How to limit the potential for a Contract Dispute to Arise

Every business transaction is different, even when the same parties are involved. The expectations and obligations related to a transaction should be clearly set out in the contract. Contract disputes can be costly, time-consuming, and damaging to business relationships. However, with careful drafting of the terms of the contract, many disputes can be avoided altogether.

Every business transaction is different, even when the same parties are involved. Commissioning a legal review of each contract which updates clauses that ultimately protect the business if a dispute arises is a wise investment. There are many examples of expensive long drawn out unnecessary legal disputes where a situation could have been saved by an unambiguous watertight contract.

Any business relationship varies as each industry sector reacts to the ever-changing markets. Contracts aimed at limiting disagreements and disputes down the line create a mutual understanding between parties as to how potential areas of contention, such as termination or failure to deliver services or goods in a timely manner will be dealt with. Clauses defining the dispute resolution mechanisms that should be employed in the event of a dispute can be implemented as soon as possible. Most importantly, should the matter have to be argued in the courts, the jurisdiction under which a dispute should be litigated under. 

Sergio Filonenko Kibu, an Associate, commented “many businesses have struggled in the wake of the pandemic and it is important for every business to ensure stability in the face of unforeseen circumstances and take proactive measures to mitigate the risk of contract disputes.” Sergio points out “should either party fail to adhere to the terms of the contract, regardless of whether the default was deliberate or due to unanticipated circumstances it is essential that the mechanisms defined in the contract to manage disputes are invoked as quickly as possible to enable a resolution to be reached as soon as possible”

The essential clauses to include are:

Notice of Dispute Clause

This clause outlines the procedure for one party notifying the other party of a dispute. It generally specifies the time-frame within which a party must notify the other party of a dispute and the information that must be included in the notice.

Confidentiality Clause

This clause, as it suggests, obliges the parties to keep all information related to the dispute confidential, including the existence of the dispute, the proceedings, and any settlement agreements reached.

Dispute Resolution Procedures

This clause sets out the procedures that the parties must follow initially when a dispute arises, including the exchange of relevant information, negotiation, and escalation procedures.

Alternative Dispute Resolution (“ADR”) clause 

ADR provides the opportunity for the parties to resolve a dispute The most common forms of ADR in a commercial dispute are arbitration and mediation. ADR has the significant advantage of being conducted privately and not in the public domain as in a court. It remains in the control of the parties involved and is less costly. Arbitration being a more formal approach. Each party explains their viewpoint before the appointed arbitrator/s separately. The arbitrator then makes a decision that is legally binding on all parties. Mediation allows all parties to put their viewpoint to the mediator whilst they are all present in the same room. The mediator will then provide a solution in an attempt to resolve the dispute.

Costs and Expenses

This clause specifies which party will be responsible for bearing the costs and expenses associated with resolving the dispute, such as arbitration fees, legal fees, and expert witness fees.

Exemption Clause

This clause limits the potential for legal action in certain situations by defining instances where liability is excluded or limited. There are two types of exemption clause – exclusion clauses where liability is completely excluded and limitation of liability clause where liability is limited but not completely excluded. However, The Unfair Contract Terms Act1977 (UCTA) expressly prohibits such clauses related to the following:

• Death and personal injury caused by negligence - this cannot ever be excluded or restricted.
• Misrepresentation - a clause excluding or attempting to limit the legal remedies available for misrepresentation has no effect.
• Breach or non-performance of a contract - Section 3 of UCTA prevents clauses that attempt to exclude accountability for breaches of contract or the attempt to vary a contractual performance that is substantially different to the expectations enshrined in the body of the contract or to prevent the performance of the contract.

Retention of title 

This clause enables a supplier to recover goods that have been supplied but have not been paid for. The supplier will also have priority over secured creditors should the other party be insolvent. The supplier must ensure that they have the right to enter the premises of the buyer and that the goods supplied will be easily identified. 

Jurisdiction Clause

This clause specifies the jurisdiction where any disputes arising from the contract will be resolved and the governing law that will apply to the interpretation of the contract.

Governing Law Clause

A typical governing law clause where the parties agree that the law of the chosen jurisdiction will govern the performance and interpretation of their agreement and disputes arising under it.

Waiver of Jury Trial

This clause waives the right to a trial by jury and specifies that any disputes will be resolved through arbitration or litigation in accordance with the contract.

Force Majeure Clause

This clause outlines the parties' obligations in the event of unforeseen circumstances that prevent performance under the contract, such as natural disasters or acts of war.

Giambrone & Partners’ expert multi-jurisdictional lawyers can identify potential pitfalls. With years of experience in providing guidance on how to mitigate contractual risks effectively. Relatively recent events resulting in the pandemic demonstrate that it is crucial to recognise the importance of ensuring that business transactions are governed by protective clauses.

Sergio Filonenko Kibu is an Abogado (qualified Spanish lawyer) and is admitted to practise in England & Wales as a Registered Foreign Lawyer (RFL). He is an associate based in the London office.

If you would like to learn more about protecting you business with a well-drafted contract please contact us at clientservices@giambronelaw.com or please click here.