Contracts are the glue that holds the commercial world together. They enable ventures that drive growth and innovation. However, they are also the leading cause of business disputes. We want to share with you the top five mistakes that, if avoided, will save you the cost, stress, and inconvenience of dealing with a contract dispute.

One – Not undertaking adequate due diligence

Due diligence involves examining the financial, legal, operational, and sales status of an organisation. You need to discover if there are any red flags, such as unpaid debts, pending legal claims, or recruitment problems that could result in the other party being unable to fulfil their contractual obligations.

An essential part of contract risk management is due diligence. If you are unsure how to conduct a comprehensive due diligence exercise, get a third party to undertake the process and draft a risk management report.

Two – Failing to put the agreement in writing

Contrary to popular belief, verbal contracts are legally binding. The problem is that without a written agreement, it is almost impossible to prove exactly what each party contemplated when entering into the contractual arrangement. Disputes can quickly arise regarding whether a legal contract exists because it is challenging to demonstrate that an offer, acceptance, consideration, and an intention to create legal relations occurred.

Another reason (among many) that commercial contracts should always be in writing is that an experienced Solicitor will ensure a dispute resolution clause is added to the terms of the agreement. This can set out how disputes will be resolved, providing a framework to avoid litigation. A written contract can also contain an Arbitration Agreement in which parties agree to use arbitration to resolve disputes. This is especially important in cross-border projects/ventures, as arbitration awards are binding and, unlike domestic court decisions, can be enforced in any State that has signed up to one of the international conventions, such as the Convention on the Recognition and Enforcement of Foreign Arbitral Awards, commonly known as the New York Convention.

Three – Not including the required warranties and indemnities

Getting legal advice on what warranties and indemnities to include in your commercial contracts will ensure you mitigate the risk of disputes. Warranties, which can be express or implied, are promises that the goods or services you are providing are of an agreed standard. An example of an express warranty is food supplied to a restaurant is organic. Delivering a product within a reasonable time is an example of an implied warranty.

An indemnity is a legally binding promise that one party will reimburse the other party if a particular event happens. In other words, the paying party undertakes to protect the receiving party from loss resulting from a specific occurrence.

Whether you are the paying party or the receiving party, it is crucial to have an experienced Solicitor draft any warranties and indemnities included in a commercial agreement. The former needs to ensure the scope of their liability is limited, which is in contrast to the latter’s requirement to get as much protection as possible. How this is worked out depends on how effectively each party negotiates.

Four – neglecting to cover off common risks

So many things can go wrong with a contract. But if you conducted adequate due diligence and risk management, any red flags will have been identified and negotiated. However, some risks are present in all contracts; therefore, it is vital that you include terms in the agreement to manage the following:

• Cybersecurity risks – these can include outside attacks and internal data breaches. Make sure there are terms in the contract defining what must be done should a cybersecurity incident occur and who is liable for any fines and/or damages claims.
• Force majeure events– a French term that translates as ‘greater force’, allows one or both parties to be relieved of their contractual obligations should an unavoidable or unforeseen event happen. The Courts view force majeure clauses restrictively and can imply limitations. One famous example is the case of Metropolitan Water Board v Dick Kerr & Co [1918] AC 119, where the House of Lords ruled that a clause aimed at covering delays which included the words “however caused” did not cover substantial delays caused by the outbreak of the First World War.
• Intellectual property risks – always ensure that a commercial contract includes terms that protect the intellectual property of all parties and dispute resolution provisions that cover what steps must be taken if confidentiality is broken or an IP right is infringed.

Five – not defining the scope of the contract

Clients often come to us seeking legal advice on a contract dispute that could have been avoided had the scope of the work, liability, and/or responsibilities been clearly set out in the agreement. Both parties need to be clear about the extent of their contractual obligations and what happens if they cannot meet their responsibilities. It is so much easier to have these conversations during the negotiation period than when the performance of the contract is underway.

Concluding comments

Getting all the above elements in place may require more investment than you originally planned. But rest assured, this will pale in comparison to the costs in terms of money, reputation, and peace of mind should an otherwise avoidable contract dispute happen.

“Prevention is better than cure for one simple reason – it is a lot cheaper.” – Jeremy Hunt.

To find out more about any matters discussed in this article, please email us at [email protected] or phone 0121 249 2400.

The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article, please contact 43Legal.