How to avoid costly commercial disputes

Joanna Ford, Associate, Cripps LLP, tackles the issue of commercial property and settling disputes.

A commercial dispute is an unwelcome risk for every business, diverting valuable time and resources away from profitable activities. The best way of managing disputes is of course to avoid them altogether. A risk-based approach to individual transactions and your business as a whole can help diminish the likelihood that a dispute will arise in the first place. What do you need to consider? Transaction, counterparty, country, product and process risk, should all be taken into account and properly addressed in advance in order to minimise commercial risk.

1) Transaction risk

Major acquisitions or disposals, important supply contracts or complex financial transactions or construction projects have a more obvious dispute exposure than others. You should be aware of the importance of:

• Using properly drafted written contracts addressing matters such as product specification, delivery time, payment terms, remedies for defective goods, exclusions or limitation of liability, governing law and a mechanism for dispute resolution
• Regularly reviewing your contracts and standard terms and conditions, simplifying them where possible
• Ensuring you have adequate insurance, that there are no gaps or overlaps in cover and that cover is not invalidated by contractual terms. Consider obtaining legal expense cover.

2) Counterparty risk

If you are doing business with a new counterparty you should check their credentials:

• Are they well established?
• Do they have a litigious reputation?
• Do they have sufficient financial resources to cover their financial commitments?
• Where are their assets?

This information can be gleaned from simple searches on Companies House and credit checks, and more in depth information can be obtained from inspection of accounts, due diligence and even enquiry agents.

Top tip: A search at Companies House (‘Find Information’ tab, select ‘Access WebCHeck’) is free, and will indicate whether a company’s accounts are overdue. This can be a warning sign that a company may be in financial difficulty.

3) Country risks

If you do business with countries outside the UK, you should also consider the litigation culture in that country; certain countries have a particularly poor reputation for litigation stemming from factors such as:

• Litigious culture
• Frequency of large damages awards
• Inadequate procedural system
• Seemingly biased or corrupt judiciary
• Difficulties in enforcing any judgement or award that may be granted

Choosing appropriate choice of law and jurisdiction clauses can reduce uncertainty and ensure that you retain control of any unavoidable litigation.

4) Product risk

Any particular risk associated with your product can be reduced by the use of:

• Quality management systems
• Product recall
• Crisis management plans
• Clear product instructions
• Warnings displayed on products
• Contractual terms
• Insurance

All these measures should be considered together and regularly reviewed by the appropriate personnel.

5) Process risk

Normal day-to-day business activities raise a number of disputes risks:

• Environmental issues
• Health & safety issues
• Employer/employee issues
• Intellectual property disputes
• Regulatory investigations

Business processes should be regularly reviewed, procedures adapted and compliance programmes implemented in line with the latest rules and regulations.

Top tip: Try to involve personnel from each area of your business in this process, such as finance, sales and development. This will ensure that each possible risk angle is considered.

When conducting business, it is tempting and understandable to focus purely on the commercial terms of the particular transaction and getting the deal done. It is a useful and potentially cost saving exercise, however, to step back from the transaction before the contract is concluded and analyse its particular risks in order to avoid the potential for a dispute to arise in the future.

Kenzie Group are a construction claims firm and if you do end up being involved in a commercial dispute, you should hire a high quality firm like them to represent you.