David Lowe: Hello everybody and welcome to our ThinkHouse autumn seminar. I am David Lowe one of the organisers of ThinkHouse, our seminars aimed at in-house lawyers. Thank you very much for joining is today. I am just really sorry that were still in a virtual Zoom world and I am not seeing you all in person for obvious reasons, although I hope that his might be the beginning of the end. Today's session is Penn and Jaw before Court and War. Before I introduce that, I just wanted to flag that this is the fourth of our autumn sessions. Last week we had data privacy and anti-trust update and just this morning we have had the in-house lawyers guide to COP26 and concluding with this what to do when contracts go wrong session. Next week we will be sending round a link and all of the materials for all four talks to that if you missed one of them, you will be able to watch it and of course share it with your colleagues within your team. You are very welcome to do that for example we are aware that in-house legal teams using the slides in this recorded session to run them as team sessions internally and you are very welcome to do that.
Anyway, today is about what happens when contracts go wrong. Pen and Jaw before Court and War. We are very conscious that especially in times like these, now furlough for example has ended today. Contracts under distress are a common feature. Obviously we have been dealing with lots of force majeure queries as we went through COVID-19 and there is a predicted spike in insolvency. Contracts will be under stress and therefore we thought it would be useful to give a practical guide about what to do when contracts go wrong, and to that Emma Carr, a partner in our dispute resolution group, joins me today to talk about how to deal with when contracts go wrong. So I will be doing to non-contentious side to it, I lead our commercial contracts team and so over the years I have worked with people like Emma and understood what to do when contracts go wrong, and indeed most importantly what I can do in my contracts to make them right. Perhaps Emma if you could just introduce yourself.
Emma Carr: Yes thanks David. Hi everyone. Yes as David said I am a partner in our dispute resolution group. My focus is on general commercial litigation so the handling, preventing, resolving disputes arising from breaches of contract and negligence. So yes I will be dealing with the contentious side of things today of what to do when contracts go wrong and practical steps you can take to avoid stepping foot into the courtroom.
David: So this is what we are going to cover today. We are going to be looking at how you act when contracts go wrong, and we are going to be moving from drafting to prevent that in the first place, to early indicators and practical steps to take before stepping foot in a courtroom. We are going to start with the drafting so we are going to look to learn the lessons of hindsight to then go well what would do in a contract so we will do that first because we are conscious that is probably what you can take a way today, deal with this afternoon and tomorrow the contracts on your desk, immediate actions, the things you can do to try and make sure you do not end up talking to somebody like Emma! Then having set that scene about what lessons are in hindsight, we will then talk about how you can spot a dispute and what you should do in those early stages. I am going to lead on the what to do in drafting your contracts and Emma is going to lead on what to do when dispute is looming.
By all means, do submit questions into the Q&A. We will gather them all together and ask those at the end so we will come in within about an hour today for which about 40 - 45 minutes will be Emma and I talking and 15 minutes for questions.
So starting with me about what are the lessons of hindsight and I have put up here on this slide basic issues, and of course you will rolling your eyes and going yes of course it meant that, but I think it is really interesting because all too often when a dispute starts looming it often starts with somebody calling me up and saying "I just want you to have a quick look at this contract, we might need to terminate it, or I just want to talk over what you think this clause means, or what the liability cap is, or what you think of this?". So the early beginnings of a dispute somebody asks me a question and when I ask to see the contract well all too often the final signed complete form of the contract is not readily available, so I might be asked to look at the Word version we think was the penultimate version but nobody is quite sure or a contract that everyone knows has been varied but nobody can put their hand on the variations, or perhaps the contractual party to the contract are not actually very clear because it just said XYZ and ABC but does that mean XYZ Holdings Limited or XYZ LLC or XYZ UK Limited or maybe XYZ does not exist anymore. There has been a corporate reorganisation. Who is the contract now with or there is a contract and there is a variation but the variation mentions there is another variation but nobody can find that one and that happens a lot. We also see that when we are doing corporate support, doing due diligence for our corporate colleagues when somebody is buying a company, most of the contracts we see in data rooms are incomplete in some way. They will rarely have all the schedules. They are rarely all completely signed and so there is a really important issue here for you to take away internally about contract management systems to make sure you are doing your best to have somewhere the complete contract readily available.
Keep an eye out for expired contracts because all too often people have a three year contract with a fixed term and then it says at the end of that term it ends, and of course we are now five years on. What happens now? Was it the old contract, does that just roll on or are we in a new contract? It is all rather an uncomfortable place which if at the time of expiry somebody had put in place may be just an email or whatever was required of the contract to extend or roll on the contract so that it rolls for three months, terminate on three months' notice, it would all be so much clear. Emma, have you come across any issues in that area?
Emma: Yes I was just reminding myself, we have had it a couple of times, one particular slightly hairy case was when we had to issue proceedings and we did not know whether we had a fully signed version of the contract. We had pretty much a penultimate draft but not the full signed version and no one really knew whether there were any differences but we had to issue proceedings on that basis. It was only we got disclosure from the other side in their defence that we saw it was fine actually. The contract was fine but it was a bit flying by the seat of your pants and quite scary at the time, so having that complete copy of a contract should not be under thought of because it is really important particularly to make sure you have got the right advice and that you are taking the right actions in accordance with that contract.
