Disputes are bad. They take up time. They take up money. This is the impression that clients will almost always be left with when they seek advice on a dispute.
To an extent, however, all of the above statements are true. Once in a dispute, it may well seem that the best way to deal with it is to pursue the dispute to its conclusion. However, with the benefit of hindsight, it would almost always have been better that the dispute had never arisen.
Of course, there is no guaranteed way of avoiding disputes. However, there are some steps that can be taken to manage – or at least discover – potential risks.
This article focuses on the early stage of a business relationship. It looks at things that can be done before there are any legal obligations on either party in relation to a project. These steps cover:
- doing proper due diligence on the other contracting party;
- setting achievable expectations; and
- drawing up an appropriate contract properly and promptly.
1. Do proper due diligence
It takes two to tango, so they say. Therefore, the first step in trying to avoid a dispute should be trying to avoid dealing with people who might raise – or give rise to – a dispute.
The most obvious way to check whether the other party might cause problems later – and something that a solicitor would hope is done in every instance – is to get to know that person at the outset. Find out whether they say they have the necessary expertise and equipment. Find out whether you think that you could deal with them. And yet always be aware of answers that seem like sales patter rather than substance, particularly if dealing with someone from a sales department rather than someone who will actually be involved in the project.
In some cases, due diligence will be more formal than mere discussions, such as in the form of response to a pre-contract questionnaire or formal works proposals.
However, relying only on a prospective contracting party to supply information does, of course, fall down if the other person is not entirely truthful – the very sort of person that you would wish to avoid dealing with. Therefore, you should always try to verify the key information using external sources.
The most obvious source of verification will be to talk to customers or people in the industry, and also to see examples of previous work. Particularly in more niche areas of expertise, the “bad apples” are potentially not too difficult to discover.
However, it is also worth checking out a business using more formal sources, such as Companies House (which is freely available online) and credit reference agencies.
In particular, formal sources can be used to check a business’ financial position, which, directly or indirectly, seems to be the cause of many disputes. The mere fact that a company has previously done all sorts of good work is of no relevance if it now has net liabilities and three county court judgments against it.
2. Set achievable expectations
The due diligence provides information needed to manage expectations in relation to the intended contract.
A key principle in the setting of expectations is to underpromise and overdeliver, which is much better than its reverse. If your customer is asking the impossible, then, as a supplier, all you can do is fail to meet its requirements. Further, if this is the customer’s starting attitude, you should really consider whether you want to continue to work for them, particularly if there is a lengthy contract. On the other side of the equation, if your supplier cannot meet your requirements, then either your requirements need to change or negotiations should start with a new supplier.
Quite often, it will seem as though one party will be obliged to do all the work, whether supplying goods, services, or both, with the other party “only” being obliged to pay. However, this apparent one-way relationship is rare in practice. In almost every instance, the customer will need to do more than just pay to make the contract work, such as accepting delivery of goods or providing instructions on aspects of the service.
Further, it should not be overlooked that the customer’s obligation to pay is an absolutely fundamental obligation. Without this money, there is no commercial purpose to the transaction. This obligation should therefore be dealt with at the outset, and in a way that manages any risks identified in the financial due diligence. For example, being paid upfront might be the answer to a dubious credit rating, but only if there is a reasonably clear amount that the customer is likely to become obliged to pay. Other options could be to agree front-loaded stage payments or obtaining monies on account. You could also consider other forms of security, such as requiring a personal guarantee from a director of the customer. This would provide a route of recovery should the customer default on its contractual obligations.
3. Draw up a written agreement properly and promptly
It is all too easy to assume that if you do not have a formal, signed agreement in place, there is no contract. In legal terms, however, this is not necessarily the case.
Particularly in business-to-business situations, the courts can be inclined to interpret events as forming a contract. This contract will probably be based on the general law, oral negotiations, and documents such as email exchanges, purchase orders and the parties’ standard terms of business (if any).
Working out exactly what the contract is in such a situation can be far from straightforward. You should therefore try to make it clear at the outset what the agreed terms are. Get them properly documented on the basis of the due diligence and the setting of expectations, and then get agreement to those terms from the other party. At the very least, this process should mean that, should there be a dispute, everyone will know where to find the terms governing the contract.
On the reverse side of the equation, if you receive a set of terms from the other party, make sure that you read them and appreciate the risks. In particular, try to think about where things might go wrong and what the consequences might be according to these terms. If there is a (potential) problem, it is better to address it now rather than hope that it never arises.
One key thing to avoid is delaying the conclusion of the contract for too long. Before work starts under a contract, both parties have an incentive to agree terms. Most likely, one party wants goods or services and the other wants to be able to get the money for supplying those goods or services. However, once work has started, it can be all too easy to proceed without then going back and documenting the contractual terms. There is also a risk that a dispute will arise before the contract has been formally agreed, albeit that a court may still view that a contract of some sort has been formed. It is therefore important to document the contract both properly and promptly.
After the conclusion of the contract
The above process will hopefully filter out people that you do not want to deal with, as well as setting out achievable expectations for a project in a coherent set of terms. All of these steps should mean that a contract starts in the best possible way.
However, a contract is not just about its formation, but also about how matters progress in practice. The unexpected can still happen, whether this is a sudden drop in the quality of one party’s work, a change in attitude of one party, or even an entirely unanticipated event. Dealing with the unexpected – and looking out for the warning signs of problems in contracts – is a topic that will be addresses in the next article in this series.
