Five-Point Summary

• Contract disputes are the leading cause of commercial litigation in the UK, with around 70% of SMEs having faced them. The financial impact goes well beyond legal fees: businesses can include wasted management time in a damages claim against the party in breach.
• Most disputes are avoidable. The majority trace back to inadequate due diligence, vague drafting, or a failure to include proper risk allocation clauses covering force majeure, warranties, indemnities, and scope of work.
• Arbitration in England and Wales is now governed by both the Arbitration Act 1996 and the Arbitration Act 2025, which came into force on 1 August 2025. The 2025 Act introduced a new power of summary disposal, a default rule on governing law, and enhanced disclosure duties for arbitrators.
• Since November 2023, courts have had power to compel parties to attempt alternative dispute resolution before or during proceedings, following the Court of Appeal’s decision in Churchill v Merthyr Tydfil County Borough Council [2023] EWCA Civ 1416.
• The best protection against disputes is a well-drafted commercial contract that has been reviewed by an experienced solicitor before signature, supported by a multi-step dispute resolution clause that sets out the path from negotiation through to arbitration or litigation.

The Cost of Getting Contracts Wrong

Contracts are the leading cause of commercial disputes in the UK. Around 70% of UK small and medium-sized enterprises have faced commercial disputes, with contractual issues as the most common source. More concerning, 42% of businesses report that such disputes put their company’s future at risk, and companies lose approximately 9% of their annual revenue due to poor contract management.

The financial burden extends beyond direct losses. When disputes escalate to litigation, average construction disputes now reach £27.7 million, a 117% increase from 2019. For smaller businesses, even modest disputes can drain tens of thousands of pounds in legal fees, management time, and lost productivity. Worse still, 72% of UK businesses have seen an increase in litigation brought against them over the past five years, with 60% anticipating further rises.

The good news is that the vast majority of contract disputes are entirely avoidable. Prevention is cheaper than litigation by a very wide margin. This guide sets out the strategies, practical steps, and expert insights that protect businesses from costly, stressful, and entirely preventable disputes.

Why Contract Disputes Occur

Understanding what drives disputes is the first step towards avoiding them. According to research by Arcadis, the single biggest cause of construction disputes in the UK is parties failing to understand or comply with their contractual obligations. That pattern repeats across all industries and business sizes.

Economic pressure is a consistent trigger. When margins are tight and cash flow is stretched, parties become less willing to absorb losses or compromise on payment terms, creating a more litigious business culture. Separately, many contractual disputes stem from one party believing the other had agreed to specific terms when no such agreement existed, or a fundamental misunderstanding had occurred. The concept of implied terms, ambiguous scope definitions, and poor contract drafting that leaves room for multiple interpretations all contribute.

The consequences go well beyond financial loss. Disputes drain management time, damage business relationships, harm reputations, and create serious stress for business owners. When staff are diverted from revenue-generating work to investigate or manage a dispute, those wasted management costs can be claimed in damages against the party in breach, calculated on an hourly or daily rate based on employees’ salaries.

Critical Mistakes That Lead to Contract Disputes

Not Undertaking Adequate Due Diligence

Due diligence involves examining the financial, legal, operational, and commercial position of an organisation before entering into a contract. The aim is to identify red flags, such as unpaid debts, pending legal claims, or resource constraints that could prevent the other party from delivering on its obligations. Many business owners are eager to close deals quickly, particularly when growth opportunities arise. Rushing into agreements without proper investigation is one of the most common and costly mistakes businesses make.

Financial due diligence means reviewing financial statements for the last three years, examining debt structures and liabilities, and comparing actual sales with projected figures. Legal due diligence covers existing contracts and leases, intellectual property, ongoing or potential disputes, and regulatory investigations. Discovering that your new supplier is embroiled in litigation or faces regulatory sanctions is information you need before signing, not after.

If you are unsure how to conduct a comprehensive due diligence exercise, engage a third party to undertake the process and draft a risk management report. The cost of professional due diligence is small compared with the expense of dealing with a failed contract or dispute.

Failing to Put the Agreement in Writing

Contrary to popular belief, verbal contracts and those formed on platforms such as WhatsApp may be 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 arrangement. Disputes quickly arise about whether a binding contract even exists, and memories fade fast.

All commercial contracts should be in writing. An experienced solicitor will ensure a dispute resolution clause is included, setting out how disagreements will be resolved and providing a framework that avoids immediate recourse to litigation. A written contract can also contain an Arbitration Agreement through which parties agree to appoint an independent arbitrator.

