Chapter 12

Things ended badly — how you know you are in a dispute

At the risk of sounding trite, it is not hard to work out when you are in a dispute.

You will generally be the accused or accuser of an allegation that you or another have not honoured certain of the terms of the contract.

A prudent contractual party will generally notify their concerns in writing.

You will know of their unhappiness from the letter if you are blamed. It will identify, possibly in general terms, the contractual term which you are bound by and set out your failure to honour or perform that term.

If you are accusing the breach, you will know that your expectations have not been met and therefore there is a problem that will need to be fixed one way or another.

At the earliest stages of a dispute it is critical to go back to the contract itself. If it is an oral agreement this is obviously difficult. There is no record of it other than recollection.

If the contract is written, then you need to review its details. Hopefully, it is clear enough for you as a non-lawyer to understand. Closely consider the clause that is in question.

Whichever side you are on, undertake the following process as your first step in analysing your position:

It is important to differentiate a breach of a contract from a party’s disappointment that its expectations are not being met.

If there are no variations or subsequent representations as to what a party can do, the rules of the game are in the agreement itself. A party is not obliged to do any more than the agreement sets out. It is not obliged to meet the ‘expectation’ of the counterparty, be that reasonable or otherwise. Are the expectations in the contract? Have you agreed overtly to meet them? If not, then you are not obliged to.

The earlier you form a view about the dispute, the better position you will be in to assess your position and if necessary seek legal advice on the back of an independent and precise consideration of where you see the rights and liabilities as sitting.

While lawyers are experienced and skilled in construing contractual terms, the contract is your instrument. It should be sufficiently clear to allow you to understand it. If the contract itself is not clear, that is a bad sign. It means that it is not easy to discern the rights and obligations of the parties. This may allow for a more tenuous or marginal allegation of breach of contract to be made. The less clear the contract is, the greater the chance for it to be contended you have obligations that are greater than what was agreed.

The contract itself is your guide. Your understanding of the contract may be coloured by matters in relation to performance of it by one party or the other. It would be prudent never to make an allegation about what the contract says or does without actually reverting to the document itself. It is easy, in the process of performing the contract, to recall that it operates in a different way or manner from what it says. Again, your understanding or opinion of the contract term is not the important thing. It is what the contract actually says that rules. In determining any dispute, you will not be listened to very closely on what you ‘thought’ the contract meant. The contract should speak for itself. If it does not, this creates an unfortunate uncertainty for both parties to the dispute that means an easy and quick resolution may not be possible.

Asserting a dispute

Any party to a contract can breach it. Identifying a breach of contract is a relatively straightforward task. Again it requires a proper review of the contract and its terms. The primary question is what rights and obligations you and your counterparty have.

Depending on the precise terms of the contract itself, there may be a mechanism for notifying disputes under it. Some parties like to have a structured means by which disputes will be notified. A regular feature of contracts is a mechanism that follows the following general sequence of events:

If there is a contractual regime where disputes are to be notified, it is important that you follow that structure. If you do not, there may be an allegation from your counterparty that any notification is invalid and that may affect the subsequent or consequential rights you have.

If there is no formal notification structure the ordinary way it is done is by letter from the party being the victim of the alleged breach to the other party. That letter should identify:

Each of 1 to 5 above can be expressed without necessarily the need for legal advice. It may be more complicated, however, to be asserting the legal consequences of the breach in 6 if you are not a lawyer. You may want the comfort of a lawyer’s advice as to what the contract says.

The matters in 1 to 5 are, in broad terms, factual. If you don’t get advice, there is often a little bush-lawyering in your interpretation of what the contract means. Generally speaking if it has been well drafted there should be no ambiguity as to what the terms and effect of the clause in it are. This will allow a person who is commercially savvy and intelligent, but not necessarily a lawyer, to fully and completely understand the terms.

