Managing Contract Disputes

A dispute is a disagreement over something. A disagreement is a difference of opinion, but not all such differences result in a dispute.

Disputes are a fact of life. They occur in every field of human endeavour and level of society, between people and organisations and countries, over nothing at all or with total justification. Some are frivolous, farcical or self-serving, others deadly and with intent.

Many disputes can only be resolved by recourse to contract law. This is a difficult, expensive and protracted approach that can produce winners and losers, as well as unexpected, unhelpful or unsatisfactory outcomes that please nobody.

The level of disputation at any point in time is difficult to quantify, since officialdom can only count things that come to the attention of its bureaucratic processes.

It stands to reason then, that the number of recorded disputes represents only the visible tip of the dispute iceberg. The corollary is that most disputes are dealt with privately, not in the public arena.

Contract disputes are just one of the myriad subsets of the universe of possible dispute categories. The trait they have in common with most other disputes is their almost complete invisibility outside the bounds of the relationship between the disputing parties."

Dealing with these disputes is generally a private matter, where publicity is not warranted, sought or desirable.

Below, we’ll cover the typical causes and effects of contract disputes, how to prepare for and deal with them if they occur, and some ways to prevent them in the first place.

Common causes of contract disputes

A contract dispute can have a single outstanding cause or multiple contributing causes where some have more effect than the others.

The circumstances can be unique to the contract parties or more broadly common across a certain type of environment and so affecting many contracts simultaneously.

Ambiguity, complexity, uncertainty and volatility certainly aggravate every operational environment. They contribute a constant and unsettling background noise that needs to be monitored and heeded as a potential cause of disputes.

Here are some of the fundamental causes of contract disputes.

The contract itself

Contracts have a well-deserved reputation for being written by lawyers for lawyers. The language used is commonly impenetrable and unintelligible, certainly to those without a legal background but often also to trained people.

The effect of this ‘by-lawyers-for-lawyers’ contract authoring mentality is twofold:

1. There is a strong disincentive for many non-lawyers to actually read the contract, because past history has taught them that the effort will not lead to any real understanding. The upshot is that an undue amount of trust is fostered in the belief that the lawyers have got everything right, that the contract is complete, consistent, correct, practical and precise. There are many publicised but anonymous instances where this has clearly not been the case, with unpleasant consequences. No doubt there are many more that only the perpetrators and the victims have nightmares about.
2. If a non-lawyer actually bites the bullet and struggles through the contract, a slightly less-worse scenario than not reading it can ensue, depending on the reader’s background in, experience with, expertise about and exposure to contracts. The opportunities for misinterpretation and misunderstanding of the contract are legion, due to lack of familiarity on the reader’s part with the legal or written language used, the contract’s purpose and the concepts involved, or each party’s legal system and how it functions.

In such cases, disagreement between the parties can easily arise, particularly due to any decision-making made by the reader based on ‘knowledge’ of the contract.

Bear in mind also that the cause of a difference of opinion could be instances like:

• Presence of an ambiguous contract clause that can be interpreted in different but valid ways
• Absence of a specific clause, and each party adopts a different approach for dealing with the missing subject matter
• Misallocation of risk to the party either not responsible or not best equipped for dealing with it
• Inappropriate one-size-fits-all contracting approach that patently doesn’t gel with requirements
• Invalid assumptions and unrealistic expectations.

It can seem like a bit of an overreaction for a difference of opinion to escalate into a dispute, but it does happen, although not all the time.

Often, a facts-based discussion between the parties about the difference can resolve the matter, but it’s when the ‘facts’ are not accepted as such by a party and the difference cannot be reconciled that a full-blown dispute can occur.

Exceptional events

A contract may not have made adequate and appropriate provision for the occurrence of exceptional events, a shortcoming not evident until such an event happens.

