8 Ways to avoid a Business Dispute

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Despite the best of intentions on all sides, disputes can arise when entering in to a new commercial contract or business relationship. According to Government figures, between April and June 2014 a total of 370,744 claims were issued in the Civil Courts (excluding Family Cases). This was a decrease on the previous quarter, but that saw the highest number of claims since 2009. A significant number  relate to business disputes.

From long experience, the following ground rules should help to reduce the risk of things going wrong in a business contract, or if they do, ensure you are in the best position to protect your interests:

1 Contractual Terms

These are key to many disputes, and the outcome of claims often turns on what the contract says. The terms and conditions should be read carefully. Ensure that your terms and conditions are drafted or approved by a specialist contract lawyer with experience of your sector. It is essential that these are regularly reviewed and kept up to date, and of course, that the terms represent your understanding of what has been agreed.

Be careful about negotiations and representations made during pre contractual discussions. Although many statements will be just sales talk, others might be construed as a term of the contract.

2 Entire Agreement

This should ensure that the contract between the parties is contained in a single document. The aim is to prevent extraneous documents or communications being relied on e.g. statements or representations made during pre contract discussions.

3 Exclusion clauses

Exclusion clauses may seek to exclude liability for consequential loss, or limit liability to a specified figure. Consideration should be given to whether these are enforceable:

  • do they apply to the areas of dispute most likely to arise?
  • are they as wide as might be assumed?
  • exclusions of “consequential” or “indirect” losses might not apply to claims for loss of profits or other loss amounting to reasonably foreseeable direct losses, within the reasonable contemplation of the parties when entering in to the contract

NB: Under the “contra preferentum” rule, any contractual term which is unclear is interpreted against the party that wants to rely on it.fun-and-games-until-204943-sfreeimages

4 Deadlines

Be realistic about fixing deadlines and be circumspect about specific dates if possible. If it seems as though a date under a contract might be missed, a revised timetable should be negotiated and recorded in writing, before time runs out. Any such variation of the contract terms should be signed by both sides.

5 Dispute Resolution Clauses

You can specifically set out means of settling disputes before they arise, e.g., good faith negotiations, Alternative Dispute Resolution, or mediation stand every chance of resolving a dispute, whilst preserving relations with the other side. This could be crucial where a valuable supplier or customer is involved. Serious consideration should be given as to whether Arbitration, as opposed to court proceedings should be specified. This may often be inserted, without considering the pros and cons, because Arbitration is not necessarily simpler or cheaper than the courts.

6 Internal Communications

Take care over written internal communications, including by email and on any company and employee’s devices. This applies pre contract, and after the contract has been agreed. If a dispute arises, under the Civil Procedure Pre Action Protocols and court rules, all relevant internal communications have to be disclosed (unless subject to legal advice privilege – where lawyers are already advising as to a dispute).

7 Negotiations

Clear communications with your supplier or customer is essential too. Being assertive but not confrontational and having clear lines of communication can help avoid misunderstandings in the first place that can otherwise lead to disputes. If it transpires that some contractual terms can’t be met, inform those affected as soon as possible.

 

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8 Identify Potential Issues Early

Early dialogue can often resolve problems, and prevent them turning in to a dispute. The party claiming breach of contract will have to prove that they acted reasonably to mitigate their loss. As such, the earlier a potential difficulty is addressed, the better chance of a satisfactory resolution being reached, or losses minimised.

Often a case that ends up in court is due to the potential problem not being identified early on, or not dealt with appropriately. In this way, seemingly innocuous molehills can turn in to mountains.

Whist not advocating full scale crisis management procedures for every teething problem, there should be a routine reporting system enabling potential litigious issues to be reviewed. Although businesses may be reluctant to involve solicitors at the start, in fact reporting at an early stage to in-house or external lawyers would be likely to make the communications privileged from production.
This article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Directors Hoodwinked out of €100 million broke duties to their Company

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The High Court has decided that two directors tricked by fraudsters failed in their duties to exercise reasonable skill and care. They paid €100 million of Company money in to a sham investment scheme induced by fraudulent misrepresentations.

