Dealing with contract disputes can be frustrating, mentally challenging and a time-consuming process. It’s paramount to make a rational decision based on the best interests of your business when considering the best way to go about settling these disputes, which means that when relationships between the contractual parties turn sour, understanding of your rights, deciding on the best options for your business and having an effective strategy is crucial.
In this guide we will set out, step by step, how you can go about finding a resolution when a contract dispute arises in the course of your business.
We will cover:
- STEP ONE: Review your contract
- STEP TWO: Alternative options to litigation – Binding and non-binding options
- STEP THREE: Pre-Action Protocols and Litigation
- STEP FOUR: What limitation periods apply?
- STEP FIVE: Consideration of costs
- STEP SIX: How can you prevent a contract dispute?
STEP ONE: Review your contract
The first step is to carefully review the contract in question. The contract will provide information that will help you determine:
How serious the dispute is:
The terms of the contract will help you identify which clause of it has not been followed and therefore what has amounted to a breach of contract. A serious breach of a significant term may lead to termination of the contract and the innocent party has a legal right to claim damages for their loss.
For a less serious breach, the innocent party may only claim damages that directly result from the breach and the contract remains in place.
In summary, determining how serious the dispute is enables an understanding of the ramifications, the parties’ entitlements and the potential ways in which an alternative resolution may be found – as we will discuss in more detail at Step Three.
How the contract should be used to inform how you resolve the dispute
There are a few things it’s important to check when you’re reviewing the contract to decide how best to move forward with the dispute. These can be summarised as follows:
- Which country’s law is governing the contract?
Make sure you’re aware of the governing law (also referred to as ‘jurisdiction’) under which the contract was written. This will more than likely be specified in the contract itself, but if you are struggling to determine your rights, make sure you seek the correct legal advice. (This guide is focusing on England & Wales as the governing law/jurisdiction).
- Is there a non-binding Alternative Dispute Resolution (ADR) clause in the contract?
This type of clause will provide information as to which steps you and the other party must take to resolve the dispute before entering into a binding decision, and is one way of enabling the parties to reach a consensual resolution of the problem. The main forms of non-binding ADR are negotiation, mediation and early neutral evaluation, and these different strategies can be read about in more detail in the handy guides we’ve put together in our Growth Hub.
- Is there a binding decision (jurisdiction clause) in the contract?
This clause is a binding form of dispute resolution (referred to as ‘DR’), enabling the parties to submit their dispute to a neutral third party to determine how it can best be settled. The most common alternatives to reaching a binding decision, aside from litigation, are arbitration agreements or Expert Determination/Adjudication.
- Is there an escalation clause?
An escalation clause (otherwise known as tiered dispute resolution clause) is where the parties agreed at the outset of the contractual relationship to use their representative to resolve the dispute amicably through ordinary negotiations. The escalation clause also sets out the steps the parties must follow before resulting to a binding decision.
The first step is usually an internal management negotiation process for an agreed period of time (for example, 20 days from notification), followed by a non-binding ADR option, and as a final step, a binding DR decision. The escalation clause can be enforced by the court and be arbitration-specific. An experienced commercial contract solicitor will be able to ensure that the process is correctly applied.
In the event of the absence of a written contract, it’s advisable to review correspondence between the parties involved regarding the related work. An email or a letter will provide detail of the time frame, scope of work and description of a product or service provided, and an invoice will provide information about pricing.
STEP TWO: Alternative options to litigation – Binding and non-binding options
As discussed above, a contract will give consideration to a binding and non-binding clause, setting out the process by which the parties intend to resolve a dispute. It’s possible for a contract to cover both contractual disputes (conflicting interpretation over the terms of the contract) and non-contractual disputes (negligence or misrepresentation).
ADR focuses on parties reaching a ‘without prejudice’ consensual resolution. The most important features of the ADR process are that it is flexible, inexpensive and quick. Due to its ‘without prejudice’ nature, it does not compromise the parties’ position if a settlement is not reached and the parties decide to proceed with other methods of resolution. It’s also worth pointing out on the topic of ADR that neither you nor the other party may use or refer to anything that is raised during the ADR process.
The most common methods of non-binding options to litigation are:
- Negotiation: an attempt by the parties’ representatives to resolve the dispute in a neutral setting, to preserve an ongoing commercial relationship and to provide a cost-effective route before moving onto a non-binding and binding decision.
- Mediation: this is the process of using a neutral mediator to resolve the dispute. In short, this leaves it up to you and the other side to agree a resolution to your disagreement.
- Early neutral evaluation (ENE): this is when a neutral third-party opinion is obtained to enable the parties to evaluate the likely outcome of the dispute before proceeding to trial. Both the Commercial Court and the Technology and Construction Court facilitate ENE.
If no way can be found to settle the contractual dispute via a non-binding option, the next step is to consider the binding option provided for in the contract. A binding option offers more structure, is less expensive and is more formal than litigation.
The most common methods of binding options to litigation are:
- Arbitration: this is a binding form of DR and the dispute is resolved by an independent arbitrator instead of the court. A party’s right to refer a dispute to arbitration depends on the existence of an Arbitration Agreement between the parties, so it’s important to check whether the contract refers to this at the outset – as touched upon above in Step One.
- Expert Determination (ED): this is a binding form of ADR and the parties get to choose a neutral expert with skills relevant to the dispute. ED is carried out privately and is designed to give businesses cheaper and faster solutions to commercial disputes.