A party to the contract may then discover that allocation of risk is unclear, it is carrying a type of risk that had not been allowed for or costed, there is no allowance for the event’s effects on time and quality performance obligations, or the other party lacks the technical, financial or management wherewithal to deal with the immediate issues and be better prepared for other exceptional events.

Declaration of a dispute may be the only recourse for addressing such consequences of an exceptional event.

Unresolved issues

A common trigger for disputes is the persistent or chronic non-resolution of operational or other issues, particularly those affecting delivery, especially in the face of assurances that “yes, we’ve fixed things this time”.

Seeming or actual indifference to the other party’s pain does not go down well. A demonstrated inability to resolve an issue just amplifies the sense of indifference felt.

Recalcitrance is worse than indifference. This can manifest in actions like the outright refusal to accept that there is an issue that needs fixing or to provide a fix unless a specific condition is met, such as payment for the fix.

Note that one or more parties to the contract can exhibit these tendencies, sometimes simultaneously. Raising a dispute might be the only option available to rein in these tendencies.

Relationship woes

A smooth and harmonious relationship between the parties to a contract is everybody’s reasonable and desirable expectation. It may never happen though, either to the degree anticipated or at all.

This shattering of expectations might occur almost immediately or after a considerable time, either suddenly without any lead-up, or gradually but noticeably and irreparably despite concerted efforts to stem the decline.

A fractious relationship between the parties can lead to a ‘shoot first and ask questions later’ or tit-for-tat response to each other’s behaviour.

Such a vicious circle of self-reinforcing behaviour can rapidly sound the death knell for the relationship and indeed, the contract.

Often, performance shortcomings, invalid assumptions or even a personality clash can produce an unhealthy, disrespectful relationship that no party really needs or wants.

In such cases, it’s really just a matter of time before one party decides enough is enough and advises the other that they are now formally in dispute in order to either improve the relationship or end it.

Typical effects of contract disputes

Any dispute can soak up inordinate amounts of time, money, effort and attention.

The longer it goes on, the more it will cost in terms of these dimensions. Worse, it will increase the visibility of the matter higher up the organisational ladder as the effects amplify.

This will not only divert senior management attention from more important matters but focus that attention where nobody really wants it.

Some of the direct costs involved with a contract dispute can include:

• Internal and external legal advice and representation
• Independent dispute resolution services
• Court costs
• Non-performance penalties if service delivery suffers during the dispute
• Missed deadlines

Disputes can cause detrimental outcomes in many areas, including:

• The relationship between the parties, covering mutual levels of confidence, respect and trust
• Ongoing and timely performance of the contract
• Exploitation of opportunities from the contract
• Longevity of the contract
• Viability of the organisation
• Higher borrowing costs
• Organisational stress
• Wasted management time

Disputes or a contract breach may be relatively rare for any particular contract, but a number could be in play at any one time across the contract fleet.

The growth in effects is likely to be more than linear, particularly if different or unfamiliar legal jurisdictions and languages are involved, and that can have a severe impact on business as usual for the Contract Management team, contract stakeholders and the organisation overall.

Throw in some regional or global disruptions like a pandemic, a recession or both at the same time, and you’re in uncharted territory with respect to dispute generation and resolution.

Allowing for contract disputes

While every contract should contain an agreed dispute resolution process, it’s unlikely to be the case.

On the sentiment scale, this can range from foolhardy, like ignoring the weather forecast of rain and leaving your umbrella at home anyway, to grossly negligent, like leaving your 2-year old unrestrained in the front seat while barrelling down the freeway in the rain.

It takes virtually no time, cost or effort to take your umbrella or ensure your most precious possession is securely buckled up in the back seat.

It’s the same with ensuring contracts are prepared for the occurrence of a dispute, where a little upfront effort can go a long way to keeping you metaphorically dry and safe.

Allowing for the occurrence of contract disputes can be handled by a multi-step process, where escalation to another step only has to occur if the current step fails to achieve resolution."

Note that there’s not necessarily a strict sequence to be followed from step to step.

