Protecting your business: The rise in commercial contractual disputes and how to avoid them

UK businesses have been hit by a strong rise in contract disputes over the past five years.

According to a recent report prepared by Gallagher, a world-leading insurance brokerage and consulting firm, there has been a significant increase in the number of UK business hit by litigation since 2019. Contractual disputes were among the biggest concerns, experienced by 35 per cent of the 750 senior leaders surveyed.

With increased costs and the current economic slowdown expected to put further strain on businesses in early 2025, this trend shows little sign of slowing down.

Sara Beaumont, a director based at WHN’s Bury office and a commercial dispute resolution specialist, explains the reasons behind the increase and outlines how these disputes can be avoided or alleviated.

Companies in the UK have faced considerable economic instability for several years due to significant major events. These include Brexit, the COVID-19 pandemic, several changes to UK’s government leaders and subsequent changes to policies.

This instability creates uncertainty and challenges. Businesses in long-term contracts drafted during stable economic periods may be struggling with terms and conditions that no longer reflect the current commercial climate. For example, a fixed-price agreement negotiated in a low-inflation environment may become unrealistic as costs rise sharply.

If contracts are not updated to reflect changes, or are not set out clearly and professionally, one or both parties may struggle to meet their commitments and seek to renegotiate terms or may end up in dispute.

Why do businesses dispute contracts?

There are several reasons why businesses find themselves in dispute with suppliers or clients over the terms of a contractual arrangement.

These include:

Lack of documentation: Informal agreements or failure to document discussions leading to disputes. Missing records of correspondence or changes to a contract.
Ambiguous terms of contracts: Poorly drafted contracts with unclear terms can lead to differing interpretations. Lack of precise definitions for key clauses or obligations.
Breach of contract: Party fails to deliver goods or services as agreed in a contract.
Disagreements over payments: This includes delayed payments, non-payment, or disputes about the amount due as well as arguments over late fees, interest, or deductions.
Performance issues: Disputes may arise due to the failure to meet quality or quantity requirements or over whether work was completed to an agreed standard.
Unclear termination clauses: Disputes arising from how and when a contract can be terminated.
Force Majeure events: Disputes over whether unexpected events justify a failure to meet the terms in a contract. (for example, natural disasters and pandemics)
Disputes over Intellectual Property Rights: Ownership or usage of intellectual property may not be clearly defined. This may lead to conflicts over licensing or confidentiality terms.
Failure to meet deadlines: Unclear deadlines or no flexibility regarding meeting them.
Unrealistic expectations: Parties having differing expectations on the outcome of a contract.

The benefit of good communication

If you find yourself locked in a commercial contractual dispute, effective communication and collaboration is crucial in managing and resolving the dispute. Engaging in open dialogue at an early stage can often prevent a misunderstanding or misinterpretation of a contract from escalating into a formal dispute.

Where disagreements do arise, alternative dispute resolution methods such as mediation or arbitration can offer a more efficient and cost-effective way of resolving issues compared to traditional litigation. These options to resolve disputes not only save time and resources but also help preserve business relationships, which can be invaluable in the long term.

How to avoid disputes

Businesses should take a proactive approach to minimise the risk of contractual disputes, especially during uncertain economic times. Greater attention should be paid to the drafting of contracts, to ensure they include clear and detailed conditions that address any potential risks.

For example, including clauses that allow for price adjustments in response to inflation or changes in economic conditions can provide much-needed flexibility. Similarly, force majeure clauses should be tailored to address specific risks relevant to the parties and the industry, rather than relying on generic contractual documents.

Seeking professional legal advice

For any formal business agreement, a well-drafted commercial contract benefits all parties by helping to ensure the terms of the agreement are adhered to as well as saving time and expense on legal action if the terms are breached.

A qualified legal adviser that specialises in commercial contracts can assist in preparing new contracts and terms and conditions, as well reviewing existing contracts and checking contracts received from thirds parties.

For those already facing disputes, seeking professional legal advice at an early stage can make a difference in achieving a favourable outcome.

Further information and advice

See also our related articles for further information:

A guide to creating successful and watertight commercial contracts : This article covers the key elements of making sure commercial contracts are successful and watertight.

The importance of terms and conditions and making sure they form part of your business contracts : Offering key considerations when using terms and conditions under English law and their importance for businesses.

How to avoid unfair terms in business-to-business contracts : A guideline to help business owners and commercial suppliers engage in fair and realistic terms of contracts.

Sara specialises in resolving commercial disputes at all levels – both before and after the issue of court proceedings – and is experienced in the use of alternative dispute resolution, particularly mediation. For further advice on dealing with a commercial dispute call Sara Beaumont on 0161 761 4611 or email her at [email protected]

To review and update your business’s terms and conditions or to review a contract or terms that you are intending to enter, please contact WHN director Paul Matthews, a specialist in drafting and reviewing commercial contracts and terms of business. Call Paul on 0161 761 8075 or email him at [email protected]