The Most Common Types of Business Disputes and How to Avoid Them

Warfare and business are often synonymous with each other. Consider the many phrases we use in business such as; strategy, tactics, great leaders and ruthlessness. These can all be applied to war.

Three of the most common types of business disputes encountered are:

• contract disputes;
• professional negligence claims; and
• shareholder disputes

All three can be disruptive and costly and are best resolved outside the courtroom, either by negotiation or other alternative dispute resolution methods.  Sometimes, however, an altercation can only be resolved on a bloody battlefield (in the business world the equivalent would be a courtroom).  Like all wars, preventing confrontation in the first place is the best course of action.  This article provides a definition of how these disputes occur and ways organisations can avoid them.

Contractual Disputes

A breach of contract occurs when a party fails to execute its obligations under a contract entirely, partially, incorrectly, or in any other manner which is unsuitable according to the heart of the contract.  Examples of a breach include failing to meet certain deadlines, substituting in materials which are different to those specified, and non-payment for goods and services. 

Contractual disputes can vary from a disagreement on the performance of a supplier contract, resulting in the loss of a few hundred pounds, to a party failing to pay on a multi-million-pound construction contract, causing an entire project to grind to a halt.  The bigger the risk, the stronger your due diligence and drafting need to be, but here a few procedures everyone can put in place to avoid breaches of contract getting out of hand.

• Ensure the contract is in writing.  Although verbal contracts are binding, trying to pin someone down on their word if things turn ugly can be near on impossible.  Having a written agreement makes it more difficult for one party to deny their contractual obligations.
• For large corporate of construction contracts, it is prudent to draft in dispute resolution clauses that can be engaged if a disagreement arises.  For example, although the adjudication process is a statutory right for parties to a construction dispute, providing for it in the construction contract allows parties to select an Adjudicator in advance and agree their powers.
• Make sure all parties to the contract understand their obligations under the agreement.  Miscommunication is one of the main causes of disputes, so “if in doubt, find it out!”

Professional Negligence

A professional negligence claim arises when the counsel of a qualified party is revealed to be incorrect, irrelevant, or unsubstantiated, and you suffer material loss as a result of their poor advice. When taking action against a professional advisor, such as a management consultant, accountant, or surveyor, you must first determine if their actions in supporting you have breached their duty of care.

Professional negligence can still apply even when a formal contractual arrangement is not in place if the individual or business still provided advice to you on a professional basis. If in any of these situations the professional’s assistance proves to fall short of reasonable industry standards, a claim for negligence can be made.

Although everyone in business has to rely on professionals such as accountants, lawyers, and engineers to get things done, there are steps you can take to avoid being a victim of professional negligence and thereby being forced to make a claim for damages.

• Make sure the professional you engage has the resources to advise you on different aspects of your business.  For example, your accountant may have a lot of experience in UK tax law but no knowledge of other tax jurisdictions.  Do your research when engaging professionals, and evaluate the diversity of resources they have in-house, and via outside contacts, who they can work with on less familiar matters.
• Select a professional via a referral whenever possible.
• Good communication is key.  Be clear about time limits (lapsed time limits are one of the major causes of professional negligence claims), and if you fail to understand something, ask for clarification.  Although spending a little extra time ensuring instructions are clear may seem tedious (after all, you are paying the professional to do something you don’t have the time or expertise to do yourself), it can save you thousands in both lost revenue and man hours if it prevents a dispute occurring in the future.

Shareholder Disputes

Shareholder disputes take place when top-level stakeholders within a business clash over major decisions that may significantly affect the company. This occurs more frequently at small and medium-size companies, and often as a result of key strategies and future planning not being documented or agreed in writing beforehand. Typical shareholder disputes include shareholders being denied input into management decisions, denial or reduction of dividend payout, and the undocumented assignment of intellectual property rights when a shareholder leaves the company.

To avoid shareholder disputes, it is imperative to:

• Have a Shareholders’ Agreement in place which outlines how voting rights will be allotted, the payment of dividends and how disputes will be resolved.
• If you sell shares to raise equity for further growth, ensure any new shareholders sign a Deed of Adherence, which will bind them to the existing Shareholders’ Agreement.

To find out more about avoiding business disputes, find a company law expert on Solicitors Guru today.