Every business involves contracts of one sort or another and for most businesses, contracts with suppliers, customers or staff are critically important.
However, in practice contractual disputes can arise quite easily from basic misunderstandings or the failure by one party to do what is expected and can have a huge impact on B2B and supplier relationships.
In her latest article, Corporate & Commercial Legal Assistant Hem Gujadhur outlines how these disputes can be avoided and mitigated using a dispute resolution clause.
What causes contractual disputes?
Most commonly, contractual disputes arise where one party fails to carry out what they have promised to do under the contract, but they can occur for a wide variety of reasons.
Areas that might cause dispute include (but are not limited to):
- One party not completing the terms within the contract
- The contract (or terms within it) not being in a single written document at all, and have instead been agreed orally or through emails
- Where there is uncertainty within a contract regarding the agreed certain terms
- Where there is ambiguity as to whether certain terms and conditions apply
- Whether or not a contract has come into existence at all
Even when a contract has been prepared to the best of both parties’ abilities, because of the uncertainties in language itself, disputes can still arise, and these will often be difficult to resolve and can be costly.
Related: What makes a strong business contract?
How to prevent contractual disputes
Although there is no way to completely prevent contractual disputes, both parties can do their best to decrease the risk by properly and carefully drafting the contract terms and, potentially, including a dispute resolution clause.
Including such a clause will allow both parties to be prepared for a dispute and set out steps to resolving the dispute. It also can prevent court involvement which can be costly and time consuming.
It is not appropriate to all contract situations but can be especially helpful where there is a dispute about a technical, accounting or legal matter, where a third party can provide their expert input.
What is a dispute resolution clause?
A dispute resolution clause is one that sets out what should happen if the parties were to have a disagreement.
These are intended to set out a mechanism to settle the issue before either party has to go to court or to terminate the contract. Dispute resolution clauses fall into a number of categories, including:
- Referring the issue in dispute to a formal arbitration;
- Providing for the referral of the dispute to an independent “expert” who is given power to decide the issues
- An “escalation clause” so that the dispute, if not resolved, is referred to higher levels of management on the basis that the senior members of the teams will have powers to agree a resolution of the issue.
In any case, the clause should set out an agreed way for the dispute to be resolved, preventing the situation from worsening.
In the full article, Hem outlines whether you need a dispute resolution clause, the risks of not having one, the costs involved and more. Click here to read it.