If you are the victim of a breach of a contract it is generally best to notify the other side at the earliest possible time. If worst comes to worst and the matter goes before a court or tribunal, the person hearing the dispute will want to see that you have promptly and efficiently sought to enforce your rights. While it is not necessarily the case that your interests are disadvantaged if there is a delay from the time in which the breach comes to your notice and the time you complain about it, there can be a credibility gap. Generally breaches of commercial contracts are taken seriously by parties to them. Often the contract is important to the conduct of both party’s general business. That means both parties rely on the performance of the contract in the conduct of their day-to-day affairs. There is an incongruity in sitting back and waiting for a breach to ‘ripen’ when in fact this never actually occurs.

It is difficult on the one hand to go to the court or tribunal complaining about the grievousness of the breach yet on the other having waited months or more from the time you came to notice it before complaining. There is an inconsistency with commencing court proceedings seeking to enforce your rights on the one hand, yet on the other hand having waited in your own good time for no apparent reason to complain of what you say is serious and terrible conduct.

If there is a good reason why you have delayed bringing the breach to the attention of the other party, it is useful to set that out in your correspondence before you make your first complaint. There may be myriad good reasons why you have waited so such a letter will generally be very helpful.

Again, every contract is different. That means every letter of demand is different. However, the following is a sample letter on a fanciful contract to illustrate one way in which a letter might be sent.

I have chosen this example because it is at the less complex end of the spectrum. There is no precise quantification of a money amount here. It is not possible to identify how much juice business was lost because of the non-deliveries. If yours is a case of a recovery of a debt (that is, you have sent invoices that have not been paid) you would replace the second last paragraph with something like, ‘Please pay the outstanding amount owed being $1 within seven days or we will sue.’

This is what lawyers call a ‘letter of demand’. As stated it is not necessary for a lawyer to send a letter of demand. However, it is regularly considered by business people that letters of demand sent by lawyers have more sting given that it is on a lawyer’s letterhead and that itself makes a statement to the breaching counterparty. This statement is essentially that, ‘we are so unhappy about your breach of contract we have sought legal advice and as a result our lawyers have written you this nasty letter.’ It escalates the dispute in a positive way for the party alleging breach. It is an implicit statement of strong commitment to the protection of their rights and interests under the contract.

Having a lawyer send your letter of demand may have this benefit in some, or even many, instances.

The clearer and more precise your letter of demand, the stronger the impression you make. A diffuse letter substantially limits its effectiveness. The important elements are the identification of the clause, a summary of the obligation the clause imposes and a statement of how a counterparty has not met their obligations. The more detail you can add, the better.

Some lawyers and people in business favour a rhetorical approach to letters of demand. That is, they express their displeasure and sense of betrayal in emotional and direct terms in the letter. It is my personal view that letters of this kind are not helpful. While it doesn’t diminish the position of the person who sends them, it is my preference as a matter of taste for letters to be more clinical, targeted and direct. In most instances the emotional content of a rhetorical letter has no effect on the party alleged to be the breacher. It often also contains statements that the author may otherwise regret with some time, distance and calmness.

Two views of the world when only one will do — the genesis of a dispute

There are a number of steps you can take within your business when a dispute is brewing to assist you in both the short and the long term.

In a nutshell, they amount to gathering and marshalling information. The more information you can collect in relation to the subject matter of the dispute (whether you are the victim or the breacher) the stronger your position will be in negotiation and, if necessary, in fighting it out.

Disputes are generated by two things:

If there is an act or conduct by a party that is in breach of the agreement, there is ordinarily an emotional response from the counterparty complaining of the breach.

Rarely in contractual disputes do counterparties who are victims of breaches shrug their shoulders and respond phlegmatically ‘that’s life’. There is regularly the sense of betrayal and a belief they have been abused given the trust they had placed in their counterparty. This gives rise to a strong reaction, in which the violated party complains about the ethics, morality and propriety of a counterparty in making the breach.

Although it is easy to say and hard to do, it is always important to temper your emotional reaction to either a breach by another party or an accusation against you. This is because it clouds your objective judgment.

