Unfortunately, disputes are a reality in business. Understanding the most common causes of commercial disputes and how to address them can help mitigate the risks that give rise to them, and in turn avoid lengthy court battles.
In this ablogrticle we delve into the frequent types of commercial disputes, the initial steps to take if things go wrong, and various out-of-court resolution options.
Common Causes of Commercial Disputes
Commercial disputes typically arise between businesses and are often centered around the contract terms or the performance of a contract. Some of the most common causes are set out below.
Contractual Disputes: These disputes often occur when a party fails to meet the obligations outlined in a contract. Issues may involve the quality of goods or services provided, failure to make payments, or late deliveries.
Where the parties enter into a written contract, it should be clearly drafted with key terms such as the scope of the goods and/or services to be provided, payment terms, delivery standards and issues of liability to prevent misunderstandings.
However, more often than not parties to a commercial agreement do not record the terms in a formal written contract. Rather, terms are recorded in a series of email exchanges and verbally via telephone conversations. And that’s okay, but parties should be careful to keep a record of telephone conversations together with a file of emails to track what has been agreed to between the parties in the event of a later dispute.
Intellectual property infringement and breach of confidence: Disputes related to intellectual property and breach of confidence occur when there is unauthorised use of confidential information, trademarks, copyrights, or patents.
Confidential information and intellectual property is often a company’s most valuable asset, and protecting these rights is crucial. Confidential information may include information such as financial statements, client databases, website analytics and business processes.
Keeping thorough records of any confidential information or trade secrets that may be exchanged, early designs, drafts, and innovations is important for evidence, especially in copyright disputes where registration is not required.
Confidentiality Breaches and Restrictive Covenants: Breaches of confidentiality or restrictive covenants (for example, non-compete or non-solicitation clauses) often arise in employment contracts, service agreements, or shareholder agreements. Ensuring that these terms are clear, reasonable, and specific to your industry is key to their enforceability.
In particular, caution is advised when including non-compete clauses in employment contracts. These clauses can only be enforced if they are reasonable to protect the business interests of the party relying on the clause.
If you do wish to include a non-compete clause in your employment contracts, it’s essential that you consult a lawyer to draft a cascading clause that has a chance of being enforced should it come into play.
Shareholder and director disputes: These often arise due to disagreements over the direction of the company or management decisions. Often the context of these disputes is misaligned expectations and a failure to properly document rights and obligations.
Without clear shareholder agreements, disputes over voting rights, share transfers and buy-outs, or deadlock situations can be both challenging to resolve and very expensive.
What To Do When Things Go Wrong
When a dispute arises, early action is critical. It’s obviously in the best interests of both parties to resolve a dispute without proceeding to litigation. We have outlined below steps you might take with a view to achieving an early resolution of a commercial dispute.
- Open Discussions: Start by having candid discussions with your colleagues or the other party. Avoid a blame culture and instead focus on understanding the root of the issue.
- Preserve Evidence: Maintain all records and communication, both electronic and physical. If litigation is a possibility, evidence will be crucial.
- Consult the Contract: If the agreement has been recorded in a formal contract, identify any relevant dispute resolution clauses, such as mediation or arbitration provisions. Check if there are clauses limiting the liability of the parties or outlining rights of termination.
- Seek Legal Advice: If early and open discussions do not resolve the dispute, engage a lawyer as soon as possible to evaluate the situation objectively and devise a strategy that aligns with your business objectives and with a view to resolving the dispute fairly, efficiently and as inexpensively as possible.
Options for Out-of-Court Dispute Resolution
While litigation is sometimes necessary, there are out-of-court resolutions available and these are often preferable for their lower costs, quicker timelines, and less adversarial nature. Some key methods include:
- Negotiation: This can be informal or formal and allows parties to control the outcome. The primary benefit is cost-effectiveness, especially if both sides are motivated to settle amicably. However, negotiations require cooperation and compromise, which may not always be possible.
- Mediation: In mediation, an independent third party helps facilitate negotiations. It’s a non-binding process, meaning either party can walk away if no agreement is reached. Mediation is often less confrontational, which helps parties to preserve their business relationships.
- Arbitration: More formal than mediation, arbitration involves an arbitrator who makes a binding decision. Arbitration is usually faster and more flexible than going to court, especially for international disputes. However, it can be costly and offers limited opportunities for appeal should one party not be satisfied with the decision of the arbitrator.
Conclusion
Disputes are an inevitable part of business, but with the right preparation and approach, many can be resolved efficiently and amicably. Clear contract drafting, prudent record keeping, prompt action when things go wrong, and understanding the available dispute resolution options are key to minimising risk and avoiding costly litigation.
