Contracts are the backbone of any business. They dictate virtually every commercial process, from the basis upon which you employ your workforce to the terms on which you do business with suppliers. Perhaps unsurprisingly, contract disputes are an unfortunate fact of life for business owners. Such disputes can be time-consuming and costly and, if not properly managed, can have disastrous consequences. Valuable relationships, such as those with key suppliers, can be damaged beyond repair, your reputation can be tarnished, and, ultimately, your profitability can suffer.
In this guide, our business dispute solicitors explain what contract disputes are and their common causes. We also detail, step by step, how best to resolve a contract dispute.
We will cover:
- What is a contract dispute?
- What are the common causes of contract disputes?
- How can you prevent a contract dispute?
- Steps involved in dealing with a contract dispute
What is a contract dispute?
Contract disputes are disagreements between the parties to a contract. Often, contract disputes arise when one party fails to fulfil their obligations under the contract, or when the parties disagree over the meaning of a contractual term.
What are the common causes of contract disputes?
Common causes of contract disputes include:
Contracts do not only arise when the parties negotiate and sign a written agreement. They can be formed verbally, through correspondence, or by conduct. Disputes regularly arise over the terms of contracts made in these manners, or even over whether a contract exists at all.
Well-drafted commercial contracts are clear, unequivocal and plainly set out the basis upon which the parties have agreed to do business. Even the choice of the most apparently innocuous words, such as ‘and’ as opposed to ‘or’ must be clearly thought out to avoid issues down the line.
The parties to a contract must perform their duties in line with the contract. If they do not, they may be in breach. Examples of instances in which a breach might occur include when a seller delivers defective goods, or when a buyer fails make payment on time.
How can you prevent a contract dispute?
Prevention is better than cure when it comes to contract disputes. Whilst you cannot forestall every eventuality, it is crucial to take proactive steps from the outset of contractual negotiations to minimise the chances of a disagreement.
Examples of the types of measures you might take include:
Ensuring the contract is watertight
The best way to avoid a contract dispute is to ensure that all your contracts are clear, unambiguous and accurately reflect the business relationship. Vague, ill-defined terminology that is open to interpretation can cause significant confusion and disagreement further down the line.
Ensuring the contract is future-proof
What suits your business now may not do so in the future as you expand and diversify. Before entering into a contract, consider where you envisage your commercial operations going over the course of the contract and ensure its terms do not stifle those goals, particularly if the contract is going to run for a significant period of time.
Those responsible for negotiating a contract on behalf of your business should have a good understanding of its terms. However, other individuals, such as employees and contractors, must be informed of their obligations and trained on the measures required to ensure compliance and avoid an inadvertent breach.
Steps involved in dealing with a contract dispute
First and foremost, it is crucial to seek legal advice as soon as a contract dispute comes to light. Expert dispute resolution solicitors, like ours, will work through each step of the process with you, ensuring your case is as strong as possible whilst seeking a quick, cost-effective solution.
Step 1 – Review your contract
The obvious starting point for any contract dispute is the contract itself. A legally enforceable contract must be in place before any dispute can arise in relation to it (albeit there may be a dispute about whether a contract exists at all).
In an ideal world, your contract will be in written form and signed by all parties. If the contract arose orally, through correspondence or by conduct, the relevant material must be carefully scrutinised to ascertain whether it amounts to an enforceable contract and, if so, its terms.
A well-drafted contract should enable you to identify which clause applies to the conduct in question and ascertain whether that conduct amounted to a breach. It should also provide information to help you determine how serious any breach is. The remedies available in a contract dispute vary depending on the type of clause breached and the effects of the breach. If the breach is of a key term, the remedies available may include termination and damages, whilst a breach of a less fundamental term may give rise only to a claim for damages.
Contracts often provide other information essential to the conduct of a dispute. You must comply with all relevant terms to avoid jeopardising your position by inadvertently committing a breach. The information to look out for includes the following:
Which country’s law governs the contract?
Contracts sometimes have a ‘jurisdiction’ clause, which states which country’s laws apply to the agreement and which Courts have the power to decide any dispute arising from it.