Mr Justice Peter Smith said that, like many such fraud cases superficially the document looks technical and highly detailed. On closer reading it is full of incoherent phrases and expressions and is completely meaningless.

It is impossible to overstate the level of incompetence demonstrated by [the Group Legal Counsel’s] evidence at this trial. He did no checks on the background of these people trying to sell this transaction to him…He discovered nothing about the details of the transactions…He accepted without challenge anything they said. Finally in October 2011 he signed away control of €100 million, despite being required never to agree anything like that…He took comfort from documents that were meaningless…If he were uncertain as to the law, he should have obtained advice from somebody else. That is what one would expect of a senior in-house legal counsel who might have knowledge of generalities, but would not necessarily have knowledge of specifics. It is plain that he had no idea what the investments were, but was content to accept the vague descriptions provided by the defendants and fell into the trap of believing in the secrecy of everything.

The Directors committed the Company’s funds in a “ridiculous and reckless” way. It was difficult to understand how the directors had failed to spot the scam: an extremely modest level of probing the deal would have shown that it would fall apart. Their conduct was seriously inadequate regarding the discharge of the duties that they owed to Company as officers and senior employees / directors to perform their duties with reasonable skill and care.

Although this case was decided under Maltese law, the High Court’s conclusion that two directors were in breach of duty is noteworthy. The general application of English law was made clear. Directors in this situation could face personal liability to the Company for losses caused by third party fraudsters.

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However, there was no basis for findings of breach of their fiduciary duty or contributory negligence against them in favour of the Defendant (those involved in the scam). The Judge refused to reduce the damages payable to the Company by the fraudsters. The directors were duped and incompetent; fools not knaves in failing to spot that the scheme was fraudulent and bound to fail.

Director’s Duties

The Companies Act 2006 contains a general statement of directors’ fiduciary and common law duties.

  • S 171 to act within their powers
  • S 172 to promote the success of the company
  • S 173 to exercise independent judgement
  • S 174 to exercise reasonable care, skill and diligence
  • S 175 to avoid conflict of interests
  • S 176 not to accept benefits from third parties
  • S 177 to declare an interest in a proposed transaction with the company

The codified duties apply to all directors of a Company (including shadow directors and, in certain circumstances, former directors).

Director’s Potential Liability

This case decided the liabilities between the defrauded Company and the fraudsters. The award against the fraudsters was not reduced due to negligence by the gullible directors. However, it did not decide whether, or how much the directors should reimburse the Company for its losses.  

As here, where a director has broken his duty to exercise reasonable care and skill, but not his fiduciary duties, the court will consider what might have happened had it not been for the director’s breach. The court has to decide whether the Company would have suffered the losses any way. If not, the director may have to compensate the Company for all of its losses caused by his breach of duty to exercise reasonable care and skill

As a matter of public policy, the courts accept Company directors have to make judgments and take risks. Too harsh an approach to directors’ conduct would have a “chilling” effect; it would discourage people either from becoming directors, or make them too risk averse for the good of the business.

Conclusion

Directors who are in breach of duty can ask the court for relief from sanctions on the grounds that they acted honestly, reasonably and that it is fair in all circumstances of the case to relieve him of liability. A director may also be protected from liability by the company ratifiying his conduct. Alternatively, a Directors & Officers’ Insurance Policy may cover the relevant liability. Obviously, all of these are a very poor second best to remaining vigilant and following the old maxim: if it looks too good to be true, it probably is!

Although the case is being appealed, it is a timely reminder of the risks of fraud to which Companies are exposed, the duties on Directors, the consequences of breach and the need for vigilance.

Case:

Group Seven Limited v Allied Investment Corporation Limited and others [2014] EWHC 2046 (Ch).

Link:

http://www.bailii.org/ew/cases/EWHC/Ch/2013/1509.html

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