This is especially important in cross-border projects or ventures. Arbitration awards are binding and, unlike domestic court decisions, can be enforced in countries that have signed up to international conventions such as the New York Convention. Written contracts also create an audit trail. When both parties can refer to the same document, misunderstandings are far easier to resolve before they escalate into formal proceedings.

Not Including the Required Warranties and Indemnities

Getting legal advice on what warranties and indemnities to include in your commercial contracts mitigates the risk of disputes. Warranties, which can be express or implied, are promises that the goods or services provided are of an agreed standard. An express warranty is stated clearly in the contract; an implied warranty is not written down but assumed by law, such as a promise to deliver goods within a reasonable time.

An indemnity is a legally binding promise that one party will reimburse the other if a particular event occurs. A supplier might indemnify a customer against third-party intellectual property claims arising from the supplied products, for example. The paying party needs to limit the scope of liability; the receiving party needs as much protection as possible. How that tension is resolved depends on how effectively each side negotiates.

Whether you are paying or receiving, have an experienced solicitor draft the warranties and indemnities included in any significant commercial agreement. In disputes where warranties are breached, damages can include not only the direct cost of remedying the breach but also consequential losses: lost profits, additional expenses, and reputational damage.

Neglecting to Cover Common Contractual Risks

Some risks are present in almost every commercial contract. Terms should address the following:

• Cybersecurity risks, including external attacks and internal data breaches. Define what must happen if a cybersecurity incident occurs and which party bears liability for fines and damages claims.
• Force majeure events that excuse one or both parties from performance. Courts interpret force majeure clauses restrictively. One example is Metropolitan Water Board v Dick Kerr & Co [1918] AC 119, where the House of Lords held that a clause covering delays “however caused” did not cover substantial delays caused by the First World War. More recently, in 2 Entertain Video Ltd v Sony DADC Europe Ltd [2020] EWHC 972 (TCC), the Court found that a warehouse operator could not rely on a force majeure clause for the 2011 UK riots because it could and should have taken reasonable security precautions. The clause offered no protection. Given recent global events from pandemics to tariff disputes, force majeure clauses have never been more important, yet they remain among the most poorly drafted provisions in commercial contracts.
• Intellectual property risks, managed through terms that protect all parties’ IP rights and include dispute resolution provisions covering what steps must be taken if confidentiality is broken or an IP right is infringed.

Two principles of contract interpretation make precise force majeure drafting particularly tricky. Expressio unius est exclusio alterius (the expression of one thing excludes another) means that drafting a force majeure clause to cover fire damage may leave smoke damage unprotected. Adding a catch-all phrase such as “any other unforeseen event” then risks the principle of ejusdem generis (of the same kind), where a general phrase is interpreted narrowly by reference to the specific examples that precede it. In Tandrin Aviation Holdings Ltd v Aero Toy Store LLC [2010] EWHC 40, the court held that a sweep-up phrase “any other cause beyond the Seller’s reasonable control” did not cover the 2007-2008 financial crisis because none of the listed examples in the clause related to economic downturn. The only reliable way to protect against a specific risk such as tariff increases is to name it explicitly in the clause.

Not Defining the Scope of the Contract

Ambiguous scope definitions produce disputes. When one party believes the contract covers X, Y, and Z, while the other thinks it covers only X and Y, conflict is predictable. These disagreements rarely arise from bad faith: they arise from genuine differences in interpretation that clearer drafting would have prevented.

A recent case illustrates the risk. In Grain Communications Limited v Shepherd Groundworks Limited [2024] EWHC 3067 (TCC), Shepherd was contracted to carry out groundworks under work orders provided by Grain. The day before work was due to start, Grain telephoned to say it would be postponed. Shepherd claimed this amounted to contract termination and brought adjudication proceedings for mobilisation costs and lost profits. The Adjudicator agreed, but Her Honour Judge Kelly overturned the decision on appeal. The contract contained express provisions allowing Grain to vary the timing of work orders, and varying instructions should not be read “strictly or pedantically”. If Shepherd wanted to prevent postponement, it needed to negotiate and include that protection explicitly. The case shows how well-drafted terms save businesses significant sums.

Understanding Express and Implied Terms

Many contract disputes come down to one party believing the other had agreed to certain terms when, in reality, no such agreement was made. Understanding the difference between express and implied terms is essential for avoiding these disputes.

