Contractual disputes happen all too often and when they do they can disrupt the day-to-day operation of your business. Disputes can also have implications for a business's finances, reputation and ongoing growth. So, as our TAKING AIM report highlights, the emphasis should always be on dispute avoidance to mitigate against risks arising.
In this article, we share some of our top tips for resolving disputes amicably without escalation to litigation or, better still, to prevent them from arising in the first place.
1. Have a clear written contract
Prevention is better than cure! The best way to stave off potential contract disputes is by ensuring you have a well-drafted contract to begin with.
Having a written contract in place that accurately reflects the terms agreed between the parties will provide the best level of protection to all involved. All too often businesses engage in contractual arrangements with no or only partially documented terms. Such arrangements bring a higher risk and uncertainty, and increase the prospects of a dispute.
If business relationships break down there can often be starkly differing accounts of what was originally agreed, which are then difficult to reconstruct from contemporaneous evidence / witness memory. As a result, disputes can be far more difficult to resolve if the terms of the contract have not been clearly documented.
A written contract which expressly sets out the terms of the deal that has been agreed will help with risk management and the protection of business assets. The details covered in a contract should, as a minimum, include:
- the levels of performance and quality expected;
- the timescales that have been agreed to be met; and
- the payment terms. A good contract will also set out a pathway for resolving disputes, if they arise (including clarity around governing law and jurisdiction).
2. Early indicators
There will often be early indicators of a dispute, which may flag cause for concern. Those indicators will be dependent on the nature and type of contract but some common red flags include:
- A breakdown in communications – for example: a party not responding to emails; not returning calls; not supplying documents; or missing deadlines and so on;
- When a party starts becoming unnecessarily formal and starts citing contract clauses on a regular basis. While not conclusive, this can be a red flag that a problem is looming;
- Late delivery or late payment. This is often a classic sign of trouble brewing – particularly if it is happening on a regular basis and without good reason; and
- When there are a lot of personnel changes at a senior board or management level, or a lot of departures generally at the contracting party – this too can be a sign that things aren't going well internally, which may in turn have a knock-on effect on how your contract is performed.
3. Communication
Talk really is cheap(er)!
Keeping lines of communication open can often save a big legal bill later on. Disputes often arise as the result of a misunderstanding – so it is important to ensure that you communicate the issues that you believe are in dispute clearly and set out how you think they can be fixed. Listen to any response and be willing to compromise.
Keep contemporaneous records of all discussions and decision making processes so that you have the evidence to fall back on later, should you need it. When trying to resolve any type of dispute (especially if making any concessions or compromises), ensure that all discussions, meetings and communications (including emails and other electronic messages) are expressed, and understood, to be on a "without prejudice" basis and/or "subject to contract"– unless or until a formal settlement is reached.
4. Don't be too hasty, and ensure you understand your position
Sometimes, moving swiftly is essential – for example, in order to keep a tight supply chain operating. However, many disputes escalate unnecessarily when people think a personal attack is being made against them. Try to be objective and distance yourself from emotion.
Make sure the situation is assessed and that all obligations and liabilities, as well as the possible consequences, are considered before any steps are taken. For example, the contractual limitations on liability may have a significant impact on the outcome of any claim and so should be properly understood in the context of any dispute from the outset and before any claim is launched.
In the heat of the moment, don't be tempted to demand that the contract be terminated – purely out of frustration! Immediate termination is usually only justified in very limited circumstances, and if you wrongly terminated a contract, you could face huge financial penalties as a result – even if it was not you who was in the wrong in the first place. Make sure you take the time to establish whether or not there has in fact been a breach of contract and, if so, how serious it is before going down the termination route.
However, do not take too long to take action as things are more likely to escalate if you bury your head in the sand. If there are steps that need to be taken urgently, then you should take them – just don't take them blindly and ensure you risk assess the situation first.
If you do have the right to terminate a contract, leaving it too long to do so could also mean you lose that right. Likewise, there may be times when immediate steps should be taken to protect your business and this could include notifying your insurers, stopping payments or halting the provision of the goods or services contracted for. Having legal advisers involved at this stage can help to assess the implications of taking action and reduce the risk of taking steps that could otherwise be detrimental to your position.