Full details of the workings of each step aren’t necessary for the contract, just some idea of the central notions is sufficient.

Objectivity, open-mindedness, an ability to stand in the other side’s shoes, and a willingness to reach a settlement quickly are critical for returning focus to the purpose of the contract.

The dispute handling steps are:

Negotiation

The cheapest, most cost-effective way of resolving a potential or actual dispute, and really the mandatory first step, is a full and frank discussion between the parties about:

• What the central issues are
• Why they have occurred
• What everyone agrees on
• Where the responsibilities lie
• How resolution could be achieved
• How recurrence of the central issues could be prevented
• What to do next if resolution can’t be achieved through negotiation.

Contract negotiation best practices mean these discussions may be protracted and require escalation. Senior executives, legal representatives and key contract stakeholders may be involved in the negotiation process at various times.

If and when resolution has been achieved, any necessary updates to contracts, processes, documentation or anything else should be quickly prepared, reviewed, agreed and implemented.

Mediation

To achieve mediation, an independent, neutral third party is engaged to assist the parties to the dispute reach a negotiated settlement. Note that the parties themselves are responsible for determining how to achieve resolution in this process.

Mediators cannot impose or even propose a settlement approach.

Their role is to set the ground rules for discussion, get the parties talking productively and fairly, and help them to stay focussed on resolving the dispute with realistic solutions.

Mediators may have open discussions with all parties together, or privately with each party under conditions of confidentiality, but may act as a go-between the parties to try to build common ground.

A variation of mediation known as binding mediation or mediation-arbitration allows the parties to undertake mediation first, but if that doesn’t lead to any agreed resolution, the mediator can put on an arbitrator’s hat and make a binding decision for the parties.

Use of binding mediation can save considerable time and costs since the mediator-turned-arbitrator already has all the facts at hand.

Conciliation

Similar to mediation, but the independent and neutral conciliators may have specialist knowledge allowing them to analyse information relevant to the dispute and offer an expert opinion for the parties to consider. It’s still the responsibility of the parties to accept or reject that advice and make the decision about resolution solutions.

Arbitration

Unlike mediation and conciliation, arbitration is the process whereby one or more impartial adjudicators collect and consider all the facts about a dispute, decide on the outcome of the dispute, and impose a solution that the disputing parties have agreed, or legislation has decreed, will be binding and enforceable.

Arbitration can be similar to court processes, but less formal, faster and confidential when required.

Litigation

While all previous steps attempting to resolve a dispute avoid the courts, litigation takes place in those courts.

Here, each party will state its case via its legal representative, the presentation of supporting evidence, and through challenges to the opposing evidence.

Litigation is typically the last resort for resolving a dispute. Costs and time taken can be horrendous.

Outcomes can be uncertain and unwelcome. Appeals can be lodged to further delay final resolution. One or more of the parties might give up in despair or disgust, to cut their losses and focus once more on their business.

Dealing with a contract dispute

It’s come to the point where it looks like you’re facing a potential dispute or a contract breach or you’re in one right now.

Your contract might be in good shape because it contains all the necessary clauses outlining the progression from negotiation to litigation on the route to resolving a dispute. Or it might not because it doesn’t.

Either way, there’s quite a bit more to it than ‘negotiate’ or ‘mediate’ implies.

The following high-level checklist identifies what actually needs to be done in order to get started down the resolution track and how to wrap it up when everyone’s buddies again, or not, as the case may be.

