How to avoid legal disputes – dealing with things when they go wrong

It would be nice to be able to assume that contracts never go wrong. To be able to assume that all contracts proceed exactly as expected, on time and on budget (or better).

However, it sometimes seems as though no contract, in fact, proceeds in such a straightforward fashion. No matter what steps have been taken to avoid disputes at the pre-contract stage, like in this recent article: "Residential construction contracts: consider using adjudication where available", or to spot trouble during a contract, like here: "A foot in the door: should supply only contracts be caught by the HGCRA?". Problems can still arise. This article therefore considers what to do when things are going wrong. In particular, it looks at the need to:

  1. escalate the matter, both internally and externally;
  2. minimise losses;
  3. document what is happening; and
  4. objectively review how to resolve the issue.

These steps should enable an organisation to be in the best possible position either to resolve the problem or to take formal action (if required).


Escalate the matter internally and externally

When there are problems with a contract, it can be all too easy to hope that if the problems are “managed locally” – or even ignored – they will go away. Indeed, some problems probably will.

However, when there is a problem, the right senior people within an organisation need to know, both to manage the problem and, perhaps, to approve certain actions or expenditure. Further, there may well need to be additional people allocated to the contract to help deal with the problem. Therefore, the matter should be escalated internally at an early stage.

Correspondingly, you should consider whether it is appropriate to escalate the matter with the other contracting party. Combined, sufficiently senior people from both organisations may have enough authority to be able to agree on a swift resolution to the problem.


Minimise losses

At this early stage, you may not know whether you have a valid claim against anyone for what has gone wrong. Further, even if you have a valid claim, the amount you will be able to recover will almost certainly be limited if you fail to “mitigate”: to take reasonable steps to minimise your losses.

To take an example, if a dissatisfied contractor walks off-site and refuses to return, waiting indefinitely for the contractor to return will not be a viable option. At some (reasonable) point, you will need to engage a new contractor and pursue such claims as you may have against the original contractor later. Otherwise, the additional costs arising from failure to minimise your loss (e.g. costs of delay to other contractors and to practical completion overall) are unlikely to be recoverable.

Therefore, practical advice is to proceed as if you have no claim against anyone. Assuming that you are unable to pass on any costs, what would you do?

A linked consideration is whether it is possible to minimise costs to an organisation through insurance (where appropriate cover exists). This is a substantial topic in its own right, but the short point in this context is that unless insurers are properly notified of a claim at an early stage, they may decline to cover the claim. This will mean that an organisation loses the benefit of the financial protection that it thought it had.


Document what is happening

In the heat of the moment, it can be all too easy to focus on the obvious issue: the need to get the problem fixed. This is undeniably important, both as a general principle and given the need to mitigate losses. However, for a claim to be pursued effectively later, it is important to document what is happening and the decisions that you make.

These days, it is not too difficult to create a written record. For example, if you have a telephone call, you can send an email to the other party shortly afterwards to confirm what was discussed. Internal emails are also helpful as they can show (1) what action was taken and (2), perhaps more importantly, why that action was taken.

The other form of documentation to consider is formal notices under a contract. Under some contracts, unless you serve notice in the correct form and within the right timescale, you will be unable to recover some or all of your losses later.


Objectively review how to resolve the issue

When dealing with a problem – particularly a substantial one – it can be far too easy to focus on “firefighting”: dealing with the immediate issue without stepping back to look at the bigger picture. Therefore, with the additional resources hopefully received through the internal escalation of the matter, it is important that someone has the time needed to take a step back and plan where to go next.

Sometimes, someone within an organisation may be able to give a sufficiently informed and independent view on the problem to help guide the next steps. This is particularly appropriate in relation to technical matters (e.g. alleged defects in paint or problems with the functionality of a computer program), where an organisation may have substantial in-house expertise.

However, for larger or more complex matters, the most appropriate form of objective review is likely to be a review conducted by someone who is both appropriately qualified and truly independent of the organisation, such as a consultant, independent expert or solicitor.


Taking further steps

In some cases, the above steps may be sufficient to avoid a sustained dispute. However, even if the matter is unable to be resolved at this stage, it does not mean that court proceedings are inevitable. There are still ways to resolve a dispute without court proceedings being necessary, including through negotiations (whether formal or informal), mediation, or other forms of “alternative dispute resolution”.

The steps that can be taken to avoid court proceedings at this stage will be the subject of the next article in this series.

Michael Booth