Every commercial activity carries with it some risk of dispute. Sometimes, that risk is so slight as to be negligible. But other times, the risks associated with a commercial action are significant. To understand the risks your business may face in respect of any given activity, it’s important to know when disputes might arise, and what is at stake when they do.
The subject matter of commercial disputes varies significantly. Some disputes are purely commercial in nature, and they exist between two commercial entities. Those are the most common types of dispute, and they can be costly. Then there are regulatory disputes. Those disputes arise between regulators and business, and sometimes result in prosecution. Fortunately, regulatory disputes are usually avoidable through compliance. Commercial disputes, on the other hand, offer a different level of complexity.
Commercial disputes arise frequently – here are some high-risk areas
When we talk about high risk areas, we talk about commercial activities that often give rise to disputes. The reasons for any given dispute may vary, but the fact remains that disputes arise under some circumstances more than others. So how can you avoid them? There are plenty of effective ways to minimise the risks of dispute and litigation. However, there is no way to eradicate that risk entirely. Quite simply, complex commercial arrangements are sometimes open to interpretation. And invariably, they’re vulnerable to circumstances beyond either party’s control. So, let’s take a look at some of the common causes of commercial dispute.
Transaction risks: the greater the complexity, the greater the risk
Transactions are possibly the greatest source of commercial conflict. As a general rule, the larger the transaction, the greater the risk that a dispute might arise. So, let’s consider why that might be. The first reason is complexity. When a large transaction takes place, there is usually a formal agreement in place. That agreement might set the terms of the transaction, and outline the rights and obligations of each party.
But when the transaction involves several parties, and large sums of money, things can get complicated. Each party will be obligated to protect the interests of its shareholders, and internal company disputes may affect the broader transaction. There is the potential for conflicting obligations within each party, and the involved businesses need to continue trading while the transaction takes place as well. As you can see, the complexities of large transactions are significant. And when a transaction deviates from its agreed course, disputes can arise whether the deviation was avoidable or not. That’s why carefully constructed contracts are so important.
Trans-jurisdictional and counterparty considerations: suppliers, contractors, and purchasers
Of course, large transactions aren’t the only major source of commercial disputes. In fact, a lot of commercial disputes arise in relation to relatively small sums of money. It is particularly important to avoid disputes of that nature, or manage them quickly and effectively when they arise. Litigating low-value disputes will often see both parties lose more money than the dispute is worth. After all, the cost of litigation is significant, and it grows rapidly as the dispute nears trial. But once a dispute arises, it’s not always possible to avoid litigation. So how can you manage the risk?
One of the best ways to mitigate the risk of disputes and litigation is through counterparty considerations. These considerations are especially important in trans-jurisdictional dealings. For example, if you have an agreement with an overseas party, you need to do a careful risk assessment. Does their jurisdiction recognise the legal principles on which your agreement is based? Is their jurisdiction known for its ‘litigious culture,’ which may see disputes escalate for non-commercial reasons?
These questions form part of the counterparty considerations you need to account for. But those considerations are not only international. Before you transact or contract with another party, consider their history. Is that party known to escalate disputes, litigate regularly, or disregard commercial agreements? If so, you may want to limit your dealings with them. Also, what is their financial viability? Realistically, will they be able to perform what they have agreed? To gauge these matters, consider conducting credit rating checks, ASIC searches, and even simple internet searches. Ask for and seek out honest referees. You may be surprised at what you find.
Product risk: minimising potential grounds for dispute
Every product your business produces is a source of income. But that’s not always the only thing that accompanies products. Product liability is a prominent source of dispute in certain industries. It can also be tricky to mitigate. Luckily, there are some simple steps that can limit your exposure to product-based disputes. The most obvious is quality control. If your products are of the highest quality possible, there is a lower likelihood that a consumer will have cause to dispute it. That’s why clear and active quality control systems are vital. To accompany your product, you should also release clear and understandable instructions, as well as warnings. If you’re selling a product that could conceivably cause any harm, be sure to outline that visibly, and in no uncertain terms.
Of course, even the greatest care can’t ensure that your products won’t be the subject of a dispute. That’s why additional safeguards are necessary. The first is contractual; contact an experienced commercial lawyer to explore possible contractual limitations of liability. They could go some way towards limiting your exposure. Then there’s crisis management; create and implement a plan to recall your product entirely, in the event that systemic faults are identified in any given batch. Finally, make sure your insurance coverage is extensive; doing so will give you the financial backing to resolve any disputes that do arise.
Process risk: taking steps to prevent disputes with employees and regulators
Product risk is a largely external consideration. So, what about the other side of that equation? Process risk is mostly internal, and it is essentially the risk of dispute that exists between you and your employees. However, there is another possible party to such disputes: regulators. Regulators, such as Fair Work Ombudsman, can instigate a dispute in circumstances where they identify flaws in your commercial processes.