David: And I have had situations where we have had to ask the other side for a copy of the final contract, what better way to signal that there is a dispute looming than the fact that you are asking the other side for a copy of the contract! That potentially blows your cover if you are weighing up what to do.
Also just to flag. We talked in past ThinkHouse contracts updates about the Rock Advertising case which made it clear that courts expect people to comply with the variation clause in their contracts and if you do not, there is a good chance your variation might not work so again it all goes back to having good contract management and administration.
My next basic step is law and jurisdiction. I just think it is really important that you make a habit to include in every contract you are dealing with a law and jurisdiction clause and if it is a very short contract, maybe it is just a short letter, do not forget you can get this down to five words - English law and English courts. If you simply said that at the end of the letter that is far, far better than nothing. OK it is not as good as the full law and jurisdiction clause but at least it gives a strong indication of the parties' intentions.
And personally just because it is a domestic contract, by which I mean an English company contracting with another English company when performance of the contract is in England there is no international content, even then I would put a law and jurisdiction clause in just to make the habit to make sure that when it really matters where there is some international content, I definitely put a law and jurisdiction clause. It is just a good habit to get into and anyway you would be surprised actually how many contracts actually are international. It might be an English seller and an English buyer, but performance is in Germany or perhaps the assets of those companies are in a different country or perhaps it is a Scottish company so sometimes it is not actually obvious whether it is domestic or international so again just keep in it a clear law and jurisdiction clause. Emma have you come across situations where there are no clear law and jurisdiction clauses?
Emma: I have, and unfortunately it just delays the process because you end up having a dispute within a dispute about what the law and jurisdiction so I fully endorse your suggestion. It is certainly something I look for. It is one of the first things I look for (a) to see if I can actually advise and it is within my competence but (b) just so that we know we are acting according to the contract, so I endorse what you say about it being paramount to get that in the contract.
David: And do not do what one of my clients did which they had obviously had a bit of a debate with the other side about which law a Brazilian company and English company so was it going to be English law, was it going to Brazilian law, was it going to be another law and so the compromise they decided on was to make the contract subject to Brazilian and English law which I think was possibly even worse than having no law in it because what does that mean a combination of English and Brazilian law. So if you do get into a negotiation about which law and which jurisdiction, obviously you will have a view about which one you prefer but ultimately it is important that you do find any compromise where you have identified a single law and a single jurisdiction that applies. Frankly it is better to have a less than ideal choice of law and jurisdiction than to have to be signed because as Emma said you are going to have a dispute about a dispute and us external lawyers rub our hands in glee at all the money we are going to make about having this futile argument about which law or court is going to be before we even get to the real dispute.
The next key point is around termination. Having a dispute is really expensive. Having a dispute uses lots of time, having a dispute uses lots of energy and is a massive distraction. It is so much better if something goes wrong with the contract if you could just simply say "OK we are just going to draw a line on this and terminate, end it and step away and we and the supplier can go off and do our own thing somewhere else and avoid putting the energy, the time and effort into it". And so it is really important that your contract is really clear about how and when it can be ended. I really hammer it into my junior lawyers when I am supervising and I want the contract to be really clear when it starts and I want to be really clear when it ends or expires and how I can end it, because if it is not clear and if there is a dispute arising we are then into a difficult situation of trying to work out what our options are.
If it is fixed term be clear what happens at the end, does it roll on to next month's notice, does it automatically expire, just what does happen? Because if it does simply says this contract will end after three years, then there is going to be a debate then about because you are now in year five, two years later just about the mechanism is and about whether that contract applies at all because the courts are not really going to want to imply anything unless they really have to and so they are not going to feel very comfortable about just assuming the old contract carried on I think another good habit to get into as a default position is to always have a termination at will clause so that you can terminate at any time on x months' notice. Now sure that is the kind of thing that will track negotiation in a substantial contract but it is best to at least start with having one of those clauses in and have it in your standard terms so that is your default position from which you can then negotiate.
In a big contract you might have to pay a price. You might have a right on six months' notice at any time but it is subject to paying certain costs because of course the supplier will be saying well my price is a five year price. If you terminate half way through year one then I have lost loads of money. Well I would observe it is better to know that and how what the price of terminating it is before you go into the contract than to be trying to negotiate your way out of a long term contract that is not going very well. When after year two your chief executive is slamming his or her fist on the table then just get rid of this, how much better is it to say that is fine? I can six months of termination now but it will cost us £x million. Are we happy to do that or we do want to press on with the dispute? Emma what is your experience?
Emma: I would want to pick up on the notice point really actually so where you do have termination at will but it is subject to six months like you said your example notice whatever we have had it before where clients have come to us thinking they have terminated because they have served notice but they then not followed the notice provisions that are often in the contract so I suppose allowing to your termination point I would also made a point about making sure you follow the process and procedure for serving that notice to letter because otherwise you can find yourself in a situation where you have invalided the notice if you like and therefore you are potentially wrongfully terminating the contract and putting yourself in a position where you could be accused of repudiating the contract so I would make that point that was fortunately in that case we got to it soon enough. We had to reserve notice in accordance with the contract and so the only price to pay really for failing to do it in the first place was it just added a couple of weeks delay but it is something that I would advise you to look at.
