Preventing contractual disputes

We regularly advise on contractual disputes and the repercussions can be costly both financially and to the reputation of a business. Whilst contracts are the foundation of business, both in the UK and internationally, it is not uncommon to be involved in disputes where parties have either an entirely undocumented agreement or a poorly drafted contract.

Whilst any contract can be the subject of a dispute, we set out below some key provisions that parties should consider including in contracts to help prevent a dispute or mitigate the risks should a dispute become unavoidable.

1. Written Agreement

Whilst not strictly a provision itself, it is critical that parties ensure that contracts are made or documented in writing.

Whilst generally in English law an oral agreement carries just as much weight as a written agreement (there are some exceptions including contracts relating to land), enforcing an oral agreement is often fraught with difficulties as issues arise in evidencing what was agreed between the parties.

It is worthwhile obtaining professional advice when having a contract drawn up as the costs involved pale in comparison to the costs of litigation. A lawyer can assist in navigating potential risks and pitfalls in a contractual arrangement and can help to negotiate more beneficial terms.

2. Pre-Contractual Discussions

At a pre-contract stage it is often advisable to ensure that discussions are ‘subject to contract’ and all correspondence relating to contractual negotiations should generally be marked as such.

As part of any substantive contract parties should consider incorporating ‘entire agreement’ and ‘non-reliance’ clauses. These clauses can be pivotal in clarifying the scope of any contract and provide certainty to the parties, as they prevent parties inadvertently becoming bound by pre-contractual discussions and representations.

3. Variation Clauses

It is often be advisable to include provision for how changes to the agreement should be effectively made. The belt and braces approach is to provide for changes to be made in writing and signed by all parties. This again ensures certainty for the parties and prevents inadvertent amendment to the contract by conduct or oral agreement.

When any variation of a contract is contemplated a wholesale review of the terms of the agreement should be undertaken to consider whether there are any unanticipated consequences that the amendment may have to the remainder of the contract.

4. Consistency and Priority

The need for clarify and consistency in contracts is paramount. Where contracts are based upon multiple documents including side agreements and terms and conditions, these should be reviewed to ensure consistency with the master agreement.

Standard terms and conditions will invariably be used in repeat business situations. However, a policy should be implemented to ensure that these are regularly reviewed to ensure that they take appropriate account of changes within your business.

An additional layer of protection can be implemented by including a ‘priority clause’ within a contract to confirm the documents that should take precedence in the event that there are inconsistencies between clauses. 

5. Termination Clauses

Many contractual disputes centre on termination. Ensuring that a contract clearly details the circumstances in which it can be terminated is pivotal. Parties should consider whether provisions such as rolling contract terms provide them with sufficient control in the event of a need to exit the contract. 

6. Choice of Law & Jurisdiction

Particularly in cross-border contracts there is merit in specifying the law that is to govern the agreement and the Courts that are to have jurisdiction over the contract. For example, parties can elect for an agreement to be subject to the law of England & Wales and the jurisdiction of the English Courts.

This provides certainty for the parties in the event that a dispute does arise, and prevents the need for parties to have a satellite dispute on jurisdictional challenges before a substantive dispute can even be dealt with. It also can have significant implications when it comes to service of proceedings.

7. Dispute Resolution Mechanisms

There are occasions when a dispute is unavoidable. Incorporating a specific dispute resolution mechanism within a contract provides a framework for the parties to follow in the event of a dispute and can help to take some of the heat out of a dispute and illicit a resolution.

In the event that an agreement does not include a specific alternative dispute resolution (ADR) mechanism, parties are still free to engage in ADR, but would need to agree terms for the same.

There is no fixed requirements for a dispute resolution mechanism. However, common provisions include:-

• A specified period in which parties will enter into good faith negotiations in an attempt to resolve the dispute. This could also include a requirement for a face-to-face settlement meeting.

• A requirement for the parties to mediate, in which a third-party mediator will look to assist the parties in facilitating a resolution of a dispute. Mediation is non-binding in that the parties must reach a consensual agreement. A mediator will not determine the dispute or make any judgment as to who is right or wrong. We find that parties often have significant success at mediation and it is much more cost effective than substantive Court proceedings.

• A requirement for the parties to attend arbitration. Generally 1 or 3 arbitrators will be appointed at the agreement of the parties. There no requirement that an arbitrator be legally qualified, it could be another relevant professional, which is why arbitration can be particularly useful in technical disputes. The arbitrator will determine the dispute and this decision is binding on the parties. Arbitration is very flexible and depending on the claim, and the exact process followed, it can be quicker and more cost effective than litigation.

If a contract includes a dispute resolution mechanism this will generally be binding on the parties and in the event that substantive litigation was commenced, in breach of the dispute resolution clause, the responding party may be entitled to raise a challenge to the jurisdiction of the Court to determine the dispute.