Over the years courts have been littered with disputes driven by ‘principle’. Principle is a noble thing. Many of the grand developments in our law have been pursued by people as matters of principle.

However, principle is not the same as the moral feeling that you have been mistreated. Do not let your feeling of unhappiness regulate the way in which you address the breach and, to the extent possible, negotiate a commercial resolution of it.

The greatest impediment to the settlement of disputes is emotion. The powerful factors in settling a dispute are reasonableness, strategy and compromise. Always emphasise the latter and never the former.

You will find your thinking is much clearer, your tactical approach cleaner and, in general terms, the result better and achieved more quickly.

Breaches of contract may be by omission or commission. By omission I mean that someone has failed to do something they should have done under the agreement. By commission I mean they have done something they shouldn’t have done or in a different manner from that required under the contract.

Neither is more serious than the other.

Your ‘belief’ that a counterparty has breached the contract is of limited use. To protect your rights you need to be able to prove that the breach has occurred and that, as a consequence, you have suffered damage.

Again, go back to the contract to identify the breach. This is essential in gathering information. You can only know the breach if you know the contract.

It is also important to bear in mind there are likely to be two perspectives on the alleged breach. Your counterparty rarely will admit to their infringement of your rights in clear and open terms. On some occasions the different perspectives are equally balanced.

It is not a breach of the contract. The delivery of the timber was all that Terry and his driver were obliged to do. The fact that his prior employee had ‘gone the extra yard’ and helped Waterside was not something that was required under the agreement. There could be no steps taken by Waterside to compel Terry to do more than merely deliver.

This example illustrates that the perspectives under the contract can be equally valid. Waterside got used to the employee delivering the timber in the most user-friendly and time-efficient manner. It may not have gone back to the contract when it complained of a breach. It assumed that was what Terry had to do. The contract was in all likelihood in short form and merely prescribed delivery to a site being a street address. It had inferred that the contract contained this extra dimension because of the conduct of the service-oriented employee.

On the other hand Terry is strictly right when he indicates to Waterside that there is no breach of the contract. The contract requires delivery only and that is what is happening.

Putting aside relationship issues and the commerciality of the position, here there is an allegation of breach of a contract that is incorrect. However it is based on facts that, from a non-lawyer’s perspective, could reasonably lead to a suggestion of a failure to perform obligations. This failure, if not to the letter of the agreement, was generally against the spirit of it and in accordance with the accepted practice between the parties.

One of the worst things to do in the context of a breach of a contract or in a dispute is to make assertions without having all of the information you need available to you to the fullest extent at the earliest possible time. In disputes over contracts, information is power.

Even though this seems self-evident, it is regularly a problem in a dispute resolution process that a party has made fairly wild and ultimately unsubstantiated allegations about the conduct of the other party at the outset. They have not done everything they need to, to check their facts. They have possibly relied on one colleague giving them a story that cannot be substantiated by the documents or the actual conduct of the parties.

Again, place emphasis on commercial and objective rationality. That means an assessment of all the objective factors. What did the contract say? What did they do? Whether you like the people on the other side or they satisfy all of the ‘relationship elements’ you wish from them, this will generally not matter under the contract.

I have set out below a staged sequence of steps that in many cases will be useful to follow in gathering information.

It is important to recognise that evidence is given before a court or tribunal generally on oath. That is, the person who gives the evidence must swear the accuracy of it. If the information is not accurate, there is a powerful sanction against the person giving the evidence. That is perjury. Perjury is a criminal offence and may see the perjurer or person giving the false evidence subject to a jail term. It is of the utmost importance that information is to the fullest extent accurate and is supportable as far as possible by documents or statements of evidence.

In the information collation system I have outlined below, I have assumed that a full and complete analysis of the contract has been undertaken and a view formed as to what the rights and obligations of the parties are. I also assume there is a general assertion of a breach of the agreement by a counterparty.