5. Documents
It is very important that you preserve documents from the outset and ensure that any standard procedure for the destruction of documents/data is suspended while a dispute is being resolved. This will help to ensure potentially crucial documents are not otherwise lost to routine destruction; which, in any event, will be part of a party's disclosure obligations under the Civil Procedure Rules, should the dispute not be resolved amicably and ends up having to go to litigation.
When a dispute arises it is a good idea to get all relevant papers in order as soon as possible. Collate a copy of the contract, any variations, agreed amendments, annexures etc. and any key correspondence already entered into on the dispute. Having all this information to hand will aid discussions internally and with legal advisers, decision-makers and, importantly, with those involved in the dispute.
6. Privilege
Throughout the lifetime of any dispute, written and oral communications will need to be carefully managed to protect your position.
Relevant correspondence with legal advisers may be protected by privilege and will not – as a general rule – be required to be disclosed to the other party in the dispute. Care will need to be taken to ensure privilege is retained in such communications and is not inadvertently lost – for example, by being distributed too widely or by losing their confidentiality status.
Internal communications may, however, not be covered by privilege, and so there may be a need to limit internal communications and discourage internal written communications about the dispute. Legal advisers will be able to recommend how to protect and manage privilege more generally.
7. Adhere to any dispute resolution requirements in the contract
One of the first things you should do is check whether there is a dispute resolution (DR) clause in the contract. This clause may provide information as to what steps the parties must take to resolve the dispute between themselves before entering into a more formal forum, as well as what forum to take if less formal negotiations don't succeed.
The main forms of non-binding dispute resolution are negotiation and mediation, and it is important to identify at an early stage whether your dispute will culminate in court litigation, arbitration or some form of expert determination (as knowing the rules of the ultimate procedure will inform the approach and potential costs and enforcement outcomes).
If there is an escalating DR clause, it will usually set out the steps the parties must follow with a view to resolving the dispute before commencing proceedings.
If there is a DR clause then it is important to follow it. Failure to do so may affect your ability to bring a claim.
Where a DR clause is not in place, or it doesn't require the DR process to be followed, this doesn't mean the parties can't still agree or propose an informal / non-binding process before launching into formal legal action. Non-binding DR processes are flexible, generally inexpensive and quick. Indeed, the courts expect parties to attempt to resolve disputes without litigation in the first instance, although careful consideration should be given to agreeing a formal mechanism once a dispute has commenced.
8. Ensure pre-action protocols are followed
Make sure that any pre-action protocols are followed, before any final decision is made to commence proceedings.
Parties involved in most disputes are required by the Civil Procedure Rules to complete the steps set out in any relevant pre-action protocols before commencing proceedings. Broadly, the objective of the various pre-action protocols is to:
- encourage the exchange of early and full information about a prospective claim;
- enable parties to avoid litigation by agreeing to settle a claim before the commencement of proceedings; and/or
- support the efficient management of proceedings where litigation cannot be avoided.
The pre-action protocols can provide a final opportunity for an amicable settlement to be reached – not only by formally requiring information about the dispute to be exchanged in advance of any proceedings, but also by letting the party with whom you are in dispute know that you are serious about proceeding with a claim. This might be enough to encourage their proper engagement in negotiation and settlement discussions.
9. Don't forget about limitation!
As soon as a dispute arises you should also consider statutory and contractual limitation periods – just in case it becomes necessary to issue legal proceedings at a later date. The limitation period is the time within which a claim must be brought. Missing a limitation deadline is likely to mean that you will be unable to make a claim – even if your prospects of success would otherwise be strong.
In England and Wales the primary statutory limitation period for claims arising from a breach of contract (based on a simple contract, not a deed) is generally six years. However, there are some cases where the limitation period may be longer (for example, where the contract involved is a deed) and others where it is shorter.
Some contracts may also provide a contractual timescale within which a claim must be brought – which may be less than the six years provided for by statue. Legal advice on limitation should be sought sooner rather than later.
10. Take legal advice
It will be helpful to seek legal advice from in-house lawyers or external lawyers at an early stage. Other key stages where it is important to consider involving lawyers include:
When drafting the contract – lawyers can help to make sure the contract clearly sets out what has been agreed: making sure important provisions are included, and dealing with all obligations, liabilities and timescales. Lawyers can also make sure that dispute resolution clauses are properly incorporated, and provisions dealing with termination and damages are covered.
