Legal Briefing

Before you call your lawyer…

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Dispute Resolution | 04 July 2011

It is often in the interests of businesses to resolve disputes at an early stage in a commercial way, without involving lawyers. This can help to reduce legal costs, avoid disruption to the businesses involved and help to preserve commercial relationships. However, parties involved in the early stages of a dispute should be aware that it will not always be possible to reach a satisfactory commercial settlement. It is essential, therefore, that parties do not do anything that will prejudice their position should the dispute escalate into full-blown litigation. Errors made at the outset of a case can have a serious, and sometimes fatal, effect on a party’s case at a later stage.

The purpose of this article is to provide some points to consider before instructing external lawyers (which may assist in reducing costs and the management of a contentious matter generally) and guidance on achieving a satisfactory outcome.

UNDERSTANDING THE CLAIM

It may seem like an obvious point, but taking time at a very early stage to investigate all of the background facts to a potential claim (whether you are in the position of claimant or defendant) and to collate the key evidence can have a considerable cost saving in the future. It allows you to form an early view on the merits of any claim and so assign the appropriate resource, both internally and externally. Consider what information you need, both to understand the case yourself and, if necessary, to brief external lawyers. This will take the form of both documents and speaking with the relevant individuals involved. The more time that is taken to collect all of the relevant background materials the easier and more cost effective it will be to bring in external lawyers at a later date, should this prove necessary.

PRESERVATION OF EVIDENCE AND E-DISCLOSURE

Those who have already been involved with a contentious matter will be familiar with the duty to ensure that any evidence in your possession or control relevant to a dispute (even one that is only anticipated but not yet made out) is preserved so that it may be disclosed during the course of proceedings. This extends both to documents that support and that are harmful to your case.

The definition of document is now extremely wide. A ‘document’ is anything on which information of any kind is recorded, whether physical or electronic. Physical documents include more than just formal documents and correspondence; for example, photographs, CCTV footage, video and audio recordings, plans, manuscript notes, and diary entries are all potentially disclosable documents.

All ‘electronic documents’ are potentially disclosable. As well as e-mails, spreadsheets, powerpoint presentations and word-processed documents, this includes information stored on any electronic device (eg memory sticks, text or call records for mobile telephones, iPods, BlackBerrys and other personal digital assistants). The definition of document even includes ‘metadata’ or information about documents that is not visible when documents are printed (examples include details of who created a document; when it was last edited; and who has viewed it). Furthermore, where it is proportionate to do so, parties are expected to disclose documents stored on back-up tapes, as well as those stored locally and on their main servers. Failure to preserve documents can result in court sanctions and/or make it harder for a party to prove its own case.

As soon as you become aware that there may be a potential dispute, you should take the following steps:

  • Consider which types of electronic documents you may have that could be relevant to the dispute (the obvious ones are e-mails but more broadly could include telephone recordings, text messages, SMS messages and instant messaging conversations) and identify where they may be stored. Identify who in your IT department will be able to assist you, and in due course, external lawyers in identifying relevant documents.
  • Consider which individuals might have documents relevant to the dispute, whether in hard copy or on their computers or BlackBerrys.
  • Inform each of them of the nature of the dispute, the time period that it covers and ask them to ensure that they do not throw away or delete any relevant documents;
  • Speak to IT and ask them to ensure that any policies of automatically deleting e-mails after a certain date are not applied to the relevant individuals’ inboxes. At the same time, it is worth clarifying the archiving policy that is applied to inboxes and how historic e-mails are archived on back-up tapes.
  • Consider whether it is necessary to take a forensic image of individuals’ inboxes or hard drives to ensure that the complete inbox and relevant documents, including any relevant metadata, are preserved.

BEWARE THE CREATION OF UNHELPFUL DOCUMENTS

Legal professional privilege does attach to communications between in-house lawyers and the business (the client) in the same way as it does between an external lawyer and its client. However, the scope of privilege protection for communications from in-house lawyers has been the subject of recent attack in the context of a Competition Commission inquiry and the principles could be extended more widely in future (see Akzo Nobel Chemicals & Akcros Chemicals v Commission & ors (competition) [2010]).

