Managing litigation risk in commercial relationships
October 2015 | SPECIAL REPORT: INTERNATIONAL DISPUTE RESOLUTION
Financier Worldwide Magazine
Expensive disputes can occur even in the best maintained contracting relationships but many can be headed off by careful thought and drafting at the outset. A well run contracts team will have – and will follow – a written and widely promulgated policy for the formation of business relationships. Set out below are just a few of the key considerations to have in mind for inclusion.
Firstly, in order for a contract to be enforceable it will need to have been entered into by an individual with the requisite authority. All relevant employees or agents should be aware of the limits of their authority to enter into contracts and stick to them. Similarly, it should be clear that the individual signing off the agreement in the other party has the authority to do so – and evidence should be requested in case of doubt.
Secondly, when both sides are keen to conclude an important agreement and get on with putting it into operation, it is tempting to allow a form of constructive ambiguity to creep in so that each can enter into the deal with a subtle or not so subtle difference in understanding as to what it means. It is much better though to ensure there is a clear and shared understanding of key terms such as pricing mechanisms, quality requirements and specifications, duration, the circumstances in which variations to the agreement will be allowed and events which will permit termination. It is vital to keep a signed set of concluded contractual documents rather than be forced later to rely on an unsigned draft printed off the computer which is thought likely to represent what was ultimately agreed.
Thirdly, it makes sense to consider whether liability should be excluded or limited or financial caps agreed in relation to potential claims. There is complexity in getting this right. In very broad terms, however, in consumer contracts and business to business contracts entered into on standard terms, a commercial party may exclude or restrict its liability for breach of contract only to the extent that the exclusion or restriction satisfies the requirements of reasonableness. In order to pass the reasonableness test, a contract term must have been fair and reasonable, having regard to the circumstances which were, or should reasonably have been, known to or in the contemplation of the parties when the contract was made. In all other cases parties are generally free to agree as they wish.
It is sensible for a party who may need to rely on such an exclusion clause to ensure that is it specifically negotiated or at least drawn to the attention of the other party; that will assist in persuading a Court to uphold it.
Fourthly, any contract with an international element should include clauses dealing with governing law and jurisdiction. This promotes certainty as to the rules to be applied to interpretation of the contract and whose judges will be involved in making decisions on any dispute. In the absence of such a clause, default rules will need to be relied upon but there can be argument about how they apply to a given set of facts.
The jurisdiction clause will not necessarily provide a complete answer as to how disputes are to be resolved. It is therefore usual to include a dispute resolution clause which sets out the manner in which any dispute may be determined. Escalation clauses are now common, particularly those clauses which mandate exchanges of information and meetings between ascending tiers of management if a dispute has become intractable. English courts will give effect to these, just as they will to clauses which require compulsory mediation before either party can start formal litigation or arbitral proceedings. Careful thought should be given as to whether litigation or arbitration is the right forum for ultimate resolution of an insoluble dispute. Many arbitration clauses are agreed to rather lazily, to the later regret of one or other of the parties. Arbitration has clear advantages of (relative) speed and flexibility and, most importantly, confidentiality. However, it is not inevitably cheaper than the Courts and does not generally suit a party caught as ‘piggy in the middle’ in a supply chain dispute.
When problems start to emerge
If a commercial relationship starts to break down it is tempting to enter a period of denial in the hope that the problem will resolve itself or simply go away. Generally, however, it is better to be proactive; the earlier issues are addressed the better the chance of a satisfactory outcome. Critical points then to bear in mind include, firstly, identifying objectives. Is it, for example, important to maintain the relationship for the future or is urgent, tough action required to preserve the business’s position? The answer will colour the approach to be taken and the tone to be adopted.
A second important point to bear in mind relates to crafting communications. If litigation or arbitration is a possibility it is important to create and state a position which is clear and robust but also persuasive. In the case of litigation in particular, procedural rules create an expectation of openness and reasonableness in pre-action correspondence and the right balances need to be struck. Furthermore, a party which decides to raise the stakes quickly by terminating the contract without grounds to do so may itself fall into the trap of committing a repudiatory breach of contract, handing the initiative – and the better of the argument – to the other.
Achieving early control of the evidence which will determine the key issues is a further critical point. It is important to secure the early cooperation and recollection of those who are potential witnesses. Relevant documents – including those in electronic form only – should be located and preserved. Systems should be put in place to preserve the confidentiality and legal privilege in communications about the dispute with legal and other advisers.
Businesses should also remain realistic about the cost of managing the dispute. Businesses always see the importance of budgeting for cash but it is equally important to factor in the management time and administrative burden of a long-running dispute; the demands of legal process arrive thick and fast.
It is also important to choose the right dispute resolution process. Early face to face discussions can promote settlement and preserve a business relationship before positions become entrenched. Mediation is not a universal panacea but it can take some of the heat out of tough negotiations and – for parties who each accept a need for some compromise from their best position – has a good track record of success.
Documenting a deal is also an important feature. If businesses are able to agree terms resolving the dispute it is essential that such resolution is clearly documented. In some cases that might require a Deed, in others a restatement and amendment of the existing contract. Careful thought must be given to what is being settled and what is not. For example, where there are no formal proceedings the dispute must be accurately defined. There may be tax consequences to consider of payments to be made or of the release of obligations.
And finally, obtaining incisive and targeted legal advice as a dispute is brewing can help parties to position themselves appropriately to secure a desired and cost-effective outcome.
Richard Portlock is a partner and Carina McFadden is a solicitor at Blake Morgan LLP. Mr Portlock can be contacted on +44 (0)23 8085 7158 or by email: firstname.lastname@example.org. Ms McFadden can be contacted on +44 (0)23 8085 7373 or by email: email@example.com.
© Financier Worldwide
Richard Portlock and Carina McFadden
Blake Morgan LLP