David: I have spotted in the Q&A somebody making the very good point commercially that termination works both ways it is likely that you have asked for right to terminate the other party will and so you might find yourself being terminated and in a situation where you are likely to. Obviously you need to keep an eye out for the commercials on that but if I am going to recommend it as a sort of a default position, but as Emma said if you are going to use it make sure you do properly. I have just been dealing with a similar argument where somebody had terminated one of those contractors where they are locked in for three years, it automatically rolls on for another three years unless they are given notice to not renew at least six months duty before the end. She did give them the notice but she did not express it in a way which contracts are written. She said she had terminated and then we were having a big argument about whether the contract had ended and when it ended and this is a phone system for a chain of retail stores which is going to be really important.
My final point on there is avoid a perpetual contract. Well I think all as lawyers would cringe at the idea of perpetual contracts. I mean some of us will even remember vaguely our business and law perpetuities or whatever, is that not a horrible place to go? Well obviously having a contract that potentially can never end is not attractive, it is not attractive then going to Emma, saying "this contract says it goes on forever, help me get out of this contract" because of course our core starting point is to read what the contract says. So do make sure that your contract does eventually end in some way. Who commercially would ever want to get into a perpetual contract so do make sure there is a clear end at some point or some means of ending it.
Obviously if you do have a long term contract with no break then bear in mind that you are now in a sort of high risk environment. I think of some of the really big contract I have done over the years which long term they often lead to disputes and it is typically around change. Contracts are pretty good usually. People are pretty good at making a judgement about what today's deal is and whether it is worth it but we are pretty bad at anticipating change. About the fact that in a five year contract, there is a reasonable chance the law might well change or that stuff will happen. Who five years ago would have predicted COVID-19 for example? Who would have predicted a fuel problem, although many of us will remember a fuel problem back in 2000, but we do actually have quite short memories and think it is never going to happen again so be very wary of long term contracts with no breaks and if you are focused particularly on the change mechanism how I tis going to work if there is a change, if sales fall, if the market changes, the law changes, whether it is worth the risk and make sure as I said think about putting a break clause even if you have to pay the break.
Now when I have talked to people about disputing, I am sure Emma will agree, disputes do not usually arise because it is in the liability clause or any assignment clause or a law and jurisdiction clause. The dispute always, always starts with an argument about price, performance or delay so obviously make sure those are clear and they are all commercial issues aren't they and this is why you will be hammering to your commercial team look you have got to make this clear. If I cannot understand this pricing clause there is no chance a judge has got of understanding it, or there is a good chance they are going to read it in a different way. We have to make this clear, all for performance, all for delay so do make sure it is clear. Do make sure change is thought about for example at the very least, and basic things to make sure that the contract delivers governance is really important not to us as lawyers but it is just people talking to each other but commercially having a framework in which people are regularly talking, dealing with small issues before they become big issues is really important and that is why service levels can often be very useful because they give some sort of benchmark expectation and signal that something is going wrong.
Turning to the legal stuff, here is the list of things in hindsight you will wish you had when you have a dispute. You will want a clear liability clause because you will want to be able to advise your business just exactly where you are and the other parties on liability. That convoluted complex liability clause which nobody ever really understands is not going to be very helpful if you are then having to weigh up whether you have got liability limited to the value of the contract or £5 million or unlimited and of course where you are on those positions will influence the nature of the dispute. I think we all know with COVID-19 having happened, CO2 shortages, fuel shortages, semi-conductor shortages etc. the importance of clear force majeure clauses justifying what is a force majeure and what is not, what happens if there is a force majeure etc. Emma has already talked about making sure notices are given in accordance with the contract so therefore actually a really boring clause at the back of the contract about whether you give notices by person or recorded delivery or whatever it suddenly becomes really important because Emma is going to be pawing all over it, working out how any days etc. so if you have not get a very clear clause you are already going to have a significant problem - how do I give notice effectively? Can I give notice in time? A clear hate of mine is I still see so many notice clauses that refer to fax. Fax is dead! Almost nobody has a fax machine or knows where it is. You are just giving a gift to the other party leave the fax clause in because then there is going to be "I sent you a fax notice, did you not get it?" and immediately you are into another dispute about dispute.
We have already talked about dispute escalation resolution, and Emma will be talking more about that later, and then I have talked about boring notices clause. Well even more boring are things like the waiver clause, the entire agreement clause and third party clause they are all really tedious aren't they. Nobody really cares about them when you are drafting the contract but suddenly when there is a dispute, more of this becomes really important. Can my group companies also take the benefit of this contract? We will turn on the third parties clause. Can I argue the tender, the nice fluffy tender that promises the world, is that part of the contract? The entire agreement clause is going to be really important. Having waived this issue, have I waived it? Well some of your waiver clauses is going to become really important and as I said the law and jurisdiction clause is also important. Emma is there anything on that you wanted to add?
