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.
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).
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.
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.