Resolving a Business Dispute Before Going to Court

Business disputes can arise unexpectedly and escalate quickly. A disagreement over payment, contract performance, ownership, service quality or management decisions can consume time, disrupt cash flow and damage valuable commercial relationships.

Court proceedings are sometimes necessary, particularly where urgent orders are required or the other party refuses to engage. However, many commercial disputes can be resolved earlier through negotiation, mediation or another structured dispute-resolution process.

The best approach depends on the contract, the evidence, the value of the dispute and the commercial outcome the business needs.

Identify the real issue

Before responding, a business should identify precisely what is in dispute.

A disagreement that initially appears to concern an unpaid invoice may involve a broader complaint about defective work, delayed delivery or an alleged breach of contract. A shareholder dispute may involve control of the company, access to financial information or the proposed exit of one owner.

The first step is usually to gather the relevant documents, including:

contracts and variations;
emails and correspondence;
invoices and payment records;
meeting notes;
company records;
photographs or technical reports; and
any earlier settlement proposals.

A clear chronology helps identify what happened, what each party was required to do and where their accounts differ.

Review the contract

Many commercial contracts contain a dispute-resolution clause.

The clause may require the parties to follow a particular process before starting proceedings, such as:

giving written notice of the dispute;
arranging a meeting between senior representatives;
attending mediation;
referring a technical issue to an expert; or
proceeding to arbitration.

Ignoring an agreed process can create additional disputes and may affect the way a court deals with the matter.

The contract should also be checked for notice requirements, termination rights, indemnities, liability limits, governing-law clauses and time limits. A notice sent to the wrong address or in the wrong form may be ineffective.

Communicate carefully

Early communication often determines whether a disagreement can be contained.

A measured written response is usually more effective than an aggressive accusation. It should identify the issue, refer to the relevant evidence and state what outcome is sought.

Businesses should avoid making unnecessary admissions or threats before understanding their legal position. Internal emails and messages should also be written carefully because they may later become evidence.

Where correspondence is intended to explore settlement, legal advice should be obtained about whether it should be marked “without prejudice”. Simply adding that phrase does not automatically protect every communication.

Negotiation

Direct negotiation is often the quickest and least expensive way to resolve a commercial dispute.

The parties may negotiate themselves or through their lawyers. A negotiated outcome can be more flexible than a court order and may include:

payment by instalments;
a reduced or revised amount;
replacement work;
amended delivery arrangements;
transfer of shares;
an orderly business exit;
revised contract terms;
confidentiality; or
continuation of the commercial relationship.

A business should enter negotiations with a realistic understanding of its legal position, evidence, costs and commercial priorities.

Settlement should be documented properly. Depending on the dispute, this may require a settlement deed, release, payment schedule, variation agreement or consent orders.

Mediation

Mediation is a confidential process in which an independent mediator assists the parties to negotiate.

The mediator does not decide who wins. Instead, the mediator helps identify the issues, test each party’s position and explore possible solutions.

Mediation can be useful where:

the parties want to preserve a commercial relationship;
there are several issues in dispute;
the parties need a confidential process;
court costs would be disproportionate;
a practical solution is more important than a legal judgment; or
both sides face significant litigation risk.

A mediated settlement can include commercial terms that may not be available through a court judgment.

Preparation is important. Each party should understand the evidence, likely legal costs, range of possible outcomes and the authority available to settle.

Expert determination

Some disputes involve a narrow technical or valuation issue.

Examples include:

the value of shares;
the quality of construction work;
compliance with technical specifications;
the calculation of an earn-out; or
an accounting adjustment.

The parties may agree to appoint an independent expert to determine that question.

Expert determination can be faster and more focused than litigation, although its suitability depends on the contract and the nature of the dispute. The parties should agree clearly on the expert’s role, the question to be decided and whether the determination will be binding.

Arbitration

Arbitration is a private process in which an arbitrator hears the parties’ cases and makes a decision.

It is more formal than mediation and can produce a binding outcome. Arbitration may be suitable where the contract requires it, confidentiality is important or the dispute has an interstate or international element.

However, arbitration can still involve substantial legal and expert costs. It should not automatically be assumed to be cheaper than court.

When court proceedings may be necessary

Alternative dispute resolution is not suitable in every case.

Urgent proceedings may be required where a party needs:

an injunction;
preservation of property or evidence;
enforcement of a restraint;
recovery before assets are dissipated;
orders concerning company control; or
a binding determination where the other party will not cooperate.

A business should also consider limitation periods. Informal negotiations do not necessarily stop time from running.

Before commencing proceedings, the business should assess the likely legal costs, management time, evidentiary risks, enforcement prospects and impact on reputation or commercial relationships.

Parke Lawyers provides further guidance on resolving a business dispute before court, including negotiation, mediation and litigation options for Victorian businesses.

Act early and preserve options

Delay can make a commercial dispute more difficult to resolve.

Documents may be lost, memories may fade and the parties’ positions may become more entrenched. Early advice allows the business to understand its rights, comply with contractual procedures and choose a proportionate strategy.

The objective should not simply be to prove that the business is right. It should be to achieve the best available commercial outcome at a cost and level of risk that are justified by the dispute.

This article provides general information only and is not legal advice. Businesses should obtain advice appropriate to their contract, evidence and circumstances before taking action.