Emma: I did just check our business cards to check we do no longer put our fax number on there and we are OK! It is not on there anymore but you are right. It was only the other day I saw fax in there and I suddenly thought you know it is a relatively new contract as well. I just thought crikey bonkers but definitely no reference to fax.
David: And these are more reasons why the boilerplate is important. Your commercial colleagues are asking do I really have to have all this? Can't we just say I am going to buy x for y on a certain date and the answer to their questions is of course you can. The contract can be really, really, really short, but you might live to regret it because all that boilerplate is all just to help build a foundation for the contracts to sort of make sure it runs in the way people actually expect.
Now over to you Emma.
Emma: Thank you David. So as David said the best way is to avoid disputes arising in the first place is to have a really well drafted contract to start with. What about when that is not possible? So for example where you inherit a contract from a predecessor or heaven's forbid the business has entered into a contract without involving legal, what about those circumstances? One of the early indicators that those contracts might be about to go wrong, well as it says on the slide it depends very much whether you are acting as a supplier or as a customer. Some common red flag indicators can include a break down in communications so you are effectively being stonewalled by the other party, they are not responding to emails, they are not returning your calls, they are not supplying the documents and information they are supposed to be, they are missing deadlines, that can be a common red flag. Also when they are getting overtly contractual over the most minor of points so they start citing contract references at you and they are doing so on a regular basis. It is not conclusive there is a problem but it is a good indicator.
Likewise with lateness of payment or delivering. That can also be a classic sign of trouble brewing and finally a loss of departure that senior management at personnel level or indeed a mass exodus of people at the other party generally can indicate there are problems going on internally which can obviously have an external adverse impact later down the line so they are just some things to watch for. David have you got any other indicators to add in your experience?
David: Yes I think looking out for a counterparty who is looking for a dispute or a way out of a contract, they start muttering things like "this contract is not profitable". That for me would be an alarm bell that something is going on and they may well have contracted cheaply and are starting to regret it and therefore they will start to wriggle. Or the contract manager that you dealing with every day is a lovely person and then suddenly he starts saying "I need to check that with my boss, I need to escalate that to somebody else" and as part of it Emma you have talked about breakdown communications where they stop communicating or the opposite is when suddenly the chatty contract manager always happy over the phone suddenly changes their communication. Suddenly everything is by email and they insist recording things. Having minutes of meetings when you have never had minutes of meetings. Those changes in behaviour for me I think are red flags.
Emma: Yes or the without prejudice label kind of just gets applied to everything willy-nilly regardless and you are suddenly like why are they putting this on all of the time or referring to words off the record or whatever. They are also twitchy moments I think and can prick you ears so they are important ones to look out for.
OK so you have some of those early indicators starting to arise. What should you do and what should you be advising the business to do? Well first and foremost probably the most important thing is to really encourage them to get you involved from an early stage. So whether you are openly involved or not or whether you are just in the background as a watching brief your involvement can be really, really useful because not only can you ensure that you are complying with the contract and all of the procedures set out in there making sure no early own goals are scored. I think that there is also a real benefit in having your objectivity and impartiality so the person on the ground who is dealing with it day to day has almost like a personal invested interest in the dispute so being one step removed from that I think you can add that extra impartiality and objectivity which can perhaps help unlock a dispute far quicker than might otherwise be the case.
Secondly, encouraging open dialogue, so as Winston Churchill is attributed as saying, and we heavily borrowed to title this session, "to jaw jaw is better than to war war". Talk is really cheap so encouraging and keeping those channels of communication open can mean that you can potentially wrestle the dispute to the ground before it grows limbs and snowballs and turns into an expensive dispute, so really do encourage that.
Thirdly, I would use the time to get relevant facts and papers in order. David and I have already spoken about the importance of getting that contracting all done, making sure you have got the final copy, making sure you have got all the schedules together because often the schedules can be just as important as the main body of a contract but get those together and also find out when, where, what, what's happened because of this fact finding can save you time later on and help put on the front foot.
Whilst on the subject of documents, preservation of documents is also key. Most businesses now have a routine destruction process for data and documents. It is very important that as soon as you get the first whiff of a dispute that destruction process is suspended straightaway. Not only is that important from a practical point of view so that you do not destroy a crucial document that you may later want to rely on but it is also in accordance now with your disclosure obligations under the CPR if you are in the business and property court so it is really important that you do that.
Informing key stakeholders is another thing to think about doing, so obey the doctrine of no surprises. I am not suggesting here that you brief the CEO minute by minute as to what is going on, but making sure that the relevant decision makers at the end of the day just have an inkling of what is going on. You can save time later on in having to brief them from scratch and finally review the contract. Sounds obvious but it is not always done. There are some key clauses to look for which I will go on to talk about in a moment but the other reason that is really important to review the contract. For those reasons David and I have touched on, to make sure you are following the process and procedures from the outset so you do not inadvertently do something which might be called into question later on or limit your recovery so follows those processes for example the notice procedures. Anything else that comes up so important to review the contract.