Express terms are explicitly included in an agreement, in writing or verbally. Confusion arises during negotiation when representations are made and one party treats them as contractual terms while the other intended them only as inducements to contract. When deciding whether something is an express term or merely a representation, a court will consider the time between the statement and the signing of the contract, the importance of the statement, the relative ability of the parties to verify its truth, and whether any verbal statement was repeated in the written agreement.

Implied terms are not agreed expressly but are read into a contract by a court on various bases:

• Usage or custom: the court can imply a term customary to a particular trade or market sector, provided it is notorious, specific, reasonable, legal, and more than a mere trade practice.
• Previous dealings: if the parties have contracted before on consistent terms, the court may imply those terms into the current disputed agreement. A regular pattern of dealings is required.
• Intentions: the court can imply a term to fill a gap in the contract, but not simply to make it fairer. The question is what a reasonable person would have understood the parties to have intended, given the background knowledge available to them when they contracted.

In BP Refinery (Westernport) Pty Ltd v Shire of Hastings [1977] UKPC 13, the Privy Council set out five conditions for implying a term: it must be reasonable and equitable; necessary to give business efficacy to the contract; so obvious it “goes without saying”; capable of clear expression; and not contradictory of any express term.

The Supreme Court refined this in Marks & Spencer plc v BNP Paribas Securities Services Trust Company (Jersey) Ltd [2015] UKSC 72, holding that the first condition may be disregarded if a term satisfies the others, and that the business efficacy and obviousness tests are alternatives: only one needs to be satisfied.

In my experience, express and implied terms often come down to common sense. In complex agreements, however, disputes about them produce lengthy court proceedings. Having commercial contracts reviewed by a virtual in-house legal counsel before signing is a straightforward way to reduce that risk. The cost of clarifying ambiguous terms at the drafting stage is consistently far smaller than the cost of litigating them later.

Ensuring Successful Contract Negotiations

A well-negotiated agreement clarifies responsibilities, allocates risks fairly, and creates a framework for resolving disagreements before they escalate. Before entering any negotiation, you need a clear picture of your core objectives, your dealbreakers, and the other party’s likely interests.

Research the other party before picking up the phone. Understanding their business, market position, and pain points gives you context and helps you find common ground. Listen actively during negotiations to understand their goals before making assumptions. Be ready to compromise on secondary issues while protecting your core interests, and communicate openly about your position.

Understanding your Best Alternative to a Negotiated Agreement (BATNA) is important. It represents your best course of action if the negotiation fails. Knowing your BATNA lets you make informed decisions and establish a walk-away point, so you do not settle for unfavourable terms. Document agreed points as you go; this prevents “he said, she said” disputes from arising before the contract is even signed.

Drafting Contracts That Prevent Disputes

Poor drafting is the source of countless disputes that could have been avoided with clearer, more precise language. Use plain, unambiguous wording. Courts interpret contracts based on what a reasonable person would understand the words to mean. Each clause should carry only one possible interpretation.

The decision in Grain Communications Limited v Shepherd Groundworks Limited [2024] EWHC 3067 (TCC) confirms that parties cannot rely on courts to rescue them from careless drafting. If you want specific protections, you must state them explicitly.

A comprehensive contract should cover the parties’ full legal names and addresses, scope of work or deliverables in specific and measurable terms, payment terms including amounts, currency, timing, and method, delivery dates and performance milestones, warranties and representations, limitation of liability and indemnity provisions, intellectual property ownership and usage rights, confidentiality obligations, insurance requirements, termination provisions, force majeure clauses, dispute resolution mechanisms, governing law and jurisdiction, and any industry-specific regulatory requirements.

A well-drafted dispute resolution clause can save enormous time and cost. See 43Legal’s article on the importance of carefully drafted commercial contracts for a detailed breakdown of what such clauses should contain. Multi-step dispute resolution clauses are increasingly standard. They typically require senior executives to attempt direct negotiation first. If that fails within a set period, such as 14 or 21 days, the parties must attempt mediation. Only if mediation fails can proceedings be issued. This approach cuts costs, preserves relationships, and demonstrates to courts that parties made genuine efforts to settle.

Can Repudiatory Breaches Be Remedied?

A repudiatory breach is a breach so serious that it goes to the root of the agreement, effectively indicating that the breaching party no longer intends to be bound by the contract’s essential terms.

A Court of Appeal decision has important implications for contract drafting. In Kulkarni v Gwent Holdings Ltd [2025] EWCA Civ 1206, the Court held that a repudiatory breach of contract is not automatically incapable of remedy. Whether it can be remedied depends on a practical assessment of the nature of the breach, not a technical classification.

