Contract disputes are inevitable in any business relationship, but they can also be valuable learning opportunities. In this article, we will share some tips on how to negotiate a contract dispute effectively and constructively, and how to apply the lessons learned to future contracts.
The first step in negotiating a contract dispute is to understand what caused it in the first place. Was it a misunderstanding, a miscommunication, a change in circumstances, or a breach of trust? By identifying the root cause, you can focus on finding a solution that addresses the underlying issue, rather than getting stuck on the symptoms. You can also avoid repeating the same mistake in the future.
Remember that the fact a contract exists meant that at one point both sides willingly decided to work together. Try and use the existing contract and relationship as a starting point to finding common ground, while still identifying the underlying issues driving the dispute.
Remember that there are two sides. Consider what the other side might be thinking, what is important to them? Maybe the dispute arises merely because the two of you are addressing different aspects, imagining different conditions, or are afraid of outcomes that the other side has not considered.
In my experience, most contract disputes come down to one of two things: poor documentation (i.e. a bad contract) or a relationship failure. The concept of a pure breach of contract—an utter failure to perform—happens with far less frequency. It sounds surprising, but it shouldn’t; a failure to perform is nearly always tied to a relationship failure. Figuring out what type of issue you’re dealing with is the first step on the road map to resolving the issue.
In the simplest terms, the "root cause" of most contract disputes can be typically traced back to the lack of proper communication amongst the parties, be it by inadequate documentation or otherwise. Oftentimes the parties fail to comprehensively voice their respective concerns at the start of the project and do not promptly advise one another during the work of potential delay issues that could affect the baseline schedule. In my experience, when parties to a contract timely discuss how best to resolve delay issues in real time (for the mutual benefit of the project budget and schedule -- not for their respective interests), as opposed to at the end of a project, the project experiences significantly less confrontational disputes.
Another example of a root cause could be a lack of clarity in the contract itself. For example, if the contract does not clearly define the responsibilities and obligations of each party, this can lead to confusion and disagreement down the line. In this case, the root cause of the dispute is a poorly drafted contract. Another example I’ve commonly seen is a change in circumstances that was not accounted for in the contract. For example, if a party's financial situation changes and they are no longer able to fulfill their obligations under the contract, this could lead to a dispute. In this case, the root cause of the dispute is a change in circumstances that was not anticipated in advance and accounted for in the contract.
The second step in negotiating a contract dispute is to communicate clearly and respectfully with the other party. This means avoiding accusatory, aggressive, or emotional language, and instead using facts, evidence, and logic to support your position. You should also listen actively and empathetically to the other party's perspective, and acknowledge their concerns and interests. By communicating clearly and respectfully, you can build rapport, trust, and understanding, and avoid escalating the conflict.
I learned communicating is crucial and things should not be left to the imagination of the other party. Having a clear and honest conversation on what is responsible for a failure to perform gives parties an opportunity to reevaluate the situation and collaboratively bring the contract back on track.
Ask questions first! Learn, don't assume. Your goal is to create an outcome that addresses the problems both sides see. To do that you need to understand the other side's perspective.
The third step in negotiating a contract dispute is to explore options and alternatives that can satisfy both parties' needs and expectations. This means being flexible, creative, and collaborative, and looking for win-win solutions that can preserve or enhance the relationship. You should also consider the costs and benefits of each option, and the risks and consequences of not reaching an agreement. By exploring options and alternatives, you can find a mutually acceptable outcome that can resolve the dispute.
The use of ADR, whether through formal mediation or arbitration or through a less formal discussion process can pay dividends. Not only can it help you inexpensively and quickly resolve conflicts, it can also help rebuild trust between two parties who once wanted to work together.
The fourth step in negotiating a contract dispute is to document and implement the agreement reached by both parties. This means writing down the terms and conditions of the agreement, and signing it as a formal contract. You should also specify the roles and responsibilities of each party, the timeline and milestones of the implementation, and the dispute resolution mechanism in case of any future issues. By documenting and implementing the agreement, you can ensure clarity, accountability, and compliance.
An example I could give is in the case of say, a contract dispute between a freelance graphic designer and a client, the agreement reached may include the scope of work, the timeline for delivery, the payment terms, and the process for revisions and changes. The agreement should be documented in a written contract and signed by both parties, with copies kept on file for reference. The contract should also include a dispute resolution mechanism, such as mediation or arbitration, in case of any future issues. By documenting and implementing the agreement, both the designer and the client can have a clear understanding of their responsibilities and obligations, and can avoid any misunderstandings or disagreements down the road.
The fifth step in negotiating a contract dispute is to evaluate and reflect on the process and the outcome. This means asking yourself and the other party for feedback, and identifying what worked well and what could be improved. You should also analyze the causes and effects of the dispute, and the lessons learned from the negotiation. By evaluating and reflecting on the process, you can improve your skills, knowledge, and confidence as a negotiator.
Taking the time to do some objective self evaluation is so critical yet so often deprioritized in busy contract cycles. No matter who the other part is, what the issue, or what the outcome, there's something to learn everytime you negotiate.
The sixth and final step in negotiating a contract dispute is to apply the lessons learned to future contracts. This means reviewing and revising your existing contracts, and drafting new ones with more clarity, precision, and fairness. You should also incorporate the best practices and principles of negotiation, such as mutual respect, trust, communication, collaboration, and problem-solving. By applying the lessons learned to future contracts, you can prevent or minimize contract disputes, and enhance your business relationships.
One key learning often missed is to be proactive with your contract management, a programme of Contract Compliance Auditing on key relationships can help identify issues before they become disputes, and allow for course correction mid contract or renegotiation of key areas at renewal. As these programmes are often contingent they can be a risk free way to perform a health check across your contracts, with the potential to identify areas of overspend and recover that lost value.