Does the contract contain a non-binding Alternative Dispute Resolution (ADR) clause?
This type of clause details any non-binding ADR methods that the parties must attempt before litigation. Common types of ADR include negotiation and mediation.
Non-binding methods are so-called since the result does not bind the parties; they can subsequently pursue other resolution methods if they wish.
Does the contract contain a binding Dispute Resolution (DR) clause?
Contracts can contain a DR clause specifying the method that must be used to resolve a dispute. DR methods result in binding decisions that the parties must adhere to (subject to any appeals process). Court proceedings are the most well-known form of DR, but others include arbitration and expert determination.
Is there an escalation clause?
Some contracts contain an ‘escalation clause’ detailing the ‘escalation’ procedure applicable to disputes. These clauses set out a series of steps that the parties must follow before they resort to the ultimate dispute resolution method, often litigation or arbitration. Each step is more formal than the last, with the intention being that the parties will settle their differences early and avoid the time and expense of proceedings.
Step 2 – Consider the evidence
Once you have established the existence of a legally binding contract and its terms, you must collate the evidence to support your case.
In a breach of contract claim, the evidence required will be that which proves the breach and evidences the loss. For example, if a supplier has delivered defective goods, key evidence will include the delivery notes and photographs of the goods at the time of delivery so there can be no suggestion that they have been subsequently tampered with.
Examples of the types of evidence you might use to prove your case include the following:
- Contractual documentation, primarily the contract itself, if there is one.
- Purchase orders.
- Delivery notes.
- Relevant correspondence between the parties. If any encounters happen in person, you should follow up with written communication.
- Witness accounts.
- Expert evidence (see below).
Expert witnesses and the role they play
The purpose of witness evidence is to prove a sequence of events or establish a set of facts. It is necessarily factual, and the witness providing it should not give an opinion as to its meaning, merits or the like. A Judge will use the evidence to piece together the history of the matter and the parties’ likely roles.
Some disputes involve complex issues that require an understanding of specialist subjects, such as science or engineering. In these cases, the assistance of expert witnesses might be needed. An expert witness’s role is to explain matters that necessitate technical knowledge, to enable the Judge to understand the intricacies of the case. The expert usually expresses an opinion on the technical issues they are asked to consider, based on their expertise and experience in the given area. Crucially, an expert witness’s primary duty is to the Court, not the party paying them.
Step 3 – Consider alternatives to litigation
Litigation is notoriously lengthy, expensive and uncertain. Luckily, there are several alternative dispute resolution methods that can be employed before, during or instead of, Court proceedings. We touched on some of the different binding and non-binding types of dispute resolution above and explain them in a little more detail below.
Non-binding methods of dispute resolution
Non-binding methods of dispute resolution are consensual and aim to facilitate the parties in reaching an agreement between themselves, voluntarily. They do not compromise any existing or future proceedings; anything discussed during ADR is confidential and without prejudice.
The most common methods of ADR are as follows:
Sometimes, the parties or their representatives discussing their issues openly can suffice to resolve them. Successful negotiations are cost-effective and quick and can preserve an ongoing commercial relationship.
In a mediation, a neutral third party – the Mediator - works with the parties to help them reach a mutually agreeable settlement.
Early neutral evaluation (ENE)
ENE is a mechanism whereby the parties obtain a neutral third-party opinion regarding the merits of either side’s position. ENE does not result in a resolution but can provide a useful starting point for negotiations.
Binding methods of dispute resolution
If the parties cannot settle the matter between themselves, they must employ a more formal, binding form of dispute resolution.
The most common methods of binding dispute resolution methods, aside from court based litigation, include:
In an arbitration, the arbitrator decides the case, and their decision cannot be appealed save for in very limited circumstances. On the whole, arbitration is somewhat less formal than litigation, and allows the parties greater control over the process. The parties’ rights to refer their disagreement to arbitration must be set out in the contract.
Expert determination involves the parties choosing an impartial expert to decide the issue. The decision is binding unless the parties agree otherwise.
Adjudication applies to contract disputes in the construction industry. Uniquely, an adjudicator’s decision is binding unless the matter is ultimately determined through arbitration. It is, however, a useful way to gain clarity on an issue quickly, without derailing the construction project.