The case involved two shareholders whose agreement stated that a shareholder was deemed to have served a notice to transfer its shares if it committed a material or persistent breach which, if capable of remedy, was not remedied within ten business days. One shareholder committed several breaches, including an unlawful transfer of shares. The other shareholder argued that this was a repudiatory breach and could not be remedied.

Lord Justice Newey rejected that argument. He held that if parties intend a repudiatory breach to be irremediable, they must say so clearly in the contract. In this case, the unlawful share transfer could be remedied by reversing it. The court took a commercial, not a technical, approach to the question. If you want a repudiatory breach to trigger automatic consequences without any remedy period, draft the agreement to say so explicitly.

Alternative Dispute Resolution: Resolving Disputes Without Court

Even with the best prevention strategies, disputes sometimes arise. ADR offers significant advantages over traditional litigation. A landmark 2023 decision changed the dispute resolution framework. In Churchill v Merthyr Tydfil County Borough Council [2023] EWCA Civ 1416, the Court of Appeal held that courts can stay proceedings and compel parties to participate in ADR. Sir Geoffrey Vos, Master of the Rolls, concluded that courts can order ADR provided it does not impair the claimant’s right to a judicial hearing and is proportionate to the aim of settling the dispute fairly, swiftly, and cost-effectively. The decision addressed longstanding concerns that compulsory ADR conflicts with the right to a fair trial under Article 6 ECHR.

Mediation

Mediation is a flexible, voluntary, and confidential process where a neutral mediator assists parties to reach a mutually acceptable resolution. Unlike litigation or arbitration, mediation does not impose a decision. It encourages direct negotiation, with the mediator facilitating dialogue. Disputes can often be resolved in a single day, outcomes are more flexible than court-imposed solutions, and commercial relationships are more likely to survive.

Mediation may not be suitable where urgent injunctive relief is needed or where there is a fundamental disagreement on legal principles. It is, though, effective across a wide range of commercial disputes and can be attempted alongside litigation or arbitration.

Arbitration

Arbitration is a private dispute resolution process where parties agree to appoint an independent arbitrator to decide the dispute. It is commonly used in commercial contracts, particularly in international or high-value matters. In England and Wales, arbitration is principally governed by the Arbitration Act 1996, as amended by the Arbitration Act 2025, which came fully into force on 1 August 2025.

The 2025 Act introduced several significant changes to the arbitration framework:

• Summary disposal: arbitral tribunals now have an express power to dismiss claims or defences that have no real prospect of success, without requiring a full hearing. This aligns arbitration more closely with court procedure and reduces unnecessary cost.
• Governing law: the default rule is that an arbitration agreement is governed by the law of the seat of the arbitration, absent express agreement to the contrary. This removes a significant source of disputes over which law governs the agreement itself.
• Disclosure duties: arbitrators must now disclose any circumstances that might reasonably give rise to doubts about their impartiality, on an ongoing basis throughout the proceedings.
• Emergency arbitrators: emergency arbitrators are now equipped with extended enforcement powers, allowing parties to obtain binding orders before a full tribunal is constituted.

The process remains flexible and allows parties to tailor procedures to suit the dispute. Arbitrators are often specialists in the relevant industry, which is valuable where technical expertise is required. Awards are generally final and binding. For cross-border disputes, the New York Convention, to which over 160 countries are signatories, provides a framework for enforcing arbitral awards internationally. To initiate arbitration, an Arbitration Agreement must be in place. Terms in the agreement can select the jurisdiction, establish procedural rules, and designate the required qualifications of the arbitrator.

Litigation

Litigation remains necessary in some circumstances: where precedent needs to be established, where the public interest is involved, or where one party refuses to engage in good faith with ADR. It should, though, be viewed as a last resort given its cost, duration, public nature, and the damage it inflicts on business relationships.

Checklist for Avoiding Contract Disputes

Before Negotiation

• Conduct comprehensive due diligence on the other party: financial, legal, operational, and market position.
• Identify your objectives, nice-to-haves, and dealbreakers.
• Research the other party’s likely interests and constraints.
• Establish your BATNA (Best Alternative to a Negotiated Agreement).
• Assemble your negotiation team with clear roles.

