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Expert Insights

16 January 2020

Risk management in disputes

Managing risk is crucial for the avoidance of commercial disputes. Risk can take many forms, including poor communication and delivery, inadequate or no contract drafting and ineffective risk management procedures. While businesses face pressure to keep costs, including legal spend, down, the importance of taking a proactive approach towards risk management cannot be overstated in mitigating cost and management time in the long term.

Early Analysis

The risk of a dispute escalating will be reduced if an early analysis of the legal issues is completed. This can be achieved by collating the essential documents in an organised/chronological format and preparing a detailed description of the case by identifying and speaking to the individuals involved.

It is recommended that legal advice is sought at an early stage. Formulating a strategy and spending money early will reduce the risk of higher, long term expenditure and risk, should the dispute be left to escalate. Well trained staff and encouragement of a “no blame” culture will also aid such investigations.

Contractual Documents

Your business needs written documents on which it can rely which clearly set out the terms agreed between the parties, whether this is a contract, your terms and conditions, invoices, a Shareholders’ Agreement or employment contracts. Terms should regularly be reviewed to ensure that they are up to date with current law and are enforceable. You should also retain all correspondence between the parties leading up to any agreement being finalised as in the event of a dispute, this can prove very helpful in determining the intention of the parties.

It is without exception, far easier, quicker and cheaper to resolve a dispute if there are clear written terms in place. It will pay off to invest the money upfront in the preparation of the documents to ensure the terms and both parties’ obligations are water tight.

Management of Documents

A consistent pitfall is the inadequate management of documents when carrying out investigations and ensuring that companies/businesses maintain any legal advice and/or litigation privilege.
Legal advice privilege relates to confidential communications between a client and lawyer and enables the exchange of information between a lawyer and client in a frank and open manner without fear of the communications being relied on by the opposing party.

Litigation privilege applies to communications between a client and lawyer which are for the dominant purpose of litigation and where proceedings are either current or in reasonable contemplation. Not only does it protect communications between a lawyer and client, but also with third parties if such communications exist for the dominant purpose of the conduct or preparation of litigation. Litigation means adversarial proceedings of any type, including tribunals and arbitration.

Issues can arise when, pursuant to internal investigations, lawyers give advice about commercial matters if that advice is not provided for the dominant purpose of litigation and the lawyer is acting with a commercial as opposed to legal “cap” on. This risk is heightened in the case of in-house lawyers.

Care should therefore be taken when carrying out internal inquiries and the basis on which parties seek legal advice, by:

  • Ensuring the instruction is clear that legal advice is being sought. Forwarding on emails without comment, again, particularly to an in-house lawyer, may cause problems.
  • Identifying who will have responsibility for managing instructions to lawyers. Care should be taken to ensure that individuals outside of the 'instructing' group do not create documents which disclose matters of concern. Even if they relate to instructions being given to lawyers, they will not necessarily be privileged.
  • Ensuring any advice on the commercial aspects that could be deemed as not giving legal advice is separated out into standalone documents.
  • Seeking advice before asking staff to undertake research or investigative work connected to the instruction of their legal advisers in order to preserve privilege.
  • Guidelines should be circulated at the outset to all managers and employees involved in the dispute explaining the extent of the disclosure obligations and the implications. This is even more important now given the court procedural rules confer a strict obligation on parties to litigation to circulate “document hold notices”, to ensure that nothing is destroyed. The relevant individuals must be briefed in relation to what constitutes a “document”, as the definition is very broad.
  • Keeping communications with lawyers on a separate file marked 'privileged and confidential'. Restrict the circulation of written legal advice and avoid notes or summaries of legal advice and exercise caution when commenting upon it in writing or when showing it to colleagues.
  • Seeking immediate legal advice if a request is received for information from a regulatory authority or you become a party to an inquiry.

In conclusion, a business can benefit exponentially from obtaining legal advice at an early stage. Whether this advice is obtained from external lawyers or your own in-house lawyer, the above action is crucial to minimise risk and to ensure that you are perfectly placed to deal with a dispute, should one arise. Your lawyers should always consider Alternative Dispute Resolution (such as negotiations or mediation) with you in the first instance, to avoid the cost and risk of litigation.