A Guide to avoiding Contract Disputes
Contract disputes are time-consuming, costly and pull business owners away from time spent in running the business. Whilst some contract disputes simply cannot be avoided because of crucial defects in the provision of goods or services, the risk of such disputes can be reduced by taking certain key steps which protect the business.
What is a Contract?
Although a detailed analysis of the legal provisions required to create an enforceable contract are outside of the scope of this article, it is important to recognise that a contract can come into existence either through a formal written contract, verbal discussions between the parties, by an exchange of emails or other correspondence, or a combination of all these elements.
In addition, a draft contract sent to one party, but which is not signed, can in certain circumstances give rise to a contract if the parties conduct themselves in a manner which follows the terms of the draft contract.
Therefore, it is important when you are entering into discussions with a potential customer or supplier, to be aware of what you are agreeing to do and perhaps more importantly, what you are not agreeing to do.
Whilst it is unlikely a contract could accidentally come about, nevertheless when agreeing potential terms, it is important to ensure that initial correspondence or discussions do not form the terms of the contract.
The starting point?
A businesses default position should be to have in place written contract with its supplier and customers. As a franchisee you should already have in place a franchise agreement with the Franchisor.
However, franchisees enter into relationships with third parties during the course of operating the franchise and therefore are at risk of contract disputes.
Even where there is a good working relationship with the supplier/customer, it is prudent to ensure that there is a written contract in place which clearly sets out what the parties have agreed. It is good practice to ensure the contract is signed.
For those who consider such formality is unnecessary, one should consider the consequences of failing to put in place a properly drafted written contract:
- Uncertainty as to the parties’ obligations is always a key factor in any dispute. Inevitably where there is ambiguity in a party’s obligation, it is a breeding ground for disputes and leaves the parties obligations open to confusion and their own interpretation.
- A Contract which clearly sets out the terms which have been agreed between the parties provides certainty in their dealings with each other.
- In the absence of a written contract the parties are left to trawl through emails, text messages and recollection of discussions with each other to properly identify the terms which may have been agreed.
- If the matter results in a dispute, trying to piece together the term of the contract is likely to result in an unsatisfactory result for both parties and significantly increase the costs of resolving the dispute.
The contract represents the cornerstone of the parties’ relationship. Any dispute regarding the quality of the goods or services provided will be assessed against the terms of that contract. However, as with all relationships, typically difficulties arise where the parties do not engage in sensible discussions to resolve minor disputes/disagreements. Almost inevitably in those cases, minor disagreements become major disputes. Therefore, wherever possible an open line of communication with the other party should be maintained or a contracts manager appointed to act as liaison to resolve any minor disputes at an early stage.
Any correspondence, including emails, between with the customer/supplier should be retained, especially where the relationship is strained.
Typically copies of such correspondence and other documents provide good evidence of the parties’ actions and conduct. It also provides an accurate record of discussions which may have taken place several years ago.
Where you do engage in telephone discussions, particularly where contentious points are discussed, a detailed record of that discussion should be retained for future use.
It is understandable that you may not wish to instruct a solicitor at the outset of a dispute, probably because of the fear of costs. However, obtaining legal input at an early stage can have the positive effect of avoiding a protracted dispute and implementing a strategy to prevent the matter becoming litigious. This in turn can result in a saving to the business.
Typically, lawyers become involved in a dispute late in the day and often the opportunity to prevent the dispute escalating is often lost. By that point often the parties are no longer communicating with each other, become entrenched in their positions and therefore the only way to resolve the dispute is for a lawyer to engage in a formal and somewhat inevitably aggressive approach to the other party.
Engaging a lawyer in the dispute, whether for advice on the interpretation on a particular part of the contract or to discuss legal options with a view to resolving the dispute, can have the advantage of avoiding the costs of litigation and preserving the relationship between the parties.
Quite rightly, no business wishes to waste its time engaging in lengthy and expensive contract disputes. With that in mind, there is much to be said for taking advice early in the contract process and engaging a lawyer to ensure the contract with your customer/supplier provides clarity as to each party’s obligations, thereby significantly reducing the likelihood of a dispute arising.
This document is for informational purposes only and does not constitute legal advice. It is recommended that specific professional advice is sought before acting on any of the information given.