David: Just before you go on there, just talking about dialogue and talking. I had a client who are fierce rivals in their sector a bit like Pepsi and Coke - it was not about those two but it was a similar sort of rivalry - and they had had a history of a decade of litigation, low grade litigation, arguing with each other on anything they could find and complaining about each other's anti-trust authorities and so forth. The head of legal at one of those companies his deputy had actually moved across to the other company a couple of years before, to much bitterness, but they had a low grade dispute and it was starting to get serious and talk of injunctions, and naturally this is where the lawyers played a great role because their head of legal called up the person they used to work with at the other company and jut said "look this is madness. We are going to end up in litigation about something that probably neither of us wants to, it is not really worth us both airing our dirty washing in public, can we not work together to try and resolve the dispute?" and that was a good example of the in-house lawyers on both sides trying to bring some calm to the dispute and find a sensible commercial resolution rather than finding themselves in court.
Emma: Yes thanks David. I think that is also where that objective perspective point made before comes back in. It is just one step removed from the people that are dealing with it on the ground with kind of a vested interest and slightly more emotional about it I think it does. It is worth its weight.
OK as I said when reviewing the contract there is some key dispute resolution clauses to look out for. So David has already spoken about governing law but it is important that you are aware of what law the contract is written under. Likewise with jurisdiction what dispute resolution forum that the parties signed to. You know the most common ones are litigation and arbitration but by no means are they exclusive so check that and check with forum you are dealing with.
ADR, alternative dispute resolution - is there a clause that obliges the parties to undertake negotiation or mediation before launching into court. There often is in contracts. Sometimes it is a standalone clause and other times it is part of a more detailed dispute escalation clause.
So just taking a little bit more time over dispute escalation clauses. You will know you have one in your contract. If there is a clause which sets out various steps that need to be taken and various processes that need to happen before you can step into the courtroom so there are various steps that need to be taken in order to resolve a dispute and you need to go through each and every one of them. Normally how they start is with some very light touch discussions between the key people dealing with the contract, and what you see happen is those discussions ramp up in terms of seniority of who is having them within the company before you get to a CEO level perhaps. And then in moving on to some more formal mediation and that having to be gone through before you even think about issuing claims or arbitration notices. If there is a dispute escalation clause in your contract, it is really important that you follow it because it may be enforced by the courts at a later date, and obviously if you have gone ahead and issued proceedings before the satisfaction of all those steps then there is a possibility that the commencement of those proceedings may be found to be invalid and so it is important that you enforce them. In the notes to the slides when they do come round there is some cases in there as to how the law has changed as to how it views the enforcement of dispute escalation clauses but the law as at today is very much that provided they are drafted with sufficient certainty they are enforceable and so do need to be followed.
Escalation clauses and internal dispute clauses provide a really good opportunity for the parties to resolve their disputes and going back to that keeping dialogue open they encourage that but even if your contract does not have one, then it still might be a good idea and there is nothing to stop you trying to agree one with the other side. Why would they do that? Why would you do that? Well because alternative dispute resolution can be really cheap and quick and effective alternative to court and likewise because they are often conducted on a without prejudice basis it really does encourage that open dialogue between the parties so people are not holding back, concerned that what they say might be used against them at a later date. So that open dialogue can really encourage a speedier resolution.
David I know your dispute escalation clauses are quite detailed but have you got a view on how you found them.
David: Yes I include them in all but the simplest of contracts now because I think encouraging people to talk in a formal way can only be a good thing, and who wants to drag the CEO into the dispute unless they have to? It is a good way of motivating the management team further down to try their best to resolve it because who wants to go to the CEO and say "I have this small difficult dispute but I am having to go through a formal dispute escalation". You really never want to waste the CEO's time so I think they are really important and valuable clauses. I am also conscious that over the years I have certainly seen a number of clients where there is a moment of rage within an organisation about what the other party has done and a business team that has insisted on rapid legal action and if proceedings are issued and litigation starts an everyone is sort of rattling their swords etc. but of course then the business moves on and litigation does not move on, litigation goes on and on for years but the business has moved on and a couple of years pass and then they starting to go why are we even doing this litigation? Why are we incurring all these huge sums of money? Who cares about this anymore? And then regretting that rage that led to this spark in the beginning and so I think disputed escalation clauses are quite a helpful way of just trying to help bring some calm and time is quite valuable and useful in those situations to ensure that people are not being trigger happy.
Emma: Yes they can definitely take the heat I think out of some of the situation and different people getting involved can add different perspectives so yes I am all for them.
So the two most common forms of alternative dispute resolution are negotiation and mediation. Negotiation what is it well in fact it is the parties just trying to resolve the dispute in a neutral setting between themselves so it can happen in writing or in person. The main benefit is that because it is not an aggressive step like issuing proceedings it can help encourage that dialogue and maintain a commercial relationship. And likewise because the without prejudice rule generally apply, people as I said generally feel more free to speak because they have got the comfort of knowing any statement they make will not be later be used against them in court so it does encourage that open dialogue.
When will statements be held without prejudice? Well they will be held without prejudice in the negotiation if they have made a genuine attempt to settle the dispute so if they were not made in a genuine attempt then just because it was part of the negotiation the without prejudice rule will not necessarily apply and statements will be admissible but to avoid confusion I would suggest if you think it is without prejudice label it as such or state it to be as such. This will not automatically mean it becomes without prejudice just because you have said it is or put a label on it. It still has to be a genuine attempt to settle to qualify for being without prejudice but certainly by labelling it or stating it as such it will help identify any intentions to any third party. Likewise though failing to label something without prejudice is not fatal to it being without prejudice it is all about whether the communication concerned a genuine attempt to settle and so if it did not then it is unlikely to be WP even if it is labelled as such but if it did and it was a genuine attempt to settle then that is likely to be upheld. David have you come across any negotiation? Have you been involved in those?