This system is set out in the context of the party alleging the breach gathering information. However, it applies equally to anyone in a contract who is seeking to initially establish whether or not it has a problem. Exactly the same steps and essentially the same information should be sought by each side in the process of information gathering.

Further, the system is not a formula. It can be used interchangeably or remodelled as you need it. Some parts may not be relevant to you in your dispute.

Once you have formed your view on the contract, you will be in a position to quickly identify which parts of the system you think are useful and those that are not relevant.

Step 1: appoint a coordinator

The coordinator gathers and organises the information.

The coordinator is the person to whom those relevant to the dispute report. A coordinator must be a person trusted in your business and should be someone who is accountable at a management level.

It is important that the person is not involved in the dispute. This means it is highly unlikely they will ever become a witness in any disputed proceedings. The coordinator’s job is to devise and implement the information gathering strategy.

On this basis, a coordinator should be involved in the process of ascertaining what the contract means. Their involvement will mean they have a more intimate knowledge of what the issues in dispute are. This will be helpful to them in that they will be involved in the process from the outset.

The coordinator must identify:

• the relevant people who need to prepare statements or summaries of their involvement in the matter
• documents or general categories of documents that need to be collated.

It is the coordinator’s job to hold people to account on a fairly short leash to comply with the requests for things to be done in the information gathering process.

Step 2: stop the talking

It is of critical importance that prospective witnesses in the dispute do not talk to each other to ‘get their story straight’. This is an improper step and one that will have serious and dramatic implications in any dispute resolution proceedings.

A court, tribunal or arbitrator will expect that witnesses come to that forum giving their evidence honestly and to the best of their ability. That is, the evidence is solely to the best of their recollection. While they may refresh their memory from objective documents that may help their recollection of events during the course of the contract, they must not become aware of the versions of events of other prospective witnesses inside the organisation.

Many cases have been tragically lost by parties on the basis of the witnesses getting together and discussing their evidence at the outset and before lawyers become involved. Although this may seem understandable to a non-lawyer, it is a gross mistake to make if there is any prospect that a court, tribunal or arbitrator will be hearing the dispute in due course.

An all-points bulletin, being an email, memorandum or other notice must be circulated to all relevant people inside the business not to discuss with anyone else, including the coordinator, their recollection of the events in relation to the dispute until otherwise directed or authorised. It is also useful to add that the discussion of potential evidence between parties is a very serious matter that may not only have implications for the resolution of the dispute itself, but may also impact directly upon the witness. In this sense they have a direct personal interest in doing the right thing. Their personal interests may be compromised along with those of the business generally.

This cannot be stated strongly enough. Each person must keep their memories of the events to themselves and only share them with lawyers when and if instructed in due course.

Step 3: gather the paper

As a result of your detailed analysis of the contract itself and the relevant provisions, the categories and classes of documents you will need to gather should become reasonably clear.

In broad terms the following categories of documents will generally be relevant:

• correspondence between the parties directly addressing the underlying issues in relation to which the dispute has been generated
• documents that evidence the performance of a contract by one party or the other relevant to the issue at hand
• any variations to the agreement that again relate to the issue in dispute
• any internal memoranda or other documents in which there has been discussion about the issue in dispute between colleagues or any correspondence with third parties that addresses the issue in dispute.

You generally do not need to gather all relevant correspondence in relation to the contract. This is particularly the case if one part or term of a large agreement has been breached. If the parties have otherwise honoured their obligations under other aspects of the contract, there is no need to go into what are otherwise uncontroversial matters.

The coordinator must identify the relevant people in the business who had contact with the counterparty or may be able to assist in advancing the information gathering process. This is done by them giving a version of events which was will assist firstly in clarifying the position and secondly (hopefully), in advancing the positive resolution of the dispute.

The coordinator should take a broad view of who and what is relevant. It is better to have more statements from witnesses that say relatively little rather than being too targeted and running the risk of missing someone who did not seem immediately a big player but who can give evidence that is ultimately of high importance.