Every dispute resolution type has advantages and disadvantages. The appropriate method in any given case depends on various factors, including the issue in dispute and the parties’ relationship. Our dispute resolution solicitors will advise on the most appropriate methods in your situation and guide you through your chosen process.
Step 4 - Litigation
Whilst litigation is usually considered a last resort, the nature of a dispute or the parties’ temperaments sometimes render it unavoidable.
Before issuing a claim, the parties are expected to follow a procedure known as a ‘Pre-action Protocol’. There are multiple Pre-action Protocols governing different types of disputes. Pre-action Protocols are intended to encourage the parties to exchange pertinent information at an early stage with a view to settling the matter as swiftly as possible out of court. If you fail to follow the Pre-action Protocol, the Court may penalise you on costs even if you win the case.
If the case proceeds to litigation, the Court will issue a timetable setting out the steps the parties must take and relevant deadlines. Litigation can appear overwhelming, complex and daunting, but our solicitors have vast experience and will work with you to present your case in the best possible way at trial.
Step 5 – Consider limitation
Your right to bring a claim does not last indefinitely. Where the contract is governed by the laws of England and Wales, as a general rule, breach of contract claims must be brought within 6 years of the breach. This is known as the ‘limitation period’. The limitation period is extended to 12 years if the contract was executed as a deed. A deed requires additional formalities – the signatures must be witnessed, for example. Some agreements must, by law, be executed as a deed, such as those relating to property sales or powers of attorney.
The parties can vary the limitation period by agreement, so it is crucial to review your contract for any reference to limitation. If you miss the limitation period you will generally be unable to pursue your claim, regardless of its merits.
Limitation periods and Pre-action Protocols
As we explained above, the parties to a contract dispute must follow a process known as a Pre-action Protocol before proceeding to litigation. Sometimes, with the expiration of limitation looming, clients are concerned that by following the protocol, they will lose the right to pursue their claim.
Speak to us urgently if you are in this position. Our business dispute solicitors will devise a strategy that preserves your ability to issue a claim whilst avoiding the costs consequences that can flow from a failure to adhere to the protocol. This usually involves issuing a claim before the limitation period expires, then requesting a ‘stay of proceedings’ pending completion of the Pre-action Protocol steps, or entering into what is known as a Standstill Agreement.
Step 6 – Costs considerations
Contract disputes can be costly, not only in terms of your business’s profitability and management time but also in legal fees. So, before embarking on any course of action, you should give careful consideration to the following factors:
The other party’s financial position
If the other party has no assets, pursuing them may prove fruitless. Even if your claim succeeds, you may struggle to collect any Judgment debt or costs they are ordered to pay.
How strong is your case?
The general rule in litigation is that the losing party must pay the successful party’s legal costs. So, if you have a strong case and succeed in your claim, you should be able to claim the majority of your legal costs back from the other side. If the case is less clear-cut, it may be more beneficial to seek a settlement through negotiation or another form of ADR. These methods are quicker and less costly than litigation, and each party usually pays their own legal costs as part of the deal.
You should note, however, that even a successful party rarely, if ever, recovers their entire legal costs. The Court will assess your costs and order the other party to pay what they consider reasonable. As a very rough guide, this often equates to around 2/3 of the total costs incurred. Further, litigation is inherently uncertain; even the apparently strongest cases can sometimes fail.
Our solicitors will discuss the costs consequences of any course of action with you before you proceed. Speaking openly with your legal team about your financial position and that of the other party, and your hopes for the outcome of the case will assist them in devising a strategy most likely to realise your goals whilst protecting your costs position.
Contract disputes are all too common in the commercial world and managing them can be a challenge. Our experienced team of business dispute solicitors comprises both commercial contract specialists and dispute resolution experts whose combined knowledge and skills can minimise your risk of contract disputes and resolve any that arise as swiftly as possible. Whilst contract disputes are problematic, with the right strategy in place, they need not be disastrous. Sometimes, when dealt with effectively, a disagreement can even strengthen a commercial relationship by clarifying specific issues and paving the way for the parties to move forward positively.