David: Yes I have. My one observation is of course although if it without prejudice the court never gets to know about what was said in the room but you cannot forget and the other party cannot forget what was said so you do need to be mindful. There might be some issues you do not want the other side to think that you know, that you have got a really weak legal case for example so you do need to be thoughtful that it may well influence and tactics of the other party but weighing up that against the fact that the openness and flexibility negotiations is really valuable. We will come on to this in mediation as well is that many disputes are resolved through commercial flexibility. Look if we can deal with this issue here, that other contract we have got will reduce our prices or will open up that factory in Ghana rather than Nigeria or whatever it is that the accommodation between the parties are flexible in a way that ultimately a court judgment is not going to deliver. A court judgment is just going to say yes you were or were not in breach of contract and these are the damages you have to pay and usually we all know don't we in our relationships money might make us feel better but it does not actually make us happy while the negotiations can do.
Emma: That is right. Mediation is the other common form of ADR so mediation is very similar to negotiation except that it brings in a third party independent mediator who comes in to try and help resolve the dispute and break any deadlock between the parties. Although you can instruct them to come up with a decision and based on what he or she has heard of each side's case the role, they generally play is more of a facilitative nature so what they will do is they will shuttle between the parties and act as a go between trying to encourage a settlement and compromise that both parties are comfortable with. The benefits of mediation is that it is confidential which is great and like negotiation it is also without prejudice. It is also a voluntary process although I say that with some caveat so it is voluntary you do not have to do it but there has been a whole plethora of case law which has issued cost penalties for reasonable refusal to mediate. So although it is voluntary be aware that if you do refuse to mediate it can lead to cost penalties later down the line if the court finds that your refusal was unreasonable. Mediation can be a really powerful and cost effective tool. It has been estimated that over 80% of mediations result in settlement so a really good success rate and will be much cheaper and quicker than going to court. They can be attended with or without legal support. It very much depends on the strategy. You might want to wheel in the entire legal team to show the weight of the seriousness you are attributing to the dispute. Likewise you might not want anyone from legal there to show the disregard you give the dispute and so it all comes down to strategy really as to who attends and who does not as well as from a practical point of view. In terms of the mediation process itself for those of you who have not been involved in one. In a typical mediation the parties will appoint a mediator and the mediator will ask both parties or how many parties there are to provide a position statement so a document which sets out their position in advance of the mediation and to exchange those documents with the other side. Then there will be the day of the hearing itself so what the meditator will do is bring everybody into one room and invite both parties to make opening statements just setting out what their position is and highlighting any key concerns to them and then what the mediator will generally do is send the parties back to their respective rooms so if it is just involving two parties you will generally find three rooms in any mediation, one room for each of the parties and then a large room which the mediator can use and bring all the parties back to, but once the parties go to their own rooms, the mediator will shuttle between the two rooms trying to broker a deal occasionally bringing the parties back to the main room if he thinks it is beneficial to do so.
Mediations are a long day and sometimes more than one day and the ones we generally see go in the diary for a whole day and it really is a whole day. I think people arrive with yes we are going to get a settlement today and by lunchtime everyone is really quite tired already. It is quite an exhausting day, you need to be alive for that I think and ready for it because it can be really quite draining and often everyone thinks a settlement is going to get signed there and then and like I said 80% of them according to some statistics settle and I think that is right but all but a handful of the cases mediations are attended over the year. Have not actually settled on the day and what has happened they have settled in days or even weeks in some cases after the mediation when people have been able to go back reflect, have some sleep, speak to the decision makers within the business and take things away so it will come into a consideration later on but do not think all is lost if mediation does not result in a settlement on the day. If it does great. The mediator will often help with that settlement agreement and once that settlement agreement is signed, it becomes binding but as I said do not despair if it does not result in settlement there and then. Thanks Suzie for already moving on to that slide.
So this slide is just covering off some of the points to consider if you are thinking of proposing mediations for the other side or alternatively if you receive a request from them to mediate. So points to consider which mediation procedure are we going to adopt so you could adopt a model proposed by a mediation service provider such as the Centre of Effective Dispute Resolution, CEDR and they have their own model or you could adopt another model entirely. It really is flexible and costs, costs of the mediator and also your own costs, the general position is that the costs of the mediator are split equally between the two parties and that you bear your own costs but it does not always have to be the case. I had a mediation a few years back where the other side point blank refused to pay for any mediator, so my client because it was so keen to go to mediation and to avoid court did agree to pay the total costs of the mediator, so although the usual position is 50/50 it does not have to be that way.
