Contract disputes are an unpleasant but relatively common feature in the business world. They are potentially very disruptive, often siphoning time, energy and money that would be better spent elsewhere. However, with the right legal advice, contract disputes can be solved efficiently, preventing significant damage to your reputation and keeping important commercial relationships on track.
What constitutes a contract dispute?
Contract disputes often arise because of an alleged breach of contract, usually where an agreement has been made between two or more parties, but one has failed to uphold its side of that agreement.
However, contract disputes can concern any of the terms contained within a contract, such as where there is disagreement over those terms.
Examples of contract disputes could include:
- A customer failing or refusing to pay for a product or service.
- A disagreement between a business and supplier over the quality of the supplier’s services, potentially constituting a breach of contract.
- An allegation that a business coerced a person or company into signing a contract or misrepresented itself to persuade them into doing so.
- A business alleging that a former senior executive breached a non-compete clause.
Contract disputes can also be common between employer and employees, for example, where a former employee argues they were not paid a performance-related bonus that they believed they were contractually entitled to. Employment disputes should be handled following the specific ACAS guidance.
The Limitation Act 1980 states that a breach of contract claim can be brought within six years of the date when the alleged breach occurred.
What does the other side want?
Whether you are bringing the claim against another party or are on the receiving end, it helps to understand what both sides are trying to achieve. What are your priorities? Is preserving the relationship the most valuable outcome or is a financial settlement likely to be the key objective, or are you looking for the quickest resolution with minimal reputational impact?
Disputes are rarely straightforward, the legal process can seem complex and the case outcome extremely difficult to predict or guarantee. This makes discussing your options early on in the dispute with an experienced legal adviser an important part of resolving any contract dispute.
How to solve a contract dispute
There are several ways to approach a contract dispute. While it is recommended to follow the guidance of your legal adviser for your specific circumstances, generally you should expect initially to enter a negotiation with the other side. Opening channels of communication in this way may be beneficial if you are keen to preserve a commercial relationship.
With the help of your lawyer, you can discuss the agreement in question. Where there is a lack of clarity in the contract, here may be some discussion over the interpretation of a certain word or phrase. If both sides are willing, an easy solution in this case may be to rewrite a certain part of the contract so that both sides are satisfied.
If it is the other party that has not adhered to the agreement, you must explain how they have done so. You will want to demonstrate how you have suffered a loss resulting from their failure to fulfil their side of the agreement. Your lawyer will likely keep evidence of the negotiations between both parties, such as any written communication (emails and letters) or notes taken during discussions.
Mediation and arbitration
If an agreement cannot be reached through negotiation, it may be appropriate to try another form of dispute resolution, such as mediation or arbitration.
Arbitration and mediation are generally seen as preferable procedures to litigation, as they are private, not public, and are typically quicker and less costly.
With mediation, parties agree to discuss the dispute in the presence of a trained mediator. As an impartial third party, they can help to facilitate the discussion and aim to guide both sides to a conclusion. A mediator is not there to influence or decide what the outcome should be. In the UK, the Ministry of Justice provides a directory of mediation providers registered by the Civil Mediation Council.
As a less formal procedure, mediation can be beneficial in many cases in allowing the parties to voice their issues, and to be more creative and flexible in any resulting agreement – since they are not bound by court rules. Any settlement resulting from mediation is not legally binding on parties until written and signed by all parties to the dispute.
As with mediation, both parties must agree to the arbitration process, but, in contrast, the arbitrator (also an impartial third party) does decide on the issue, based on evidence presented by both parties. Before commencing arbitration, both sides must agree to uphold the decision of the arbitrator, even if it is not in their favour.
Litigation – a last resort
Litigation, i.e. presenting the case before the court for a judge to decide the outcome is often viewed as a last resort in contract dispute cases, as it is generally an expensive and lengthy process.
Again – it comes down to the objectives of the parties involved. For some, money is not the concern and they want their day in court to have the issue aired and decided on publically. For others, financial recompense will be sufficient to settle the dispute.
For these reasons, and given current practical issues of resource-stretched courts, litigation is seen as a last resort and the court will expect parties to have tried alternative dispute resolution before litigation.
Your legal adviser will guide you through the litigation process and formal legal protocol. Put simply, the person or business making the claim must notify the other side(s) in writing of their intention to take them to court. Parties receiving this notification must then decide whether to defend the claim or accept it. Again, the advice of a lawyer is critical in weighing up the benefits and pitfalls of both options.
If the dispute proceeds to court, all parties are expected to disclose the list of documents they intend to rely on in court. This also applies to witness statements if one or both parties wish to bring in witnesses, including independent expert witnesses. During the trial, both parties’ lawyers will orally make their clients’ cases. It is ultimately up to the judge presiding over the trial to make the final decision.
What remedies are available for contract disputes?
The remedies available for contract disputes depend on the type of breach that has occurred – whether minor, material, fundamental or anticipatory – and the course of action taken by the non-breaching party. For minor breaches, for example, communication is often the best remedy; the breaching party can simply correct their mistake.
With material or fundamental breaches of contract, the awarding of monetary damages is often the appropriate legal remedy. This course of action is intended to put the party claiming to have suffered a loss into the position they would have been in had the other party not, for example, breached the contract.
In other cases, equitable remedies are sought. The court may, for example, order a party to perform the obligation they should have performed under the terms of the contract. It is possible for the court to serve a party with an injunction that either prevents them from doing something (a ‘prohibitory injunction’) or orders them to do something (a ‘mandatory injunction’).
There are some situations, for example cases where misrepresentation or mistakes have occurred, where the best remedy is to set aside the contract altogether. This is known as rescission and restores both parties to the positions they were in before they entered the contract. Finally, a court may also choose to rectify written contracts where it is deemed that the agreement in question is inaccurate or misleading.
Having a dispute resolution clause in your contracts with suppliers, clients and employees is a sensible way of ensuring a fair and pre-determined method of resolving disputes should they arise. A dispute resolution clause allows you to specify a specific plan of action, such as informal negotiation or mediation as the agreed first step. This gives both parties an opportunity to reach an early agreement, saving time and money and preserving the commercial relationship.
Legal advice should always be sought when drawing up or reviewing contracts; it is one of the best ways of reducing risk and protecting yourself and your business.