However, there is often the risk that, in the process of delving into the background of any dispute with the client, communications may pass that comment on the dispute but that may not be privileged. This can occur where, for instance, an employee on the business side is asked to provide information about a certain set of facts by another employee who is not an in-house lawyer (perhaps before the in-house legal team has been involved). This risk may be greater at the very early stages of a potential dispute where it could be said that no dispute was contemplated (and so litigation privilege may not attach to such communications). (Macfarlanes recently acted on a case where one employee informed another in an e-mail ‘we have breached every clause in this contract’: it happens!) It is therefore advisable, from a very early stage of any matter, to ensure that all communications relevant to a potential or actual dispute are sent via in-house lawyers and, where documents are prepared, that these are marked as being prepared for the purposes of taking legal advice. If you have any concerns or a matter is particularly sensitive, the recommendation is to seek advice on the point.

FORUM AND JURISDICTIONAL ISSUES

In the event that you are proceeding with a contentious matter in-house, it is important to ensure (especially if you are the party bringing the claim) that you have checked all relevant contracts that apply to the issues in dispute for any notice requirements, dispute resolution clauses, governing law clauses and jurisdiction clauses. These may very well dictate the form in which you should communicate a dispute to the party on the other side. Importantly, certain notice provisions may be prescriptive as to how and in what time frame a dispute should be communicated, and failure to comply with any such requirements could absolve the other party of any liability (for instance in the case of a warranty claim, where it is common to see limitation of liability clauses tied in with notice requirements) and so be fatal to a claim.

Thought also needs to be given to the relevant jurisdiction and forum (arbitration or court proceedings), as this is likely to dictate the form of any pre-action correspondence and the procedure to be followed (which if not followed properly could have cost consequences at a later date).

An English court may not accept jurisdiction of a dispute that is before the courts of another country in the European Economic Area. If there is a risk that the other side could issue proceedings in another jurisdiction, consider whether you need to issue proceedings in this jurisdiction to ensure that the English court is ‘first seised’.

LIMITATION PERIODS

On becoming aware of a potential claim against a third party, it is important to consider whether there are any relevant limitation periods that apply and to ensure that any claim is brought within those limitation periods. These could be a time frame stipulated in a relevant contract and/or as stipulated by the Limitation Act 1980. In contractual disputes the limitation period runs for six years from the date of the breach of contract (though as mentioned above there may be an express clause that provides for a shorter time period). In tortious disputes (such as a negligence claim), the limitation period can vary but usually runs for six years from the date when the cause of action accrued (ie when damage is suffered). You will therefore need to ascertain what type of dispute it is (it could fall into both categories) and what the relevant dates are.

CONSIDER WHAT YOU KNOW ABOUT THE OTHER PARTY

It may not be worth suing an insolvent defendant if you are likely to have difficulties enforcing any monetary judgment against them. Equally, if you have concerns about the financial position of a party you may want to consider taking certain steps in proceedings, such as requesting security for costs or seeking freezing orders to prevent assets being dissipated.

Determining which jurisdiction the other party operates in (and where their assets are held) is also useful information, especially when considering whether to bring litigation proceedings and the possible risks of enforcing a judgment against the other party.

Commercially, is there still a business relationship with the party on the other side (especially if they are a client) that could be used as leverage in any attempts to settle a dispute? Would it be more productive, for instance, for lawyers to remain in the background and for there to be a business-to-business approach to resolve the matters on commercial terms?

Has the business been in dispute with the same party previously (or does it know another party that has), and what insight into the motives and attitude of the other party towards litigation can be gleaned from that. Are they, for instance, the type to pursue a matter to the end no matter the merits of their case?

The more information that you are able to obtain through internal business knowledge of the other party and public sources (‘googling’ an opponent is always a worthwhile exercise), the better informed your decisions as to how to proceed.

MAXIMISING RECOVERY OF DAMAGES AND MITIGATION

A claimant will need to be able to prove in detail the losses that it has suffered. You should therefore keep accurate and full records of losses suffered and management time spent resolving problems. Claimants will not be able to recover damages for losses that could reasonably have been avoided and you should take care to mitigate your losses.

Immediate steps may therefore need to be taken to mitigate loss as the more time that passes, the more difficult this may be. Any steps taken to mitigate loss should be carefully recorded, even if they do not prove fruitful. If steps to mitigate will involve extra expense, it may be worth notifying the other side of your proposals. If they do not object, this may make it harder for them to argue, at a later stage, that the steps taken were unreasonable and to deny liability for the cost. Conversely, if they do object, this will make it harder for them to say that you should have taken the relevant steps to mitigate your losses. If certain steps are considered but discounted, a record of why should also be kept.