Location, where will mediation be held? It can be held at either party's commercial premises or at a lawyer's offices. It is one to consider I think with strategy so is there a benefit to having the mediation on your own turf or at your own lawyer's offices. It sounds a minor point but I have attended mediations where we have been hosted by the other side, we have been put in rooms without windows, we have almost been starved out and not fed. We have certainly been caffeined out and not given coffee. There is something to be said for the logically ease of knowing where you are, having control on catering, knowing where the toilets are. The phycology as well I think of having it in your own office, but likewise it might be a benefit to attending their offices or even having it in a neutral setting for that reason but it is something else to think about.
Who will be the mediator? So I suppose if you are in a dispute with the other side try to then get them to agree on your choice of mediator is probably not without risk. What we often see drafted is each party will put forward three candidates and then they will try and decide one of those. If that does not resolve in a mediator being appointed then often what you see is a default nominating party being specified so for example Centre of Effective Dispute Resolutions, CEDR, as I mentioned are often stated to be the nominated party.
In terms of who is the mediator as well also think about what type of dispute you are dealing with. It does not necessarily have to be a lawyer who is the mediator if you are dealing with an accountancy issue it might be better somebody who is an accounting professional and for the nominating party to be the Chartered Institute of Accountants for example rather than CEDR. So there is something else to think about.
Attendance we have already talked about whether the legal or legal do not, and what message that conveys but the other thing to think about is the level of seniority of the commercial people that are attending. There is nothing worse than and I speak from experience of going through an entire day's mediation, you get to a point where you think you are going to get something signed off and in writing and Joe Bloggs from the other side turns around and says actually I have not got the authority to sign off on this. I need to make a call. I need to speak to somebody and then that person is not available because they have not been put on notice, they need to be available so I suppose the key thing is make sure whoever is attending from either party has the decision making power is has that mandate to make a decision or alternatively has a hotline to somebody who is available who will be able to give that authority. The situation often more so happens with insurers when you need insurers OK to make sure they are on standby if they need to sign off on any settlement.
Also how long to give the mediator. As I said, the majority of mine have settled in the days after so you do want to put an agreed period of time on it because you do not want the mediation and the period post mediation to carry on forever without being able to take the next step but you do not want it to happen too soon either and then just run the risk of the benefits of mediation not being fully felt.
Finally, facilitative or evaluative, as I said most of the time the mediator is facilitative but they can also be evaluative so you can ask them to make a decision. Again very much depends on strength of your case, or the case against you of course.
You had a mediation didn't you David? You are doing my job!
David: I was involved in my first ever mediation during lockdown and I guess I do not formally get involved as thankfully it is not usually my contract that is in dispute. It is somebody else's contract and I have had nothing to do with it so when I get a phone call I have got a problem with this contract, I hand it over to somebody like Emma but actually in this case and it was an agreement I had heavily negotiated and it had gone wrong. Thankfully it was legally absolutely clear that the other party had a minimum purchase obligation and the wording was absolutely solid, but they were refusing the minimum purchase and this was worth several million pounds and the client asked me to remain involved while one of our litigation partners did the mediation bit. It was a really interesting process. I think firstly it was really valuable in that OK we all had to spend a long day and that meant timing up senior executives on both sides, board members on both sides for a whole day who really did not want to do it. That is one of the reasons for doing it because you get their attention, you get their irritation at being involved and wanting to get rid of this and gets the dispute sorted before you end up in long laborious and expensive litigation. It is always going to be cheaper than litigation even though at the time it feels like it is a very sort of heavy commitment. I always thought it was great how flexible it was. The other side put their full position paper and they got a barrister involved in this and sent this sort of 20 side position paper quoting case law. We sent back a two sided one focusing on the commercials. You are allowed to do that whichever you think is best to put in your position because we thought their legal position was really flimsy. That is why we thought they spent 20 pages writing it out because they knew at their heart it was really flimsy. What was really valuable I think was our frustration as my client's frustration was never being able to have a proper commercial conversation with the party on the other side about resolving it. It had gone very quickly to their lawyer's hands who had been really aggressive from day one and therefore we never felt we could have a commercial conversation and now the other side could not escape. They had to listen to our commercial proposal for how we were willing to do it.
Really interesting to see the mediator at work because he puts you under real pressure and you almost start thinking he is on the opposite side - he was pushing us, saying you are not really going to go to court over this. You have not got credible evidence on this - really pushing it and having to remind our client he is just doing that to hear what we say because he has got to go back to the other side and put our strongest position as we shuttle back and forth and all of this was on Zoom because of course we were in the deepest darkest lockdown before Christmas last year and that works really well. I was a bit sceptical because we all hate being on Zoom team calls don't we but I found the structure of it works really well and there was a clean room where we could all be and then the mediator very slickly moved us into separate rooms and would put the commercial guys in a little room by themselves etc. etc. So all in all it was really good. As Emma said it was a long day. It started at 10.00am in the morning. We thought we would be done by mid-afternoon. It was sort of 1.00am in the morning before actually the other client decided to go to bed but as Emma said two days later we got a signed settlement agreement.
Emma: I think that is a really good point as well David that you make. More often than not clients will say to me look I am sure this mediator's on the other side's payroll because they are picking all these arguments in our case and they seem to be really roughing us up and yes that it what the mediator does but rest assured he or she will be doing it with the other side in their room. Their job is to try and get that agreement, that compromise and so they will go to those lengths to do that.
