Director & shareholder disputes are often preventable

Planning and preparation helps to avoid director & shareholder disputes disputes - learn how

Director and shareholder disputes are an unfortunate fact of business life but can often be avoided with adequate planning.

As the old adage goes “failing to plan is planning to fail” – a common reason for such failure is that the parties are either inexperienced to the point that they are unaware of the pitfalls, they are desperate to get the deal done or that’s how they have always conducted their affairs (and been lucky to date !)

Of course once a dispute has arisen, mediation will help in resolving the issue, but ‘an ounce of prevention is better than a pound of cure’, so below you’ll find some ground rules for avoiding business disputes in relation to contracts and agreements.

  • Before commencing any work:

Before you an agreement is signed, make sure that an adequate and watertight contract is drawn up stating clearly what both parties are committing to. If you commence work without a contract in place you are in a weaker position if there is trouble down the line, and such trouble is highly likely in the absence of a formal contract.

It is also important to keep a record of any negotiations that took place in the lead up to a contract, including records of emails, as this information can sometimes be used in legal proceedings, should a dispute occur. If there were numerous meetings during the negotiations, minutes should be kept, and copies provided to both parties. If proper records are not kept, parties will find it harder to substantiate their record of events in resolving a dispute, even if mediation is used to avoid costly and often uncertain legal proceedings.

  • Verbal vs Written agreements:

 

With some exceptions, it is not strictly necessary to put most agreements into writing for the agreement to be considered legally binding, nevertheless it is good practice to do so. The obvious disadvantage of relying on verbal agreements is that one party may misunderstand the terms, or may remember incorrectly. A quick email after a telephone discussion summarising the conversation and the agreement, and a request that the other party confirm these details, can go a long way to avoiding disputes later or as part of a mediation.

 

  • Clarity of terms:

The agreement should be written in as much detail and clarity as possible. The terms of the deal, payment details and stages, should always be clear and unambiguous. Specify in as much detail as possible the quantity, quality or other descriptions of the matter being agreed.

If terms are ambiguous, and a dispute makes its way to court, a judge will decide what a reasonable person or a person with your experience, with the same background information reasonably available to you and the other side at the time you made the contract, would have thought you agreed – and that might not be what you think you agreed at all!

Therefore it is worth investing the time at the outset to clarify all the relevant issues under discussion, which will almost certainly save significant headache later. It could almost be called ‘mediation in advance’: by clarifying the needs and requirements carefully at the outset, the dispute is resolved in that it never arises!

  • Whose Terms?

If you have a standard contracts for directors and shareholders or management and partner agreements, it is important to draw people's attention to them, and to ask them to acknowledge that they are aware of those terms.

  • Authority:

A common mistake is not ensuring that the person who signs the agreement has the legal authority to do so on behalf of the company. If you are not sure whether the person you are dealing with has that authority, it is best to ask for an email from the company confirming that this is the case. Always keep hold of the business card of the person who signs the contract, as this may be used as evidence of their position within the company, and in what capacity they presented themselves to you.

  • Names and Spelling:

Equally important is to ensure that all company names are written correctly in any contract and in all invoices. For example, leaving out ‘Ltd’ could mean that the director is personally liable for any disputes and subsequent losses that result from contract.  

  • Future Proofing:

Does the contract make provision for events that may be unlikely but possible, such as a takeover or merger? Or what about "unknown unknowns" - things beyond one's current imagination - is there any provision at all to address an impasse?

  • Breach:

A breach of contract is where one party does not fulfill their obligations as agreed in the contract. If you feel that the other party is in breach of contract, the first thing to do is to write to them specifying the issues, and suggest how they might put the situation right. If that fails, you may wish to consider mediation, or to issue legal proceedings which in itself may bring them to the mediation table.

  • Dispute Resolution and Mediation:

It is recommended that when drawing up a contract, that the parties consider how they will resolve any dispute that may arise. A ‘dispute resolution clause’ could be inserted which states whether both parties will refer to their own solicitor, or invite a mutually acceptable industry expert or independent mediator to offer an opinion. This clause could specify that both parties will mediate any dispute before resorting to the law.