When a dispute first arises – undertaking a legal analysis from the outset of a dispute will help establish the extent of any dispute and provide an independent view on who might be to blame for the breakdown in a relationship, and more importantly, how the dispute may be resolved amicably. Dealing with disputes can also be very time consuming and so having additional support from legal advisers can prove helpful and more cost and time-effective in the long-term, as well as adding a further layer of impartiality.
When negotiating a settlement agreement – involving lawyers can help to stress test the seriousness of the situation and ensure that all elements of the dispute are covered in any settlement agreement that may be reached. Having external legal advisers attend formal settlement discussions – such as mediation – can also send a signal to the other side of the importance of the dispute to the business. Likewise, external legal advisers can also help with preparing opening statements, position papers and strategy if a mediation is then undertaken.
When legal proceedings become likely – to ensure all court rules and protocols are followed and all deadlines are met. Also, legal advisers are well placed to draft any claim, defence and other court documents and/or to instruct counsel to do likewise.
The automotive sector, with its complex, cross-border supply chains, relies on a web of interconnected contractual arrangements between the various stakeholders. There is therefore significant scope for contractual disputes to arise within the sector, and it is imperative that all players understand their position if they are to prevent and manage those disputes once they arise.
In particular, looking at the manufacturing supply chain, a party's contractual position can be key in high-pressure scenarios where rights need to be enforced (or defences relied upon) at short notice – for example, where just-in-time supply is threatened, and options need to be explored to keep manufacturing facilities operating. In those scenarios, a clear contractual framework can be vital, and can make a real difference when seeking urgent relief or support from Courts or Arbitral Tribunals.
Given the scale of the industry and some of the relationships which exist within it, when those relationships break down or issues arise, very significant claims and material losses can be suffered – the contractual framework in place between the parties, and understanding how best to approach and manage associated disputes, can be the key to a favourable outcome in any mediation, arbitration, litigation, or other dispute resolution that follows.
The speed of change in the automotive sector is also likely to drive more disputes, particularly as supply chains change in the face of a push for rapid decarbonisation, and with shifts to accommodate mobility solutions, tech and AI, as well as generally evolving consumer demands.
Understanding how to manage and react to contractual disputes, particularly within the automotive supply chain (taking account of the context and your place in the supply chain), the pressure points, and options available in times of stress are fundamental to maintaining and advancing business in a time when there are industry-wide, irreversible changes taking place.
Given the nature of the aviation and aerospace industries, contracts entered into within these sectors are often high-value and long-term. These agreements require greater collaboration between the contractual counterparties than may be typical elsewhere – and it follows that when issues arise, the potential ramifications may be significant. It is therefore imperative that the contracts are fit for purpose in the first instance, keep step with developments over time, and, when issues do arise, make clear provision for who is responsible and what is to happen.
Our Aviation, Aerospace and Defence team has a proven track record helping clients to manage their contract disputes. We are able to advise you on every step of your contractual journeys, leveraging our significant experience and sector knowhow to your benefit.
Businesses in the retail sector rely on an interconnected web of contracts to operate, from supply chain and manufacturing, to distribution and sales. This means that when issues and disputes arise in relation to one contract, it is likely to have a domino effect on others. It is crucial, therefore, that businesses are able to assess their position and understand the likely impact of disputes on other areas of their contractual network as soon as issues arise, and that those issues are then dealt with quickly.
Our Retail team has a vast amount of experience advising businesses in the sector on mitigating risk and managing issues and disputes when they arise. This has included acting for a consumer retailer in a dispute relating to informal agreements to increase order quantities, acting for a high street retailer in Commercial Court proceedings and advising on risk avoidance in transitioning suppliers for nationwide retailers.
How will you evolve your approach?
As our Taking AIM report highlights, outcomes for defendants appear worse than for claimants and so being on the front foot in relation to disputes and dispute avoidance is important. Our top ten tips provide a focus to assessing your current approach to contracts and managing successful supplier relationships. You can also read more about alternative courses of action when managing conflict and disputes by reading the full report.
To talk more about any of the key points raised in this article, please get in touch with Emma Carr or Saha Dehsheykhi.