Contracting tips for scaling businesses – avoiding and managing commercial disputes

Published 4 November 2021

When it comes to drafting commercial agreements, identifying and managing key risk areas (and indeed potential areas of dispute) should always be a primary consideration. Early-stage and scaling businesses – especially those involved in technology – often find it tempting to race into new agreements in order to drive forward a new relationship, and there is often some reluctance to negotiate for fear of losing the business. However, taking the time to consider the contractual terms and assess the risks will often prevent headaches (and claims) down the line.

Litigation can be stressful, costly and a drain on resources. On that basis, prevention is key. Whilst it is very unlikely that a business will be able to avoid disputes altogether, there are steps that can be taken to prevent disputes from becoming litigious. To do this, parties must ensure that:

• everyone understands what the key 'pain points' might be on a particular deal;
• the contractual drafting is unambiguous;
• everyone has considered and agreed upon what alternative dispute methods and additional 'flex' could be built in to allow for resolution of any disagreement without resorting to formal proceedings; and
• there is a sensible process to follow if and when a dispute does arise.

Key areas of contention

The ‘pain points’ which are likely to give rise to a dispute will vary based on the sector and circumstances of the commercial arrangement. However, there are some common themes when it comes to issues which cause the most disagreements, which include: (i) intellectual property ownership and misuse; (ii) data protection; (iii) poor or late provision of services / goods; (iv) staff-related issues (e.g. TUPE risk or staff poaching); and (v) unforeseen circumstances such as Brexit or lockdowns.

Approach to contract drafting

• Avoid ambiguity – it sounds obvious, but the literal meaning of the words used in a contract are of primary importance and will ultimately be relied on by the Court. With this in mind, the parties should be careful to ensure (particularly around contentious issues like intellectual property and liability) that the wording is always clear and reflects what has been agreed commercially. Using worked examples for things like liability caps and service credit regimes can be useful.
  
  
• Be wary of the template – commercial parties often assume that template clauses, even those which were once upon a time drafted by good lawyers, are bullet-proof and that one size fits all when it comes to contract templates. Templates can be useful and cost effective at the drafting stage, but should always be revisited in a new deal, and the document should be driven by what has actually been agreed at a commercial level.
  
  
• Contracting tools – parties to a contract will usually prefer for contracts (and indeed the relationship with the other party) to 'live on' in the event of a dispute, and to avoid drastic action. There are a number of provisions that can be included (depending on the type of agreement) which can help them achieve this, such as:
  • Performance regimes – where appropriate, it may be useful to build in service level / KPI commitments from suppliers with clear remedies which would apply (typically service credits) where these are not fulfilled. This provides a method of monitoring performance and also provides customers with a contractual remedy without having to resort to a formal claim.
    
    
  • Delay provisions – has the supplier committed to provide a particular deliverable by a certain date? If so, consider whether it is possible to hard-code some pre-agreed remedies into the agreement which apply on late delivery. It is also sensible to spell out any 'customer dependencies' which the supplier is reliant upon, so there is transparency.
    
    
  • Step-in rights – these apply when certain triggers are hit (e.g. the supplier commits a material breach of contract) and allow a customer to assume some responsibility over service delivery for a specified period, and will often involve the appointment of a different third party supplier. This provides a method of resolving a serious deterioration in performance before the contract 'breaks'.
    
    
  • General governance – aside from the above it is always sensible to have a general governance structure, even if that is simply an obligation on the parties to have quarterly or annual review meetings to discuss progress. Open communication and transparency is key.
    
    
  • Change control – having a clear process allowing for changing the commercial and legal aspects of the agreement is important, and will provide useful flexibility in the event that circumstances change.
    
    
  • Multi-tiered dispute resolution clause – this sets out a stepped process for the parties to openly discuss any disagreements at different levels of their respective organisations, escalating at appropriate levels and culminating in discussions between CEOs (or equivalent). It is possible to have a similar clause dealing specifically with invoice disputes. It's important that any such procedure does not impede on a party's ability to resort to formal proceedings if necessary; this should help to avoid a party using the tiered process as a 'stalling' technique.

How to manage a dispute pragmatically if one does arise

• Was this our fault, and should we try to settle? - When faced with a dispute, it is important for parties to take a deep breath and consider the issues brought to it honestly and unemotionally. Sometimes, a party may need to accept that it is at fault and in those circumstances, it may be sensible to make an offer to settle the dispute with the opposing party. In these cases, a legal professional can provide advice on an appropriate offer and assist you with any negotiations.
  
  
• Communicate positively – no matter how aggrieved you feel by your opposing party’s behaviour, or the prospect of litigation being brought against you, maintaining composure and a positive relationship is very important. In almost all cases, the tone adopted by the parties in the early stages can frame how a dispute progresses, and early hostilities are not a good place to set the bar. Acknowledging a claim and responding quickly is not a sign of weakness, but of organisation and respect toward your opposing number. A swift but robust response with a positive tone can also help to head off claims at an early stage before parties become entrenched in their position.
  
  
• Seek legal advice as soon as possible – when it comes to dispute resolution, there are some matters which can be managed in house. However, it is normally obvious when a matter is going to require expert support from legal advisors. In the very early stages of a dispute, lawyers can provide advice privately to start with, and can help with drafting emails to be sent directly from you, or on your own headed notepaper to avoid spooking your opposing party. Instructing lawyers as early as possible can help prevent parties from all sorts of problems later down the line. It prevents parties from accidentally admitting liability, saying something regrettable or from inadvertently acting in breach of the Civil Procedure Rules, by destroying documents for example. While lawyers can be expensive, it is unlikely that their advice will outweigh having to pay out for the full claim.

If you have any specific queries or wish to discuss anything covered in this update, please contact Polly Jackson or Alistair Cooper.