WITHOUT PREJUDICE NEGOTIATIONS AND SETTLEMENT

In the event that you are able to successfully manoeuvre a dispute towards without prejudice negotiations and, hopefully, a settlement, it is important to ensure that you avoid common pitfalls.

Before labelling a document or discussion ‘without prejudice’, consider:

  • is there a dispute in contemplation; and
  • are your communications with a view to reaching a settlement of the matter?

Documents or conversations evidencing genuine attempts at settlement will not be shown to the court. Prefixing a conversation, or heading a letter or e-mail, with the phrase ‘without prejudice’ will reduce the risk of such documents being disclosable at a later stage. However, communications made purely to advance a party’s case, without any attempt at compromise, will be disclosable in court proceedings regardless of such a label.

In reaching a settlement with the other side, it is important that any terms are carefully documented. A key provision of a settlement agreement is the full and final settlement clause. Such a clause needs to be drafted so that it covers all aspects of the dispute being settled so that there can be no scope for the other party to continue with any part of the claim. The House of Lords in Bank of Credit and Commerce International SA v Munawar Ali, Sultana Runi Khan & ors [2001] held that it is possible to settle claims for all rights of which a party is unaware and of which they could not be aware, but only if very clear language is used to make plain that that is the parties’ intention.

In the event that proceedings have already been issued, consider whether a confidential settlement agreement needs to be attached to an order staying the proceedings on the terms of that settlement order (known as a Tomlin Order).

CLAIMING FOR WASTED STAFF AND MANAGEMENT TIME (AND THE NEED TO KEEP ACCURATE RECORDS)

It is possible to claim for damages for management and staff time spent rectifying problems caused by the wrongdoer’s breach of contact or duty (although the costs of time spent pursuing the claim are unlikely to be recoverable). It is not always necessary to show an actual loss of profit, due to the diversion of staff, to be compensated in this way. Compensation may be based on the time and cost of employing the staff to the business. The Court of Appeal set out the test for awarding such compensation in Aerospace Publishing Ltd & anor v Thames Water Utilities Ltd [2007]. Aerospace sought damages for the lost revenue that would have been generated by its staff had Aerospace’s property not been damaged by flooding due to a burst water pipe and consequently Aerospace’s staff not been diverted from their normal duties.

The Court of Appeal formulated a three-point test:

  1. to succeed with its claim, a claimant must adduce all the evidence that it could reasonably adduce to show the extent of the diversion of staff;
  2. further, the claimant must establish that the diversion of staff caused significant disruption to its business; and
  3. if the first two elements can be established, it is reasonable for the court to infer that, had the staff not been diverted from their usual activities, they would have directly or indirectly generated revenue for the claimant in an amount at least equal to the cost of employing them during that time.

Point 1 of this test demonstrates the need to keep detailed and contemporaneous records of the time that is spent by management and staff on a particular matter. It is advisable, to the extent possible, to detail this on a person-by-person basis and to include in such a record the nature of the work being undertaken. Any other evidence that can be collated contemporaneously, detailing what work the staff and management would have been working on at the time had they not been diverted, will also greatly assist when it comes to arguing the point in court. The risk of not having detailed evidence of the diverted time of staff and management was highlighted in Bridge UK.Com Ltd (t/a Bridge Communications) v Abbey Pynford plc [2007], where the court discounted the damages sought by 20% as a result of the claimant’s failure to keep contemporaneous records.

INSURANCE

If a claim is being made against you, consider whether you are covered by insurance. If so, check the terms of the policy as failure to comply with those terms may entitle an insurer to deny liability. In particular, there is likely to be a requirement that you notify the insurer of the circumstances giving rise to a claim within a specified time limit.

Whether you are the defendant or the claimant, you may also wish to consider the various means of insuring against an adverse outcome to the dispute, should it prove impossible to settle it. For example, after-the-event legal expenses insurance will provide cover against an adverse costs order and (usually) the insured party’s own disbursements. The premiums are likely to be deferred and/or staged, which means that the initial cost is likely to be low. A defendant may also be able to obtain litigation buyout insurance that will cover any liability for costs and damages in excess of a specified amount.