As stated above, it is not the job of the coordinator to review, redraft and prepare the statements. This is irrespective of whether they are a witness in the proceedings or not. The coordinator’s role is simply that of a facilitator.

In this sense, the coordinator should send an email or correspond with the prospective witness asking them to set out to the best of their recollection all relevant events in relation to the issue in dispute including, but not limited to:

• any conversations they had with colleagues on this issue
• any conversations they had with their counterparty or the other side on this issue
• their internal correspondence
• any correspondence with the counterparty
• any documents that were prepared or had come into existence on the issue in question
• any communications, be they written or verbal, with third parties about the issue.

To the best extent possible, they should set out more rather than less in the witness statements. A ‘kitchen-sink’ approach seems excessive, but you will better assist your lawyers in due course by giving them more rather than less. Let the experts determine what is relevant and what is not. You would be surprised how frequently an off-the-cuff comment is made by an apparently peripheral witness that, when explored, becomes a crucial piece of evidence in court, tribunal or arbitration proceedings. The more you give your expert legal advisers, the better the position.

Witness statements, depending on the person’s importance and centrality to the dispute, may run to a significant number of pages and contain a lot of detail. This is an example to broadly set out the form and structure of a witness statement. It contains another fictional and imaginary set of facts.

The above statement is a general summary of the type the coordinator should be looking for. Some people will have more to say than others. This person is a peripheral player in a dispute. I have chosen them deliberately. It is to show that the person giving the statement doesn’t have much to say about what is clearly a much bigger dispute. They are saying only what they can from direct experience. They are not telling a story that they do not really know. However, it may be that the conversation she had with Mr Tam proves very important in the ultimate assertion of rights and liabilities. On this basis, and even though this person is not at the heart of the matter, it is important they add details like this.

In some disputes everyone from the most junior secretary through to the managing director may be important. Conversations held or documents received (or not received) may be extremely important in determining who is right and wrong and the validity of the claims. People at all levels of the organisation may become involved.

It is important that the managing director or senior management send a note to the people involved confirming it is a requirement that they assist and that all steps will be taken to assist them by the suspension or reallocation of other duties so as to make sure that all information can be gathered as early as possible.

Step 4: third parties

It may be useful to obtain evidence from people who are not employees of the organisation.

Generally speaking, even the most well-disposed customers or professional colleagues from other companies are reluctant to become involved in a contested dispute in which they have no direct involvement or stake. This is because it is a level of engagement that is often unrewarded and takes a lot of time. It also can be a good way to make enemies — that is, to side with one party over another in a dispute in which you have no role. However, if it is important to obtain evidence from third parties, it is best to keep your request in writing. This can be a delicate exercise.

Again, the coordinator should circulate a list of people who are third parties or people outside the organisation with whom the issue of the dispute should not be discussed in substance. Talking to them about the detail of the facts and evidence may corrupt their evidence in the same way as an internal discussion at the water-cooler may.

The coordinator must get them to set out their evidence to the best of their recollection in a similar form to that set out above.

Step 5: how the coordinator should receive the evidence

So as to minimise the prospect of the evidence being tampered with, the evidence should be provided to the coordinator confidentially in an electronic form that cannot be easily read (on a disk) or in hard copy in a sealed envelope. The coordinator should rise above their understandable interest in reviewing the evidence of each of the parties. This is to ensure that in due course if they need to give evidence about the system of collating the evidence, they can honestly and truthfully say they are totally unaware of what any party may say and that their role was simply to facilitate. If there is an allegation of collusion or tampering, it may be that the coordinator will need to give evidence about the system they actually employed. It would be in their interest to be able to tell the court that they played a role in coordinating by requesting the evidence, but had no knowledge at any stage of what the person was actually saying in reply to the request for their evidence. A system of keeping the evidence confidential must be preserved at all stages.

Maintaining the secrecy of your communications

Legal professional privilege is an important aspect of Australian litigation law. It is the principle that protects secrecy of communications between lawyers and their clients.

