Hindsight is a wonderful thing. Once a dispute has arisen, it seems all too obvious that “the signs were there”. However, noticing those signs at the time is nowhere near as straightforward as when you know the apparently inevitable conclusion.
The previous article in this series looked at how to avoid disputes in the pre-contract stage by:
- doing proper due diligence on the other contracting party;
- setting achievable expectations; and
- drawing up an appropriate contract properly and promptly.
This article looks at how to avoid disputes by looking out for potential signs of trouble during a contract. In particular, it considers the following potential signs of trouble:
- changes to key personnel;
- inadequate performance;
- financial problems; and
- external influences.
It then looks at how to initially respond to signs of trouble.
Changes to key personnel
On the face of things, changes to key personnel might seem insignificant. Contracts are (almost always) between companies, not the people who work for those companies. Therefore, regardless of personnel changes, the companies are still bound to perform the contract.
In practice, of course, things are seldom as straightforward as this type of strict legal analysis would suggest.
In some cases, personnel leaving might mean that it is nigh on impossible to recruit a suitably qualified replacement. (This is particularly prevalent at the time of writing, in September 2021.)
In other cases, personnel change might signal – or cause – a change in attitude of the other party. By way of example, think of the quantity surveyor that is replaced by their employer because they are too “lenient”, or a new business manager that is on the lookout for any legal basis on which to terminate an unprofitable contract.
There are doubtless many occasions on which personnel change (reasonably) seamlessly. Nonetheless, this superficially simple act does seem to lead disproportionally to disputes.
Inadequate performance
A more concrete sign of trouble is inadequate performance of a contract by the other party. At the outset, this might be in relation to apparently trivial issues, such as lack of communication or slightly late performance. However, it could build up to something more substantial, and could be a sign that the other party is unwilling – or unable – to perform the contract properly.
Of course, inadequate performance is not just about one party failing to deliver goods or services satisfactorily. It is also about the other party not performing their obligation to pay for those goods or services. Late, partial, or no payment may be a sign of a dispute (depending on the explanations given for non-payment, if any). Alternatively, it may be a sign of something equally, if not more, problematic, namely financial problems.
Financial problems
Financial disclosure requirements for private limited companies are, from an outsider’s perspective, disappointingly limited. A basic balance sheet may be all that a company is required to file at Companies House, and only then up to nine months after year-end. Alternatively, by the time that a county court judgment appears on a company’s credit record, the damage may already have be done.
All of this means that by the time that any formal news is announced about a company’s financial position, it may be too late. If a company’s credit has not been withdrawn already, it may be very shortly, and with it any opportunity of continuing the contract on the usual commercial basis. Further, financial claims for breach of contract are likely to be worthless if they will only be met by a small payment to unsecured creditors a year or two down the line.
Given the above, spotting inadequate contractual performance and listening out for any “murmurings” in the industry are likely to be some of the few ways to spot financial problems before it is too late to deal with them.
External influences
The previous article addressed the importance of setting out achievable obligations in a contract between parties. However, those obligations will have been judged to have been achievable based on the situation as it was known at the time. One need only think of March 2020 to think of how radically such underlying assumptions can change.
Of all the situations on the list, it is one where there might be the best prospect of salvaging the situation. Leaving aside whether contractual terms might be legally binding in such situations, if there is an unforeseen event that is no-one’s “fault”, there might be more scope to do a (new) “deal”.
Responding to signs of trouble
A sign of trouble is, at the very least, something to be investigated. Of course, it may turn out to be nothing. However, “forewarned is forearmed”.
Where the sign of trouble does indeed look like trouble, it is an opportunity to consider what next steps to take. Legal input may be needed at this stage, particularly if a superficially attractive option, such as terminating a contract, could backfire, such as if there is no proper basis to terminate the contract at that stage.
On a more general level, communicating, both with the other party and people likely to be affected by a dispute, is key.
As parties are, by this stage, in a contract, it is likely to be impossible to avoid all of the consequences of a dispute. However, spotting signs of trouble might provide an opportunity to nip the problems in the bud, or at least to help mitigate losses.
The next article in this series will look in more detail into how to deal with signs of trouble once they have been spotted.
