Contract management Drafting a detailed contract can save SMEs minor and major hassles
Of the many challenges that small-to-medium enterprises face in the UAE, some of the most common involve debt collection and poor cash flow issues. In part one of this three-part series, I provided an overview of the distinct stages a business can take to mitigate its exposure to bad debts. In the second column, I discussed practical considerations for SMEs entering into new contracts. Here, we take a look at contract management and dispute resolution. It is often the case that contracts, once signed, are filed away in the bottom drawer and only referred to when things go wrong. Active contract management can go a long way to reducing the risk of a dispute and to limiting exposure to late payment and non-payment.
Examples of good contract management include:
1. Being clear on the contractual terms and conditions regarding delivery of goods and services, timing and method of payment, and planning for these accordingly.
2. Identifying variations to the contract early, whether this be an extended or modified scope of work or otherwise, and obtaining agreement to the terms of that change, including with respect to charges and payment.
3. In circumstances where you suspect there is a likelihood of a default on payment, or where you identify an actual or anticipated payment issue, obtaining legal advice can appraise you of the relative strength of your position under a contract. It preserve your rights as stated and before law, in case it becomes necessary to formerly pursue the debt.
4. Maintaining full and accurate records of all correspondence and documentation generated during the performance of the contract, including safe filing of original documents. Claims and attempts at commercial dispute resolution are often undermined due to poor record keeping where evidence cannot be substantiated.
5. If you do end up in a late payment situation where the counterparty is persisting you continue to deliver goods and services, ensure that you obtain written acceptance of the outstanding payments before carrying out further work or delivering further supplies. This will prevent the counterparty from arguing that the outstanding payments were not properly incurred, should the matter end up in a formal dispute forum.
Dispute resolution
Should you find yourself in a dispute over payment, or dealing with a debtor who is not responding, there are a number of practical considerations for managing the dispute process:
1. At the outset, it is advisable to have your lawyer carry out a litigation risk assessment and provide you with advice on the various options, including time and cost associated with each option, for seeking the debt payment. This will give you the information required to manage your dispute and will help add credibility to your demand for payment.
2. In almost all cases, an amicable settlement is preferable to going to court or arbitration. If you do reach an agreement, whether that be a payment plan or final settlement, ensure the terms of that agreement are robust and can be effectively enforced, together with obtaining effective payment security.
3. A key consideration will be the available forums for bringing a claim and enforcing a judgement or order. This will often be set out in the contract. Where it is not, or where the jurisdiction is non-exclusive, there may be options as to the forum in which to bring your dispute.
4. Your counterparty will also likely have considered what your options are and this will affect how it approaches the dispute. For example, if the claim is of a moderate amount and subject to the jurisdiction of the local courts, the counterparty may assume that it does not make sense commercially for you to bring formal proceedings. This would make any threat of court action somewhat ineffective for the purpose of a settlement and a different angle of attack may be required.
Conversely, if you were able to bring your dispute to one of the small claims forums, the counterparty would know that you had a reasonable prospect of obtaining a judgement for minimal capital outlay, which may motivate them to settle.
5. Seeking legal advice at each of the three stages identified is likely to save you significant amounts of money and management time by ensuring your contract is sound and the legal aspects of your credit control system are robust. Obtaining this advice need not be expensive. A simple “red flag review can often be the difference between entering into a good contract or a bad contract, or efficiently managing a dispute, or not.