- Adjudication: this is a binding form of DR specific to construction contracts.
An experienced dispute resolution solicitor will be able to explain which of the above methods is more beneficial for your dispute.
STEP THREE: Pre-Action Protocols and Litigation
As a general rule, court proceedings should be your last result. However, in certain cases the court can provide an effective way of resolving contact disputes. The Civil Procedure Rules (CPR) provide detailed guides on the litigation process. Simultaneously, there is an expectation by the court for you and the other party to consider Pre-Action Protocols prior to commencing any claim. Failure to consider those rules will result in penalties at a later stage of the proceedings.
Currently, there are multiple Pre-Action Protocols under the CPR, but if none of the specific Protocols apply to your dispute, then the provisions of the Practice-Direction on Pre-Action Conduct and Protocols (PDPACP) should be considered. Although the PDPACP is not mandatory, the courts have the discretion to order sanctions against a party that does not comply with the PDPACP.
If the parties cannot resolve their dispute, litigation is usually provided for in a contract clause, provided that the parties failed to settle their dispute through other resolution methods. Litigation involves a court trial, is binding and enforceable. It is also costly and a slower way to resolve a dispute, particularly now that the courts are dealing with a backlog of cases since the Covid-19 pandemic.
Litigation could, however, be considered the best option for parties who have expensive matters with many disputed issues and are unable to resolve them in another way.
Find out more about the litigation process from our dispute resolution partner, Ian Carson, as he explains the key stages, documents and timeframes involved in the court process.
STEP FOUR: What limitation periods apply?
For contract disputes, limitation periods are provided by the Limitations Act 1980 or agreed in the contract by the parties. A limitation period is a time limit within which a party can bring a claim. Once this time limit is expired, the right to commence proceedings is lost.
The Limitation Act 1980 provides that a claim for a breach of contract must be made within 6 years from the date of such breach. If the contract is executed as a deed, the limitation period is 12 years.
The requirement of reasonableness
Limitation periods specified in a contract must be reasonable to be effective. The reasonableness test is set out in the Unfair Contract Terms Act 1077 (UCTA) and largely depends on the bargaining power of the parties to the contract. A limitation clause in a contract is unlikely to be challenged by the court and as a result the parties will be free to negotiate smaller or longer limitation periods than the statutory limitation period.
Limitation periods and the Pre-Action Protocols
The Pre-Action Protocols set out steps for parties to follow to narrow down matters before issuing proceedings, and potentially resolve the dispute without having to litigate. As a result, there will always be enough time to comply with the relevant protocol before the limitation period expires. In those circumstances, a claim form should be served and the other party should be informed that there is intention to file a request of ‘stay of proceedings’ until completion of the pre-action protocol steps. This approach will avoid any subsequent applications for costs penalties or sanctions.
A dispute resolution solicitor can help by explaining the limitation periods based on your particular dispute and provide a strategy.
STEP FIVE: Consideration of costs
One other aspect that needs careful consideration before deciding the best course of action for your dispute is costs. Points you need to consider include:
- What is the other side’s position?
Does the other side have enough assets? If not, then entering into litigation might be a waste of your time and money.
- How strong is your case?
The general rule in litigation proceedings is that the losing party will pay the winning party’s costs. If you have a strong case, then going all the way to court might be an option. If you have a weaker case, seeking a quick ADR settlement might be more effective and less costly. As a general principle in ADR, each party pays its own fees in attempting to reach settlement.
- Discuss legal representation fees with your solicitor
Seeking legal advice will help you make an informed decision as to what you may recover through litigation. You may also wish to sensibly discuss the risk of not getting what you want, depending on the nature of how the dispute is resolved.
- Have you considered ADR options?
Refusal to consider an ADR option before or during litigation might result in court sanctions, and these sanctions can potentially be financially onerous for your business.
Seeking legal advice at an early stage from a dispute resolution solicitor will enable you to see things clearly, objectively and from a commercial perspective.
STEP SIX: How can you prevent a contract dispute?
Contact disputes can be prevented by pre-planning your strategy during the negotiations and drafting of the contract. Here’s how you can get the contract right from the beginning to avoid a contract dispute:
Draft a strong contract that is clear and unambiguous
The most important element of a contract is its ability to deal with potential issues that might arise, save time and money and preserve the parties’ relationship. To achieve these outcomes, it’s important that the contract:
- Accurately reflects the deal
Outline your position in the contract by drafting deal points. If deal points are not included in the contract, it could be considered outside of the scope of it and therefore not a binding obligation.
- Is clear about performance
The contract must be clear about performance requirements and specific about deadlines. Avoid general and vague time periods, because this increases the prospect of one party getting out of the contract if the deadlines are not met.
- Details expected level of quality
The contract should ascribe the level of quality, the criteria of meeting the quality level and will specify who will determine that this quality level is met.
Seek legal Advice
Our experienced team of lawyers consists of specialist commercial contract solicitors and dispute resolution solicitors, whose combined knowledge and skills can assist with both helping to prevent contract disputes, and also with helping you to explore ways to settle disputes when they do arise. We also offer something a little bit different, which is why we’ve put together various packages that provide entrepreneurial businesses like yours with ongoing support and peace of mind in a way that suits all budgets and requirements.