To minimize the risks of dispute that accompany your production and service processes, you need to consider a few things. Foremost, you must consider safety; does your company oversee a safe workplace? Are your production and service processes free from hazards? This is a dynamic process that must take place on an evolving basis. After all, safety is always an immediate consideration. Then there are factors such as benefits. Are your employees being remunerated in line with statutory requirements? Do they have the support they need to work confidently and safely? Process risk is one of the most challenging areas of risk to mitigate, but it’s also one of the most important. The best thing you can do is support your employees, and respond promptly to any concerns they raise.
Technological and regulatory change: keeping up
Technology is one of the fastest evolving facets of commerce. In many cases, it has evolved so quickly that commercial regulations are left to catch up. That means your commercial interactions with technology need to be undertaken in a measured and cautious manner. So, why is that exactly? Technology allows us to store and transmit information easily. That often includes sensitive information relating to your business, and your clients or customers. When you’re in possession of sensitive information, you need to consider its security. But with the rise and evolution of technology, what is appropriate in terms of security can change without warning.
As malicious individuals and entities try and access sensitive information, they develop ways to overcome existing cybersecurity measures. If that occurs in your business, your secure data may be breached. Worse still, you may be liable for that breach. To reduce the prospects of disputes relating to data breaches in your business, it is important to have a well-considered and evolving data security policy. We suggest seeking the advice of both IT and legal specialists to develop yours. With data security, comes the security of your business, and the security of your business relationships.
Trade practices and evolving business: remaining compliant as your business, products, and marketing techniques grow
Today, a large proportion of trade practices are governed by Australian Consumer Law. The Australian Consumer Law – or ‘ACL’ – effectively moderates the relationships between businesses and consumers. As a result, it applies a number of rules, restrictions, and obligations to commercial entities. Along with those rules, restrictions, and obligations, are numerous penalties for non-compliance. To avoid any dispute arising between your business and the relevant regulators, it’s important to have a trade practices compliance regime in place. But how can you develop one that appropriately encompasses the relevant laws? That’s where professional legal assistance is vital.
Your trade practices compliance regime should have a particular focus on marketing and advertising. Those areas are regulated by ACL, and those regulations intend to ensure that all advertising materials are not unfair to consumers. The terms used in the ACL include ‘misleading and deceptive conduct,’ which is something your business should be trained to recognise at a management level. Of course, legal advice is vital. But as a starting point, consider reviewing all marketing materials and representations to ensure that they are reliable, and easy to justify. You should also review new products themselves. Ask yourself: do they meet the baseline requirements imposed by Australian Consumer Law? Those sorts of questions can help you resist disputes with consumers, and subsequently regulators.
Mitigate, don’t litigate: why is risk management so important?
So far, all the risk mitigation practices we have looked at are centred on one thing: avoiding litigation. But why, exactly, is that so important? After all, won’t litigation result in a fair outcome? Well, that depends on your perspective. If a dispute is litigated and goes to trial, you need to consider the costs involved. Litigated disputes can last for years, before even reaching trial. During those years, your business will need to pay legal fees, court filing fees, and often experts’, mediators’ or barristers’ fees as well. Over the course of several years, the costs of all that can build to significant heights. Then there’s the trial, which will see your legal outlays increase further still.
Of course, that cost might not be such an issue if you are awarded a favourable judgement at trial, and an order that the other party pay your costs. But even under those circumstances, you can find yourself far from even. Costs orders don’t often encompass your entire legal outlays, so you might still lose money on your lawyers’ fees. Then there are judgements themselves, which might not match the sum you were seeking, even if they do find in your favour.
Another common misconception is that the other party to a litigated dispute will be able to pay damages and costs, if it is ordered to. It’s vital to remember that courts cannot make a company pay money it doesn’t have. So, the possibility remains that you could win a trial completely in principle, and still walk away with nothing, because your opponent is liquidated or bankrupt. To top that all off, the outcome of any trial is far from certain. For those reasons, litigation really should be a last resort.
The best way to mitigate your risks of litigation is with professional help
Mitigating the risk of commercial dispute in your day to day dealings is a significant task. It involves careful consideration, and attention. It also involves experience and technical expertise. That’s why expert input is an important feature of risk minimisation in any commercial setting. With an experienced commercial lawyer overseeing your transactions, agreements, and disputes, you can achieve greater security and efficiency in your business activities.
The information provided by Kafrouni Lawyers is intended to provide general information and is not legal advice or a substitute for it. Business people should always consult their own legal advisors to discuss their particular circumstances. Kafrouni Lawyers makes no warranties or representations regarding the information and exclude any liability which may arise as a result of the use of this information. This information is the copyright of Kafrouni Lawyers.
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