Contractual disputes happen all too often. When they do, they bring the potential for disruption to the day-to-day operation of your business, as well as implications for 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 trying to resolve 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 contractual 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 level of risk and uncertainty. If 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 parties' agreement have not been documented.

A written contract which expressly sets out the terms of the deal that has been agreed will help with risk management and protection of business assets. The details covered should, as a minimum, include: (i) the levels of performance and quality expected; (ii) the timescales that have been agreed to be met; and (iii) 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, which may flag cause for concern. Those indicators will be dependent on the nature of the contract but some common red flags may 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 is cheap!

Keeping lines of communication open can often save a big legal bill later on. Disputes are often the result of a misunderstanding – so make sure you communicate clearly the issues that you believe are in dispute and how you think it 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 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 – 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 before a claim is launched.

In the heat of the moment, don't just say that the contract is terminated, or that the other party is in breach – purely out of frustration! Immediate termination is only justified in very limited circumstances and if a contract is wrongly terminated then huge financial penalties could follow – even if it was not you who was in the wrong in the first place. Make sure time is taken to establish whether or not there has in fact been a breach of contract and, if so, how serious it is.

Don't take too long though. 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 make sure the situation is assessed first.

If you do have the right to terminate a contract, leaving it too long to do so could 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 provision of the goods or services contracted for. Having legal advisers involved at this stage can help to reduce the risk of someone taking steps that could be fatal to the contract – which could, in turn, prove costly.

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 will 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 the communications and is not inadvertently lost – for example, by being distributed too widely or by losing their confidentiality badge.

Internal communications may not be covered by privilege, and so there may be a need to limit internal communications and discourage written communications about the dispute. Legal advisers will be able to recommend how to protect and manage privilege.

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 which steps the parties must take to resolve the dispute between themselves before entering into a more formal forum, and what form that forum is 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 court 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 formally requiring information about the dispute to be exchanged, 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 think about limitation – 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 actually provide a contractual timescale within which a claim must be brought – which may be less than the six years provided for by statue. It may also help to seek legal advice – on the dispute and all key issues arising - 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 instructing lawyers may be useful 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 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 having additional support from legal advisers can prove helpful and more cost–effective in the long term, as well as adding a further layer of impartiality.
  • When negotiating a settlement – 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 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 are 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.