Contract disputes

Key Points Overview

• Early assessment of contractual terms, evidence strength and commercial objectives is essential.
• Consider whether damages are an adequate remedy or if injunctive relief is necessary.
• Limitation periods vary - typically 6 years for simple contracts, 12 years for deeds.
• Court action involves significant costs, time delays and uncertain outcomes.
• Alternative dispute resolution often provides faster, cheaper and more flexible solutions.
• Valuing losses requires careful analysis of direct damages, consequential losses and mitigation obligations.
• Exclusion clauses and limitation provisions can significantly restrict recovery.
• Preserve all relevant documents and communications from the outset.
• Early legal advice can prevent disputes escalating and identify the strongest strategic approach.

Types of Contract Disputes

Contract disputes take various forms, each presenting distinct legal and evidential challenges :

• Payment disputes - non-payment, late payment, disputed amounts, set-off claims, and retention of funds.
• Performance disputes - failure to deliver goods or services, substandard performance, delays, and specification failures.
• Interpretation disputes - disagreement over contractual terms, ambiguous clauses, implied terms, and scope of obligations.
• Breach of warranty - misrepresentation of facts, failure to meet guaranteed  commitments and standards, and defective products or services.
• Termination disputes - wrongful termination, notice periods, post-termination obligations, and restrictive covenants.
• Variation disputes - unauthorised changes, additional work claims, and agreement to modifications.
• Force majeure claims - excusing performance due to unforeseen circumstances, pandemics, and frustration arguments.

Common Causes of Contract Disputes

Understanding the root causes helps in both prevention and resolution of disputes:

• Poor Contract Drafting - ambiguous or incomplete terms create uncertainty and interpretation disputes, with missing key provisions such as termination clauses or dispute resolution procedures.
• Changed Circumstances - market conditions, regulatory changes, or unforeseen events can make contractual performance difficult or uneconomical.
• Communication Breakdown - misunderstandings about requirements, specifications, or timelines often result from poor communication during contract performance.
• Commercial Pressures - financial difficulties, competitive pressures, or business relationship deterioration can trigger disputes over previously accepted arrangements.
• Performance Issues - genuine inability to perform due to resource constraints, technical difficulties, or supplier problems can escalate into formal disputes.

Key Considerations Before Taking Action

Several critical factors must be evaluated before pursuing formal dispute resolution:

• Strength of Legal Position - assess the clarity of contractual terms, quality of available evidence, and likelihood of proving breach or defending against claims. Consider whether technical expert evidence will be required and its likely cost and impact.
• Commercial Objectives - determine whether the primary goal is recovering money, obtaining specific performance, preserving business relationships, or setting precedents for future dealings. Commercial considerations often outweigh pure legal rights.
• Financial Analysis - evaluate the value of the claim against likely costs of pursuing it, including legal fees, court fees, expert costs, and management time. Consider the defendant's ability to pay any judgment obtained.
• Relationship Preservation - assess whether maintaining ongoing commercial relationships is important and how dispute resolution methods might affect future dealings. Consider whether collaborative approaches might achieve better long-term outcomes.
• Time Constraints - review limitation periods for bringing claims and any contractual time limits for notices or claims. Consider business urgency and whether interim relief might be necessary to preserve position.

Strategic Approach and Factors

Developing an effective strategy requires considering multiple interconnected factors:

• Evidence Gathering - systematically collect and preserve all relevant contracts, correspondence, delivery records, payment documentation, and witness evidence. Early evidence preservation is crucial as memories fade and documents may be lost or destroyed.
• Legal Analysis - identify the strongest legal claims and defenses available, considering contract terms, applicable law, and relevant case precedents. Assess procedural requirements and any jurisdictional issues that might affect the dispute.
• Settlement Potential - evaluate opportunities for negotiated resolution throughout the process. Early assessment of settlement parameters can save significant costs and preserve commercial relationships while achieving acceptable outcomes.
• Procedural Strategy - choose the most appropriate forum and procedure for the dispute, considering costs, speed, complexity, and enforceability requirements. Different procedures offer different advantages depending on case characteristics.
• Risk Management - assess litigation risks including adverse costs orders, counterclaims, reputational damage, and business disruption. Develop strategies to minimise these risks while pursuing legitimate claims or defenses.

Potential Pitfalls with Court Action

Litigation involves numerous potential pitfalls that can undermine even strong cases:

• Cost Escalation - legal costs can quickly exceed claim values, particularly in complex cases requiring extensive evidence, multiple experts, or lengthy trials
• Time Delays - commercial disputes often take 18-24 months to reach trial, during which business relationships deteriorate and market conditions change
• Uncertain Outcomes - even strong cases can fail due to unexpected evidential developments, witness credibility issues, or unfavorable judicial interpretation
• Public Exposure - court proceedings are generally public, potentially exposing sensitive commercial information or damaging reputations
• Limited Remedies - courts primarily award monetary compensation, which may not address underlying business problems or provide needed commercial solutions
• Enforcement Challenges - winning judgments does not guarantee payment, particularly where defendants lack assets or become insolvent
• Counterclaim Risks - defendants may raise counterclaims that exceed the original claim value, potentially leaving claimants worse off
  Issues Regarding Valuing Losses

Accurately valuing contractual losses presents several key challenges :

• Types of Recoverable Loss - direct losses include immediate costs and expenses flowing from the breach, while consequential losses cover indirect losses that were reasonably foreseeable. Lost profits from future earnings and wasted expenditure on the failed contract may also be recoverable.
• Key Requirements - losses must be reasonably foreseeable at the time the contract was made, actually caused by the breach rather than other factors, and properly proven with credible evidence. Claimants must take reasonable steps to minimise their losses following breach.
• Common Limitations - contractual exclusion clauses may limit or exclude liability for certain types of loss, particularly consequential damages. Speculative or unproven losses are not recoverable, and expert evidence is often required to establish quantum.
• Practical Challenges - establishing causation can be difficult where multiple factors contributed to losses. Lost opportunity claims require assessment of the probability of success, while mitigation obligations may reduce recovery if not properly addressed.

Alternative Dispute Resolution Options

ADR methods often provide more effective solutions than litigation:

• Negotiation - direct discussions can resolve disputes quickly and cost-effectively while preserving business relationships
• Mediation - structured discussions with neutral mediators, achieving 70%+ success rates and creative solutions beyond legal remedies
• Arbitration - private proceedings with specialist arbitrators providing expertise, confidentiality and international enforceability