Nothing fancy is required, but various types of assistance and involvement might be needed along the way to achieve a contract dispute resolution:

• Collect the facts pertaining to the dispute, such as who did, or allegedly did, what and when
• Identify the key issues involved in the matter
• Reveal any actual outcomes of the situation to date, and any potential outcomes should the matter not be resolved quickly
• Attempt to minimise the effects of the dispute through discussions with the contract’s key stakeholders
• Obey the doctrine of no surprises by keeping the appropriate level of organisational management informed about the current state of play. Any further escalation upwards can be handled by those managers as and when necessary
• Review the relevant contract’s dispute-related obligations and rights to determine what can and can’t be done
• Propose a course of action based on any relevant obligations and rights, or in their absence, what it makes sense to do
• If the contract doesn’t contain any dispute resolution clauses, develop a set in readiness for a contract amendment
• Set triggers to drive escalation up the chain of command for when progress seems stalled
• Discuss the situation and the proposed course of action with the other side, harmoniously and without aggression or insult. Identify all areas of agreement and differences of opinion
• Document everything. The details could be crucial to the eventual outcome, especially if the matter can’t be resolved by ongoing negotiations and ends up going through the other dispute resolution steps
• Impress on everybody involved in or affected by the dispute the need to keep its occurrence and its details confidential
• Maintain your regular routine and business with the other side to the extent possible and practical
• Invoke the contract’s actual or proposed dispute resolution process if negotiations have failed or are not making any progress
• While the dispute resolution process in under way, review options for terminating the contract in case any proposed or mandated resolution is unfavourable, or if continuing to do business with the other side is unpalatable
• If an acceptable resolution has been achieved, formulate any contract changes needed to prevent recurrence of the issues causing or caused by the dispute, and update the contract.

How can you Proactively prevent contract disputes?

Preventing disputes isn't always possible, but there are four things you can do to be in the best possible position:

• Know the contract
• Anticipate potential issues and prepare accordingly
• Pay attention to minor issues and monitor them closely
• Foster relationships with your suppliers

The old adage says that an ounce of prevention is worth a pound of cure. Even if we now measure in grams and kilograms, the adage still holds up.

But, now as then, not everything is preventable because not everything is foreseeable. This is as true for contract disputes as for any other kind.

However, awareness of the common causes of contract disputes described here allows preparation of preventive measures for at least those causes. Certain areas like construction and government contracts may suffer additional common causes.

Let's take a look at the above points in-depth.

Know the contract

A contract can be simple or complex, aspects that can’t be determined without actually reading it. That can be a time-consuming task, especially if the contract is lengthy and the subject matter unfamiliar.

Summarising the contract down to its plain-language key essential facts as you go can yield benefits way beyond its cost.

Ideally, a summary should be prepared from the version of the contract being prepared for approval at the completion of negotiations.

Errors and omissions can be corrected in both the final contract and its summary, then reviewed by the parties to the contract to obtain agreement about the completeness and correctness of the content and its meaning.

This action should minimise the risk of future differences of opinion about those meanings, and the likelihood of any attendant disputes, but it’s no guarantee.

The summary minimises the need for Contract Managers to have in-depth knowledge of every key and important contract in their area of responsibility."

Existence of a contract summary enables a shorter reading time with no legalese to translate and no bumf to distract the attention.

This means that a contract can undergo a review quickly and on short notice as the need arises. Like when the other party suddenly decides it now disputes the agreed interpretation of certain clauses.

Should the other party make such a claim, either the contract summary if available or the contract in question should be promptly reviewed.

With sufficient knowledge of the contract available, actions can be taken to try to prevent any disagreement about the contract from escalating into a dispute.

Anticipate and prepare

No contract can be 100% proof against uncertainty. Unexpected and even inconceivable events can and do occur, sometimes with warning signs, often without.

What a contract should be is uncertainty-ready. That means designed to be flexible and adaptable in the face of non-specific change, and that means containing explicit clauses allowing that flexibility and adaptability."

That could entail something like development of say an emergency management process to be activated under potential or actual duress.

Its purpose might be to allow immediate consideration of the effects of the event on operation of the contract, then deliberation, agreement and implementation of changes to the contract to deal with the event in a manner that removes the option for a party to raise a dispute of some kind in relation to the event.

Sweat the small stuff

Common wisdom has it that you’ll never get any meaningful work done if you sweat the small stuff, worry about minor issues and problems. This is certainly the case a lot of the time.