One of the aspects of legal professional privilege is to protect documents created for the purpose of a company or business obtaining legal advice when litigation is considered or contemplated.

The above evidence-gathering process is expressly in contemplation of a dispute that may be litigated.

On this basis it has a legal professional privilege that attaches to it.

The key elements are that:

• a dispute and litigation is anticipated
• evidence is being gathered
• the evidence is being gathered for the purpose of being provided to the lawyers to be used in a potential dispute.

These elements give the creation of the witness statements a level of secrecy.

This secrecy is important as it stops the other side from accessing these documents during the course of the dispute.

However, this secrecy is easily lost.

On this basis it is extremely important that in setting out the rules of the evidence-gathering process steps are taken to make sure this privilege or secrecy is preserved.

A prominent heading should be included on the document to the effect that the statement is prepared in the context of proposed litigation and is for the purpose of providing it to lawyers for legal advice.

Further, every witness statement should be labelled at the top on the front page of the document that is ‘Prepared in contemplation of legal proceedings and is for the dominant purpose of obtaining legal advice’.

This formula of words is extremely important. It makes an express statement to the reader of that document down the track that it has been prepared directly for advice for lawyers. This reserves its protection as being privileged.

Documents that are not generated in this way may be available for the other side to inspect.

This may have a terrible consequence.

During the course of the evidence-gathering process you may obtain evidence that is not especially helpful to your company’s position. In a perfect world you will not want the other side to get access to the information. It may contain details that will help the other side. However, if there is any slackness or looseness in the preparation of the statements or the general circumstances in which they are obtained, there is a real risk of this taking place. This may actually make the difference between a successful resolution of the dispute for your side or having to give up on disadvantageous terms because the legal landscape is so bleak.

If you have any doubts at the outset about the evidence-gathering process, how it should be conducted and any rules of the game, it is important to obtain legal advice at this early stage as to how you should best commence the process.

You can’t be too cautious.

Talk to your lawyer at the beginning for direct guidance as to the best means of doing so.

In the absence of having good and proper advice on this question all your good work may go to waste, or worse, be to the advantage of the other side!

What lawyers look for

In order to get the best out of your lawyers, the more evidence you can present in an orderly, structured and properly prepared way, the quicker you will get an advice on prospects and hopefully move to a resolution of a dispute.

It will be necessary for the lawyers to digest all the issues in relation to the dispute. This generally means a review of all the documentary and written evidence. They need to know the facts before they can advise you on what your position will be.

Each of the steps above can be easily undertaken by lawyers. However, this obviously comes at a cost.

The evidence-gathering can be a time-consuming and expensive exercise. By undertaking the steps set out above, you will arm your lawyers with a significant amount of the information they are likely to need without incurring the costs of preparing it.

There is also a collateral benefit to maintaining the system. Compelling employees to prepare their own witness statements drafted in their own hand in their own time promotes a level of accountability and less scope for them to disavow the document or change their evidence in due course. They told their story first with no pampering, workshopping or filtering.

Remember, the key is certainty. While nobody ever wants to receive adverse evidence, it is better to get this up-front than to proceed on a misapprehension as to the strength of the case and find at some later stage very much down the track that your case is weaker than you thought.

There are many benefits to adopting this system; however, it is hard to do it partially. That is, it would be bad to adopt every part of the system except to have the coordinator act as an editor or re-drafter of the statements. This would be more detrimental than effective. In this context, it would be better to have the lawyers prepare the statements because it is accepted by the court that the lawyers will be involved in the final preparation of evidence and act as a gauge for what is relevant and irrelevant in the dispute.

I cannot overstate the importance of the coordinator being independent and at arm’s length from knowing the evidence the witnesses will give.

Another tip is to chronologically order all the documents you have collated that are relevant to the dispute. This is merely a step that the lawyers will likely take in the event that a box or boxes of undifferentiated material is given to them. Again, it saves time and money for there to be a neat and chronologised bundle delivered to them.