Managing the risk of business disputes

The challenges and uncertainty caused by macroeconomic conditions going into 2024 are likely to trigger disputes in business relationships. Attempts by parties to renegotiate terms, give notice of termination, or otherwise extricate themselves from contractual obligations, can be expected to rise where businesses face financial pressures or disruption to services or supplies. Equally, businesses in acute distress may have no option but to renege on contractual obligations and fail to make timely payment. 

A perfect storm has been created by unprecedented events (the pandemic being a prime example), significant ongoing geopolitical tensions, regional conflicts, and a challenging financial landscape in the UK characterised by extreme inflation, high interest rates and challenging labour market dynamics. These complex and interconnected factors are outside of a business's control. However, foreseeing and addressing potential contract-related issues will be vital for businesses seeking to weather the storm. 

The reality is that cash flow problems in one business will have a knock-on effect on the businesses it deals with. For those grappling with more serious cash flow issues, operational disruptions, and changing market conditions, the potential for disagreements over contract performance, delivery delays, and payment terms will escalate. 

When challenging times hit, it becomes essential to enforce performance of obligations owed to the business by others to keep running. However, the business's ability to meet its own obligations, in particular payment commitments, becomes increasingly difficult. Equally, businesses may find that counterparties begin looking for ways to extract themselves from burdensome obligations, for example by seeking to rely on allegations about the quality of goods or services being supplied or failure to deliver them on time, that might justify termination. 

While many believe their contractual rights and obligations to be clear-cut or even 'cast iron', we frequently find this is not the case. Resolving this type of dispute at court often comes down to a delicately balanced exercise of interpreting the grey areas in contractual wording. 

Mitigating the risk of business disputes in the current climate requires an initiative-taking and strategic approach. It is essential to have a comprehensive understanding of your business's contractual rights and obligations. This is achieved by reviewing existing contracts and terms and conditions of business, paying particular attention to performance, termination, and dispute resolution clauses. Identifying potential vulnerabilities is crucial for informed decision-making. Where businesses have suppliers of goods and/or services that are key to their operations and profitability, they should consider undertaking regular credit checks and monitoring of those suppliers to spot 'red flags' that may result in their either being unable to deliver or their business failing. This will enable businesses to be more proactive in finding alternative suppliers or pivoting their focus to those products or services that may be unaffected by non-performance.

Where difficulties with performance are anticipated, or unfavourable terms are discovered, it is also wise to explore opportunities to renegotiate terms. Where alternative business service providers or suppliers can be sourced, it will be important to ascertain the notice period for terminating the relationship with the business's existing supplier. This is likely to be easier where effective and transparent communication with the other contractual parties has been maintained. It also puts the business in a stronger position to do so before it is under more intense financial pressure due to non-performance. 

Where challenges do arise or delays in performance are anticipated, businesses should collaborate with their advisors to implement a strategy for managing the knock-on effect on their business. As part of that strategy, it is usually wise to notify customers promptly. Such steps may identify solutions that work for everyone and can prevent disputes escalating. It may also be appropriate to include dispute resolution mechanisms in agreed terms and ensuring that terms dealing with the venue and choice of law for determining the dispute are included, especially where businesses have foreign suppliers and/or customers. 

If disaster strikes and a key supplier lets a business down or a key customer fails to pay, acting quickly to implement a strategy to mitigate both reputational and financial damage to the business can be crucial to that business surviving the fallout and maintaining profitability.