However, it’s very easy to run up against the law of diminishing returns by blind adherence to this notion, when the cumulative aggravation of many small but unresolved issues hits a tipping point. Then it’s ‘Houston, we have a problem’.

This shouldn’t be a surprise to the perpetrators, but it’s surprising how often it is.

Nobody likes a festering sore. Unless treated adequately, effectively and quickly, it can result in gangrene and loss of limb or life. A Band-Aid is not treatment.

Unresolved issues are a contract’s festering sore. Disputes are its gangrene. Prompt and successful treatment is necessary. This should take the form of a time-bound escalation process that operates in the same way as the critical incident process usually established for service delivery issues."

The aim of the escalation process is to minimise the likelihood of an issue causing enough aggravation to morph into a full-blown dispute.

Issues should be prioritised by impact severity, with associated response and resolution target timeframes. A missed target results in escalation of the issue’s priority, notification to the next level of issue management, and restarting of the response and resolution clocks.

This escalation process repeats while the issue remains unresolved, until the highest level of priority is reached.

This is when very senior management needs to get involved. By design, this is not a good place to be. Particularly if penalties can be sustained by the party responsible for resolution of the issue.

Foster the relationship

Achieving and maintaining a good working relationship between the parties to a contract is a fundamental enabler of and contributor to the contract’s success.

This can be hard work, especially when there’s an inordinate power imbalance between the parties – such as being the sole or way biggest customer or supplier - that manifests in a ‘my way or the highway’ attitude.

A good working relationship requires honesty, flexibility, transparency, good listening and a can-do attitude. Embrace and encourage these traits."

It doesn’t need any condescension, fawning, buck-passing, recalcitrance or arrogance. Challenge and work around these mindsets.

Tension will commonly be experienced in a business relationship simply because the involved parties have different goals and pressures driving them.

That relationship might be one of a very large number for any or all of the parties. Things can easily fall through the cracks when you’ve got scale.

Strong efforts might be needed to prevent normal tension degenerating into an adversarial culture that loses sight of the shared targets and aims of the contract. Open and timely communications between the parties is essential.

A solid relationship can help to maximise the levels of common alignment between the parties and smooth out the inevitable bumps of divergence that occur during its lifetime. Since those bumps include potential and actual disputes, the rewards are well worth the effort.

Summary

Disputes are almost inevitable if a contract is unsuited to operating in its intended environment.

Assumptions, plans, preparations and expectations can be invalidated in a virtual eye-blink.

Misunderstandings can be rife when there’s little commonality of spoken, legal or technical languages and practices, but also when there’s a lot.

What is needed is a clear, fair and precise contract with built-in dispute avoidance, prevention and resolution mechanisms, and an ability to cope with uncertainty."

There is also an ever-increasing need for appropriately skilled and experienced people, able to anticipate, understand and mitigate various forms of operational constraints on the smooth working of contracts.

Even then, without due attention, contract disputes can escalate unexpectedly, uncontrollably and even irrevocably, causing temporary or permanent harm to relationships, to contracts, to reputations and ultimately even to organisations.

The right attitude is key for minimising and dealing with contract disputes. This means a willingness, ability and preparedness to make things work, to stay on track or get back there quickly, to be civil and not burn bridges, to be firm and fair but not officious or offensive.

Do everything possible and reasonable to deal effectively with issues, to prevent or avoid escalation to dispute level.

Do everything necessary to defuse a dispute as quickly as possible, to minimise its impact, its visibility to senior management, and its progress towards the courts.

Record for posterity and implement the lessons learned from every successfully resolved dispute, to prevent repetition of the same issues or disputes.

It’s pointless, masochistic and time-wasting to repeatedly solve the same problem rather than prevent its recurrence.

If you would like more information about how to manage contract disputes, or how Gatekeeper can assist with those activities, then contact us today.