Back to basics to avoid court

5 July 2009

6 July 2009 | Jake Kanter

Litigation between buyers and suppliers is increasing. Jake Kanter talks to lawyers to see how you could avoid putting your relationships at risk

No matter how you dress up a supplier relationship as a partnership, it will always come down to the money.

This is the view of Alan Ma, partner at law firm Maxwell Alves, who believes there has been a marked rise in litigation between buyers and suppliers during the recession. Ma is not alone. Research by SM reveals the economic downturn is exposing unprecedented contractual tensions and many claim strong supplier relations are under threat.

"Relationships are more adversarial," says James Baily, partner at law firm Herbert Smith. "Contracts are allowed to roll on during the good times, but when things become tough, even the most entrenched deals are exposed and disputes can arise."

Herbert Smith's figures show contractual disputes (relevant to procurement) at the Commercial Court - a division of the High Court - jumped from 839 in 2007 to 1,398 last year.

Susan Singleton, solicitor at Singletons, says organisations are "going after every penny vigorously", while Rupert Choat, CMS Cameron McKenna partner, admits there is increased sensitivity.

He says disagreements can be triggered by the smallest issue - particularly in the construction industry.

The lawyers say buyers are taking legal action for many reasons, including suppliers' failure to deliver goods and services to specifications.

But the real battles are emerging on the supply side. The Federation of Small Businesses says that many legal gripes stem from late payment, as vendors demand what they are owed.

"Suppliers have got a lot less to lose because they are on the brink. People are so desperate that litigation can become an easier route than going to banks for money," says Singleton.

Late payment becomes particularly pressing if a vendor's customer slides into insolvency, Choat explains.

Richard Auton, associate at Walker Morris, says suppliers are more inclined to challenge public sector contract awards. He believes businesses are "nervous" public authorities have not "got their head around" EU procurement regulations.

This was evident in software supplier Epix Systems' decision to sue Kirklees Council for £400,000 last month. It claimed the council's procurement processes were "fundamentally flawed" after missing out on a contract (News, page 9). So how can buyers prevent these legal threats? The message from lawyers is clear: Go back to basics.

Singleton expressed astonishment that some past clients had no written agreements in place with vendors. "It's still so common," she says, adding that clearly defined contracts are essential to prevent disputes.

If this fails, Baily says "hardship clauses" can be built into deals. These enable either party to re-open contract negotiations in extraordinary cases.

Paul Carter Hemlin, director of Contract Management Direct, says it is in the interests of buyers and suppliers to mitigate the risk of disputes. He argues litigation can be a "nuclear event", completely destroying relationships.

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