OK so conscious of time when to get external support involved - David has just pointed out one of the downsides of getting legal and external legal involved to soon. You know taking out the commercial hands but mediations a juncture that external support often gets involved in. Their attendance at the mediation can help carry weight but even if they do not attend, just being in the background helping to prepare position papers and advising on strategy on the day can be helpful. They can be involved much sooner as well. Obviously dealing with disputes is time consuming so additional support enabling you to get on with your day job and be helpful and it also adds a further layer of impartiality but likewise at the end clients often go through all the dispute escalation steps themselves and only involve external legal when courts looks imminent so it really is a flexible process and it is one where external support can dip in and out as and when required so they are just a few things to consider which might help you resolve the matter in a quicker and cheaper way than launching into lengthy and costly court proceedings from the offset.
I suppose we would be really interested to hear now if you have any questions or more stories that you would like to share of when contracts go wrong or of ADR so David over to you and questions please.
David: We have been looking and questions have been coming in. We have had one actually going back to the beginning where we talked about law and jurisdiction about where you are having a dispute with the other party about which law and which jurisdiction in your contract. What could you do sort of neutral options? So Emma I will lead on that and see if you have anything to chip in but the classic situation usually is an international contract. Maybe you are a UK company so you might start off with English law and you may have weighed up whether you are going to have English courts or arbitration and the other party I don't know maybe they are based in China will go actually no we want Chinese law and Chinese courts whatever. How do you resolve that because both party feels like they will lose face by agreeing to the other law and jurisdiction?
Emma: Yes I think it very much depends on where they are based. You know if I couldn't have English law and jurisdiction I would ideally want something in Europe just because it would be easier to enforce or something in a jurisdiction where I know they would recognise any order made in this country so you could look at who signed up to the New York Convention for example. You would just want to make sure anything was enforceable so and other party would want to do likewise so I think you just have to try and find a compromise on that basis really which is not a full answer I am afraid but it depends on where the parties are based.
David: Yes I think that is really important because in my example they were China. Of course the Chinese courts will not really take much heed of another country's courts. Arbitration is probably going to be much more successful in China and actually attend an international cross border contracts end up with arbitration because it diffuses the debate about jurisdiction.
I do a lot of international contracts and many of you will be heavily involved with things like eco terms. Over the years I have come to the view that contract law around the world is pretty similar because funnily enough buying and selling goods and services causes the same problems wherever you go so don't get too hung up on the law. It is better to have a clear and certain law than to leave it open. I do usually try to persuade people that English law is actually is an international reputable law with judge or arbitrators that are recognised as tend not to be corruption etc. so my starting point was I would try to persuade people to stick to English law, ready access to justice, ready access to lawyers with English law experience, but the kind of countries I go to for compromise especially when we have gone down arbitration - Sweden - I often use as everyone feels very comfortable with Scandinavian involvement. New York sometimes although getting anywhere near anything to do with US comes with a fear of finding yourself even with an arbitration some kind of US litigation is always a bit of a worry. Singapore is often particularly for Asian contracts as a sort of relatively neutral place. Dubai I am seeing increasingly often as a sort of reasonable trusted third party country. Switzerland I don't really - their law has some particular quirks so it is not my favourite law but better than no law of course. I think most people have confidence in the neutrality or perceived neutrality of Switzerland.
So I think there are quite a few options and I think it does depend on where the parties, where the dispute is likely to be and the nature of the contract.
Another question Emma we have had is about document destruction. Obviously many businesses have policies to destroy documents and obviously in the modern world getting rid of data and documents that are on your IT system. I mean practical tips for how in-house lawyers should manage that when the first whiff of a dispute comes up.
Emma: Yes I think it goes back to do when those early indicators arise. Sending that message out making sure it is documented that you have gone to the key stakeholders of that information. To stop the destruction or to suspend it. So making sure you have done that. We also as external lawyers particularly if the matter is likely to proceed in the business and property courts now will immediately notify you of the need to do that because we will ultimately have to confirm to the court that we advised you on that basis and I think the same would apply to you and in-house legal as well. Practical tips I mean unless you can get involved and encourage those when they are entering into contracts to make sure they store them in the right way and to keep you involved which goes back to keeping legal involved just so that if nothing else you can make sure that all the variations are in one place, all the schedules are in one place and that is that database available, because it can be quite unruly really depending on how many variations and iterations you go through of the contract but for reasons we have both stated, having that fully completed copy of the contract is really of key importance if and when you get into dispute territory.
David: I guess a key part of this is to bear in mind how important it is to have your records. Often it will turn on who emailed who on what day. If you have not got the email, you would not even know that you had got that weakness in your position or indeed strength in your position so document retention is important strategically as well as from a legal perspective.
Right it is now 2.32pm so I am conscious that we have overrun a little bit and I do not want to take any more of your time. I am sure you have all got meetings this afternoon so I just want to thank you very much for joining us today for this webinar on when contracts go wrong. As I said we will be sending out a link next week with a recording of this seminar and indeed all the other seminars we have done and this slide and all the materials and we will also be mopping up the questions that we have not had chance to answer and hopefully make contact with you directly so thank you very much.