During Negotiation

• Listen actively to understand the other party’s genuine interests.
• Seek common ground and look for collaborative solutions.
• Take rational, market-based positions backed by evidence.
• Document agreed points as discussions progress.
• Be prepared to compromise on secondary issues while protecting core interests.

During Contract Drafting

• Insist on written agreements. Never rely on verbal contracts.
• Use plain, unambiguous language throughout.
• Define all key terms to prevent multiple interpretations.
• Specify the scope of work, deliverables, and timelines precisely.
• Include warranties and indemnities appropriate to the transaction.
• Address cybersecurity risks, force majeure events, and IP protection.
• Draft clear limitation of liability and indemnity clauses.
• Include a multi-stage dispute resolution clause.
• Specify governing law and jurisdiction.
• For international transactions, include arbitration provisions referencing the New York Convention.

Before Signing

• Have an experienced solicitor review the entire agreement.
• Verify that all negotiated points are accurately reflected in the draft.
• Check that parties’ names, addresses, and signing authorities are correct.
• Ensure all referenced documents and schedules are attached.
• Confirm compliance with relevant laws and regulations.
• Verify insurance requirements are appropriate.
• Check that any industry-specific provisions are included.

After Signing

• Store the signed contract securely and accessibly.
• Diarise key dates: payment deadlines, renewal dates, termination notice periods.
• Establish a contract management process to monitor performance.
• Maintain regular communication with the other party.
• Document any variations or amendments in writing.
• Address issues promptly before they escalate.
• Conduct periodic contract reviews to ensure ongoing compliance.

Frequently Asked Questions

What are the most common causes of contract disputes?

Most disputes trace back to parties failing to understand or comply with their contractual obligations, particularly around scope, payment terms, and performance standards. Misunderstandings about express and implied terms, vague drafting, and poor documentation of negotiated points are also frequent triggers. Economic pressure compounds the problem: when cash flow is tight, parties become less willing to absorb ambiguity.

How can my business reduce the risk of a contract dispute?

Carry out thorough due diligence on the other party, negotiate terms carefully, and put a clear written contract in place. The agreement should precisely define scope, responsibilities, risk allocation, warranties, indemnities, and a multi-step dispute resolution process. Have the contract reviewed by a solicitor before signature.

Are verbal or WhatsApp agreements enforceable?

Yes, in most cases they can be. Verbal agreements and contracts formed on platforms such as WhatsApp are legally binding if the core elements of a contract are present: offer, acceptance, consideration, and an intention to create legal relations. The real difficulty is proving what was agreed, which is why a well-drafted written contract is always safer.

What did the Arbitration Act 2025 change?

The Arbitration Act 2025 came into force on 1 August 2025 and amended the Arbitration Act 1996 in several important respects. Arbitrators now have an express power of summary disposal to dismiss claims or defences with no real prospect of success. The default governing law of an arbitration agreement is now the law of the seat. Arbitrators have codified ongoing disclosure duties on impartiality, and emergency arbitrators have extended enforcement powers. Parties should review their arbitration agreements to assess the impact of these changes.

When should I get a solicitor involved with my contracts?

Instruct a solicitor before signing any significant commercial contract, and certainly where there is high value, regulatory risk, cross-border elements, or complex liability and IP issues. Early advice on drafting and negotiation is consistently far cheaper than managing a dispute after the fact. A solicitor who has reviewed hundreds of commercial contracts will identify risks that neither party may have considered.

Getting Help with Contract Drafting and Disputes

The strategies in this guide protect businesses from the most common and costly contractual mistakes. Good due diligence, careful drafting, and a well-structured dispute resolution clause do most of the work. The Arbitration Act 2025 has also updated the framework for businesses that include arbitration provisions, with new powers and default rules that affect agreements entered into from 1 August 2025.

Our virtual in-house legal counsel service can help you draft, review, and negotiate commercial contracts that protect your business and prevent disputes. To discuss your requirements, email info@43legal.com or phone 0121 249 2400.

Melissa Danks is the founder of 43Legal. She has over 20 years’ experience as a solicitor working within the legal sector dealing with issues relating to risk management, dispute resolution, and advising in-house counsel in SMEs and large companies. Melissa has extensive expertise in providing practical, valuable, modern legal advice on large commercial projects, joint ventures, data protection and GDPR compliance, franchises, and commercial contracts. She has worked with stakeholders in multiple market sectors, including IT, legal, manufacturing, retail, hospitality, logistics and construction. When not providing legal advice and growing her law firm, Melissa spends her time running, walking in the countryside, reading and enjoying downtime with close friends and family.