25 Nov 2018

Tips on how to prepare for a dispute, or perhaps avoid it altogether

Authored by: Omar Al Shaikh, Maria Lezala and Victoria Woods

In brief:

  • Commencing or facing litigation can be a very stressful, time consuming, resource draining and expensive process for all involved. 
  • In some circumstances, litigation could be avoided by the taking of certain careful, pre-emptive steps. Where litigation is unavoidable, there are still some actions that can be taken to ensure a party is effectively prepared.
  • In this article, we discuss some key ways to prepare for the worst, and maybe even avoid litigation altogether.

1. Prepare - do your due diligence

We appreciate that a comprehensive due diligence exercise can be costly and time consuming and may not always be a feasible option for many individuals or businesses at the outset of your commercial relationships. However, it is extremely important to understand the party you are dealing with, if later on you might need to sue. You must ‘know your counterparty’ to effectively bring your claim against, as well as to defend yourself against them.

In modern business practice, it is commonly accepted that you can make certain requests for minimum key information from your counterparty at the start of your dealings, such as: (i) a copy of the company’s trade licence or passport details; (ii) founding company documents (such as the company’s Memorandum and Articles of Association); (iii) details of shareholders or ultimate beneficial owners; (iv) evidence that the company or individual is of good financial standing (as may be indicated in the company’s financial statements or accounts); and (v) perhaps, information on assets held by the company.

Requesting this information upfront is not only commercially prudent, but from a litigation standpoint, is invaluable. Once a relationship sours, such information is almost always very difficult to obtain.

A key consideration when deciding to initiate legal proceedings, is whether your counterparty has assets against which to enforce any successful judgment. If there are no accessible assets, then it is doubtful that litigation is worthwhile as it could be just throwing “good money after bad” and litigation just may not be feasible.

2. Have a well drafted contract and a good understanding of its provisions

It is of the upmost importance to have a well drafted contract, which includes a clearly worded and appropriate dispute resolution clause to enable you to pursue the remedy you want, in the way you want, if a dispute arises. Having a well drafted contract which covers all foreseeable eventualities can also assist in avoiding dispute or preventing litigation. If litigation is however already imminent, it can help to secure a party’s success.

  1. One size does not fit all

In practice, unfortunately it is not uncommon to come across poorly drafted contracts that are not fit for their purpose. For example, some parties will use template contracts with untailored dispute resolution clauses, which can ultimately prejudice that party if a dispute arises. Or the parties may have no written agreement at all which can lead to problems over the most fundamental of issues, such as whether a contract exists at all. See our article on “Verbal contracts in the UAE – is lip service enough?” here for further details.  In our experience, the lack of a written agreement is most common in relation to distribution agreements, where parties have simply relied on verbal agreements and perhaps previous dealings, and/or based their trading with each other on documents such as purchase orders and invoices.

  1. Dispute resolution clauses are key

It is extremely important to have a carefully considered and well drafted dispute resolution clause within all contracts. If a dispute arises, there are multiple ways in which it can be resolved. Therefore, a dispute resolution clause should include provision for who can resolve the dispute, when, where and how. Such provisions avoid prolonging the dispute due to disagreement between the parties as to how that dispute should be settled. A number of factors will influence what type of dispute resolution clause would be most appropriate for a party and for a given contract and obtaining legal advice on the available options is strongly recommended.

  1. Understand your contract

As well as having a clear and comprehensively drafted contract, it is important to understand what the implications are of its provisions. For example, it is critical to understand how you can terminate or exit the contract. In practice, we have seen many companies (even large multinational corporations) terminate agreements with their counterparties, without fully understanding the termination clause and its implications. We strongly recommend that parties seek legal advice prior to terminating any agreement in the UAE, to mitigate the risks involved in any potential litigation which may ensue as a result of a wrongful termination.

We often see that companies, when they are acquired or merged with other companies, often do not have proper assignment or novation agreements in place to take effect from completion of the acquisition/merger. If a dispute arises, this can make litigation more challenging and/or put the litigant in a more difficult position. Again, we recommend that parties seek legal advice before any such transaction which also deals with the aftermath of the transaction, in order to protect the party’s interests and ensure smooth post-completion interaction/operation.

3. Requesting Security

If you are entering into a contract (particularly one of high value), we recommend that you obtain some form of security for certain types of transactions or business relationships, in order to protect your business should a dispute occur.

A party can request security in a number of ways including signed and post-dated cheques, personal guarantees (particularly important for loan agreements), bank guarantees, parent company guarantees, land or vehicle mortgages and assignments of earnings and so forth.

Arguably, one of the most effective forms of security in the UAE is a cheque, because if a cheque given as security is dishonored, this constitutes a criminal offence under UAE law. The drawer of the cheque effectively stands as a guarantor for the amount of the cheque pursuant to Article 606 of UAE Federal Law 18 of 1993 (the Commercial Transactions Code), and can also be sued in civil proceedings for the amount of the cheque. If a cheque is provided as security, we suggest that you try to obtain the personal indemnification details of the signatory, should you need to bring a claim against them personally in future.

4. Keep relevant documentation

It is sensible to keep all documentation relating to your dealings, which may become relevant if a dispute arises. Keeping copies of all relevant contracts, related emails, text messages, purchase orders, cheque receipts means that, if a dispute arises, this may help to facilitate and expedite the litigation process, strengthen your position and may even help to prevent litigation occurring in the first place, by strengthening your pre-action negotiating position against your counterparty.

In our experience, there has been an increase in the number of contractual defaults of late. Prior to threatening or filing litigation proceedings, it is wise to keep lines of communication open with your adverse party and, if possible, obtain a written acknowledgement of the debt perhaps by requesting an acknowledgement for accounting purposes. Once such an acknowledgement is obtained it becomes very difficult for the party to resist any litigation claim that may subsequently have to be brought.

Conclusion

To try to limit the costly and time consuming effects of litigation, steps can be taken to firstly reduce the chances of a dispute arising, and then assist in effectively preparing for unavoidable litigation. “By failing to prepare, you are preparing to fail” – Benjamin Franklin.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

For more information, please contact us on sectors@hadefpartners.com.