Reasons for disputes in a Contract

What are the main reasons for disputes in a Contract? Please share your ideas so that we can take care those issues in our next proposal.

Reasons for disputes in a Contract: From experience the main issues in a contract dispute is when the contract responder (supplier) has not properly and adequately reviewed, clarified, negotiated and responded to all terms, conditions and clauses within the contract. When a contract is looked at in more detail, the areas that generally bring about a dispute include but are not limited to:

• Contract performance (both over and under) including liquidated damages and/or fees
• Specification, design, and the scope of the agreement
• Price adjustments
• Liabilities of each party to the agreement
• Intellectual property generated as a consequence of the agreement
• Records of events (conversations, meetings, variations etc….)
• Amendments to, or clarifications of clause(s)
• Versions of agreements
• Clauses that may be interpreted as ‘unfair’ under contract law

Where possible a nomenclature should be requested to aide in the interpretation of the contract, which all parties agree to from the outset. Be sure to inform your intended subcontractor of the outline of your commercial terms before he sends his quotation with his terms of sale. This avoids significant disputes during the initial subcontract negotiations. In my view, the clauses most commonly giving rise to disputes aren’t the legal ones, but those relating to what will be delivered! At our workshop at the spring IACCM Conference in London, we asked this very question of the commercial managers in the room. You can find a brief summary of the group’s conclusions here:

(A) The main reason for disputes in construction contracts is a poorly defined scope of work.

(B) Unclear requirements, contradicting statements and characteristics of the parties involved (how parties wants to solve the problem) are the major reasons of dispute in my opinion.

Many have already replied with the high profle suspects; from my perspective the problem arises from poor drafting on the scope of work and often of express terms agreed between the parties (over and above boiler plate clauses); the proper allocation and structure towards risk (if it should go wrong), with both parties appreciating just how that risk allocation works in practice and an all round lack of reading, appreciation and education of the what the contract says. The latter in my experience has happended with smaller sub-contractors, who in essence go for the cash in a flash, but often make a hash! Always a provocative question and one that you persistently advise on improvement, but programme and delivery just gets in the way. well, for me, one of the clear reasons for dispute are the different and competing interests of the players in the goal field….

In IT, the SLA / Penalty clauses can raise discussions. They need to be clear and detailed. One good tip is to provide examples of penalties calculation as well as indicators measurements. A lot depends on the nature of the industry however I feel that most conflict arises because the RFQ/RFP was never clearly written and defined at the start. And too many times when you have a “well-seasoned” contract manager that tries to clarify or ask the right questions to understand what the customer is looking for, they will get a response like “why can’t you just quote what I already have out there like everyone else is doing…no one else has asked this so why are you… or “i don’t know”. I would like to say it doesn’t happen but it still does and more frequently than you would think. If the Customer doesn’t issue an amendment to their original RFQ after presenting legitimate clarification questions, then you can bet your bottom dollar not all interested parties will be happy in the end. I would say this is most demonstrated in industries where technical issues or specifications are mission critical. (Industries such as airlines, construction, defense related etc.). Many occasions we receive RFQ/RFPs with single line scope of works and General Terms and conditions. Sometimes we were even asked to quote as per experience and you can imagine what will be the final result of the contract!!!. A well defined RFQ/RFP with full picture of the scope work is the foundation. A well defined scope of work will guide the contractor in estimation and prepare on a good proposal and that will reduce the chances of disputes.

In simple terms – lack of understanding. What is wanted- what is ordered and what is being delivered. The nearer people get to understanding those then the less chance of dispute. Disputes can be classified in a number of areas so it is difficult to determine key disputed issues under one category

For example:

  1. Disputes associated with cost could be project financing difficulties, schedule payment – late payment, employers claims interfaces
  2. Disputes associated with time could be related to additional searches, testing. F.M. criteria
  3. Disputes could also be classified within softer areas such as culture, contract interpretation and employer/contractor risks.

However, in my research into this subject the majority of persons interviewed said that the key issues in disputes were the lack of interpersonal skills, lack of equity e.g. one or other of a party being unreasonable and unforeseen physical conditions. I think the main reasons of the disputes is drafting contracts the good drafting which show the obligations of parties and how to solve the problems in case of disputes. Unfortunately, amended wording to contracts causes difficulties because people do not understand them or the inclusion of amended clauses can alter the intent of the standard worded form. If people don’t or cannot understand then there is a greater possibility for dispute at some time. Multiple contract documents, such as annexures and specifications, can lead to conflicts or ambiguity during execution phase. There should always be a clear order of precedence stated in the main contract document. Of course it depends on the nature of the work. Sources of disputes in construction contracts are different from the same in consultancy service contracts than man and material contracts than supply contracts and so on. Clarity of the scope of work is essential in dispute avoidance in all types of contracts. issues related to extension of time, application of liquidated damages, payment, variations are common causes of disputes specialy in construction contracts.

In principle, legal and commercial terms are well defined in contracts. However, bad or not sufficiently defined scopes are the major source of disputes in delivery contracts. It is not necessary to have a clear and defined Scope in the body contract but at least to anchor with the related annexes, exhibits or Particular Conditions where we can find settlements to any eventual dispute.



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