Legally Aware Business
Commercial disputes are an increasing trend within businesses. According to Nick Johnson, commercial litigation partner at Manchester law firm, Glaisyers, businesses can sometimes be their own worse enemy because there are plenty of ways to avoid disputes occurring in the first place. Here Nick explains how and why it is so important.
Paying taxes and dying always scores pretty highly on the list of life's unpleasant certainties. For many, business disputes with suppliers, customers, employees, and fellow directors are just as likely and almost as distressing. The key difference to remember here is that unlike death and contributing towards the Country's bank balance, avoiding commercial litigation is something that businesses can take significant steps to avoid.
This article will initially investigate some of the reasons why disputes can escalate into full-blown commercial litigation. I will then move on to look at how disputes can be minimised. Key to this is formal documentation, which makes sure all parties are in no doubt as to the terms and conditions of their commercial relationship. This will in the main focus on contracts between suppliers and customers, but will then move on to briefly discuss a host of other areas where disputes can arise, and where there should be contractual documentation in place.
Obtaining the relevant advice
Before considering the importance of any contractual documentation, it is important to understand the need to obtain proper legal advice at an early stage in any dispute. Irrespective of whether you do have the contractual documentation in place, a failure to take the correct legal advice at an early stage can often lead to prejudicing your position in any dispute. In particular, at a time when you envisage you may be involved in a dispute and before the issue is raised by any other party, is a time when you should seek such advice.
Unfortunately, many companies see their accountant as their first port of call when involved in a dispute. There is a clear and understandable reason for this. Accountants are often perceived by many as to have the closest of understanding of the individual company's welfare and therefore are seen by the managing directors of many companies as the person to speak to for business advice. However a dispute is not a matter upon which you are seeking business advice. One would not seek to go to a butcher to buy bread and therefore one should not approach one's accountant to seek legal advice in a commercial dispute.
While accountants always have the best interests of their client at heart, they are not technically qualified to deal with disputes involving complex legal issues. Would you trust me to carry out an audit of your business?
In addition to identifying to whom you should obtain advice from is the need to do this at an early stage. It is often the case that businesses will attempt to resolve disputes themselves, or even more dangerously don't do anything about it. It is commonplace for a business to try and diffuse the problems themselves, usually in correspondence. However, it is this correspondence that often returns to haunt a business when the matter reaches the court. A business can often undermine its own case by failing to properly present its case at an early stage or to address certain issues. Burying your head in the sand is even worse and never makes the dispute disappear. Therefore it is important at an early stage to address issues and seek legal advice.
Litigation is a risk faced by many businesses after an initial dispute has sparked off. However, a business can limit its disputes by putting in place formal documentation. In doing so you set out in detail the basis of your trading relationship and which to a large extent can avoid any confusion. The importance and issues arising from the contractual documentation varies according to the circumstances in which it is used.
It is surprising how many companies don't have contracts drawn up with its customers or its suppliers with a view to protecting its position. Having considered the significance of any contractual documentation there are then a number of issues which a business needs to consider before putting them in place.
It will not be possible in most circumstances when dealing with your customers and suppliers to have in place a bespoke set of terms and conditions which relate to each individual contract. Therefore, in dealing with a large number of customers and suppliers it is necessary to have some standard terms and conditions. However, there is no reason why those standard terms and conditions do not reflect the nature of your business with a view to reducing the risks of being engaged in a dispute or exposing yourself to a loss. Seeking proper legal advice can ensure that those standard terms and conditions best reflect the nature of your business and the way in which that business wants to carry out its transactions.
Once a business has agreed upon certain terms and conditions it then needs to ensure they have been properly incorporated into any contract it may enter into with its customers or suppliers. Therefore at the time which a business enters into a contract, has it taken steps to ensure that the terms and conditions will apply. The mere fact that they exist does not mean that they will be incorporated.
