Contract litigation – defective contracts, parties and arbitration

Contract litigation – defective contracts, parties and arbitration

Contract litigation – what to watch out for?

Commercial litigation usually refers to disputes between companies. This is distinct from civil litigation which are disputes between individuals or individuals and companies. This firm only represents corporate clients in litigation cases. This article is focused on commercial litigants not civil litigation.

Defective Contracts

It is trite contract litigation that in dealing with contract cases the court will first determine whether there is a contract and if it is, on the face of things, enforceable.

The low hanging fruit for the defendant’s solicitor to take in contract litigation cases is the point that the agreement the claimant is relying on is incapable of being a valid contract because it is so badly drafted that it fails as a contract. Either that the contract in entirety was void because, for example, it was signed by an unauthorised person or, it is impossible for the court to interprete as it is totally unintelligible. Or, alternatively, the Defendant’s solicitors could argue that even if the contract in question was a valid contract, then it is voidable since the clauses it contains are unenforceable. For example, there is an unforeseen natural disaster that has not been provided for in the contract or the statute of limitations makes a clause redundant.

Unless a contract is completely unintelligible or a clause or clauses are unenforceable because of some questions of law then the above arguments are almost never going to be necessarily a completely successful defence to a contract dispute in reality. Assuming that there is a written document signed by both parties, and that some meaning can be constructed from the content of that written document, then it is very likely that the court will decide that there is some sort of valid contract unless there is some other compelling reason to hold otherwise.

Contracts are rarely ruled by the court to be invalid in their entirety but individual clauses within the contract can more often be held to be void.

Arbitration Point

This is an important issue that arises time and time again in contract litigation. The arbitration point can easily be missed by a claimant which might prejudice the claimant’s case unnecessarily since it is an easy point to deal with.

If a contract includes an arbitration clause or there is a stand-alone arbitration agreement, then generally the parties must refer the matter to arbitration. Each party can ask for the proceedings to be “stayed” which means stopped whilst the matter is referred to arbitration. One of the ideas behind arbitration, which is governed by the Arbitration Act 1996, is that it mitigates the complexity, costs and time spent on court litigation. Generally, the parties can structure the arbitration proceedings as they wish. However, the court still retains the power to grant interim injunctions, enforce arbitral awards, make orders requiring evidence, and both parties have the right of appeal an arbitral award to the High Court on issue of jurisdiction or questions of law.

The parties can agree in advance to exclude the right to appeal on questions of law. The Arbitration Act 1996 also stipulates certain mandatory requirements on matters such as immunity, appeals, payment of fees and certain rules if the parties fail to agree their own arbitration rules. You can take a look at the provisions of the Arbitration Act 1996 here.

Generally, if a claimant does not take the arbitration point and the contract provides for arbitration then the defendant could apply to the court for the claim to be struck out. This in practice would be a very drastic order by the court and is unlikely to happen. Proceedings are more likely to be stayed, and the defendant would usually get the costs of the application to strike out the claimant’s case, if the claimant had failed to refer the matter to arbitration without a valid reason.

It is not in every case that there is an arbitration clause that the claimant must refer the case to arbitration. The arbitration clause may be voidable. If the Defendant is arguing that the contract in its entirety is invalid, then they are also saying that the arbitration clause forming part of the contract is invalid.

The arbitration clause may be so badly drafted that the contract may be valid but the arbitration clause may be voidable. It is not very difficult for an arbitration clause to be valid but it should, at the very least, contain which arbitration rules are to apply.

It should also be noted before agreeing to an arbitration clause you should consider if they are in fact appropriate. Arbitrations are expensive and do not necessarily cost less than the county court: firstly, an arbitrator needs to be appointed by the relevant parties, the arbitrator will give directions including disclosure and pleadings- points of claim etc. then in due course there would be a hearing followed by an award. Even for basic commercial breach of contract disputes, an arbitrator would probably have requested a fee per party, and charge extras. Legal costs in actual court proceedings would probably be the same. The claimant might not recover more by going to arbitration.

Incorrect defendants

Another issue that often arises but that is often overlooked is naming the actual correct defendant on the claim form. In other words, suing the correct party or parties.

Note that just because there is an additional Defendant to add does not mean that the initial defendants were incorrectly added. It is quite possible to add more defendants as a case proceeds as you become aware of them by a minor application or at the case management conference. The court rules on adding and substituting parties to a litigation can be found here.

In some cases, an organisation may have been taken over and all its debts and liabilities novated by a commercial transfer agreement which is not a public document. The best the claimant’s solicitor can do is to make enquiries about any novation through a commercial transfer agreement. If the information is not provided voluntarily then it can only be obtained through a court order. In some cases, governmental organisation’s debts and liabilities may be passed over by statutory instrument.

In conclusion, the above are just some of the frequently arising issues in commercial contract litigation cases. Being aware of them will assist you in improving your chances of bringing a breach of contract commercial case successfully.

To book a face to face consultation for commercial legal advice you should contact a specialist intellectual property lawyer (charge rates may apply and may vary).