimating one's capabilities or underestimating risks) while entering into a contract, cognitive biases, and willful negligence - any of these factors can lead to non-performance and increased defaults.
Economic and Financial Conditions. Economic downturns, fluctuations in the market, or unforeseen financial challenges for a contracting party can lead to defaults. Higher unexpected costs, can put a severe strain on the finances of contracting parties, leading to defaults.
Social and Environmental Factors. The state of society and external environment can affect contracts, too. For instance, a natural disaster, political instability, or even societal shifts in values and priorities can render contracts challenging to fulfill. A changing regulatory landscape can also make previously viable contracts difficult to comply with.
Drafting Shortcomings. Poor drafting of contracts can significantly contribute to defaults. Ambiguous / incomplete contracts that leave gaps can create uncertainties or disputes. If contracts do not include clear triggers for dealing with defaults, or if the rules are not tailored to the parties' specific circumstances, this can lead to increase in defaults.
Operational Challenges. From a practical perspective, reasons such as delays in construction, failure to provide promised materials or labour, or a subcontractor's failure to perform can lead to defaults. These operational issues can be caused by poor performance, unreliable supply chains, or lack of proper project management.
To sum it up, an increase in defaults by contracting parties can be attributed to a combination of psychological factors, economic pressures, societal changes, legal inadequacies in contract drafting, and operational challenges.
Each of these factors alone can contribute to the increase in defaults, and when combined, they can have a compounded effect.
Therefore, one must endeavour to anticipate these issues and go for drafting, reviewing and negotiating commercial contracts accordingly. Such a pro-active approach may mitigate potential risks and result in a relatively shock-proof relationship.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