It is important that a business brings its terms and conditions to the attention of its customer or supplier and that they agree those terms will apply. Unfortunately, the way business is conducted, there will be no discussion between the parties or correspondence which confirms this. A business will often rely upon the terms and conditions being incorporated as a result of its transactional documentation. Therefore, a company will often have its terms and conditions incorporated into its order form, order confirmation form or invoice. In the absence of any correspondence or other documentation there can often be arguments over what is known as the battle of the forms. In the absence of any argument over there being incorporation as a result of a course of dealings, it is advisable not to endorse your terms and conditions on the back of an invoice. The reason for making such a comment is that an invoice is sent after the business has entered into a contract. Therefore, any terms and conditions should be endorsed on an order form or on an order confirmation form.
Any argument over the battle of the forms normally occurs when a business argues with its customers as to which terms and conditions apply. If a business having placed an order on its own order form in which is incorporated its own terms and conditions, the supplier then confirms that order on its own documentation on which there are its own terms and conditions, there is then an argument as to whose terms and conditions will apply.
This can be very relevant when arguing over whether a retention of title clause applies to obtaining the return of goods where there has been non-payment or in limiting any exposure to damages in situations whereby a party has failed to honour its obligations.
In a situation where there is a conflict as to whose terms and conditions apply the parties can be involved in a lengthy dispute, which can detract from the real issues between the parties. Therefore, in situations where there is a dispute as to whose terms and conditions apply, this matter should be resolved and confirmed in correspondence before any goods or services are delivered.
Other areas in which a company should consider formal documentation are in the areas of investment and recruitment.
In situations where an investment is being made into a business, the terms upon which this is being made should be clearly set out in an agreement. If an investment is being made in return for shares then the parties should consider entering into a shareholder's agreement to avoid any arguments at a later stage over how a company should be run and what should happen in the event the parties cannot agree. Too many times an investment can be made while maintaining no control over the company or the fellow shareholders.
In the situation where individuals run a business as a partnership then again one should avoid the "gentleman's handshake". It is important that the parties to a partnership enter into an agreement, which sets out the basis upon which the profits will be divided and what their obligations are. In addition consideration should also be given to the situation as to what would happen upon a partner retiring. There will always be a situation where a partner retires or the partnership is dissolved and therefore provision should be made as to how this will be dealt with. Failure to do so can cause arguments at a later stage over the repayment of any capital or attempts by another partner to take existing clients.
The success of a business often depends upon its employees. Therefore a business wants to protect itself from the damage that can be caused when a key employee leaves.
It is often the case that an employee gains a considerable amount of knowledge while working for a business and builds up close relationships with its customers. Therefore when an employee terminates his employment, a business needs to take steps to protect itself. In the absence of any service agreement with its employee or contract or employment, the business will have little protection.
Simply the existence of formal documentation reduces the number of arguments, but it is also worth ensuring the following.
Terms and conditions are spelt out in plain English
You have procedures in place, which allow you to check that the goods you have supplied have been inspected.
When dealing with a major order, always monitor its progress and ensure that you have a good understanding of the terms and in particular, your obligations.
If you envisage a dispute then identify the likely value of the claim and the issues at stake. Also, collect all the relevant documentation and take statements from those involved. While this may seem to be a somewhat erroneous task, it does avoid documentation at a later stage being lost, or employees leaving a business and then no co-operating at a later stage with the provision of a witness statement. Always preserve the subject matter of the dispute and if necessary, carry out an early inspection and take any photographs.
There are lots of other areas for which formal documentation involving the running of a business should be considered. This may arise in the context of trademarks or other areas of intellectual property, which may be a valuable asset of the business. Getting things written down in the form of a contract and being aware what actually constitutes a contract can go a long way to ensure the smooth running of your business and also in assuring its future success. Those businesses that don't are in my view, treading a fine line over a big drop as a considerable amount of time and money can be spent in dealing with disputes and not taking the business forward.
Nicolas Johnson is commercial litigation partner at
Manchester law firm, Glaisyers.
Nicolas Johnson is commercial litigation partner at Manchester law firm, Glaisyers He can be contacted on 0161 832 4666 or email@example.com