Brexit and IT contracts: Managing escalation, mediation and the prospect of legal action

You've tried everything to avoid a legal dispute with a business partner, but to no avail. So what should you do next? Arnold & Porter's Michael Bywell offers some advice

In my first article I offered some practical tips on managing termination and exit issues where the scope of existing contracts needed to change to accommodate Brexit-related business decisions. In this follow-up I look at what to do when, despite the best laid plans, disputes arise and escalation occurs - to the point that mediation, arbitration or litigation in the courts looks likely.

Take a simple scenario: Customer C is changing its business operations due to Brexit and, 12 months into a contract, no longer needs 25 per cent of the services currently provided by Vendor V. However C's contractual commitment to V (that V should provide 100 per cent of the services) has an initial three-year term and the total contract value over the full term of the contract is significant. V's performance to date has been sub-standard, and it was late in completing transition.

C has tried to negotiate a variation to reduce the scope of the contract to 75 per cent, but V is demanding substantial compensation. A dispute has arisen and C has triggered the dispute escalation provisions in the contract between the two companies. Those provisions provide for dispute resolution meetings between senior executives from both parties.

What follows is a selection of tips that apply with equal force to all sides. In this scenario the contract between C and V also contains a mediation clause and the option of litigation or arbitration:

• Investigate the legal merits of your position and (with your legal team) devise a dispute resolution strategy. Remember that from the moment there is talk of litigation, communications with lawyers and certain third parties should be protected (i.e. you can communicate in confidence).

• Look ahead to the prospect of litigation or arbitration and work on the assumption it will happen (hope for the best; expect the worst).

• Safeguard your position in open (i.e. on the record) correspondence. If you have valid complaints ensure these are recorded and notified to the other side. For example, in the scenario outlined above, C would complain that V had breached its transition obligations and performed its services poorly.

• This will help protect your position. It may also build leverage for future negotiations. Complaints made long after breaches have occurred could undermine your credibility and legal case in any litigation or arbitration that follows.

• Where provided for under the contract, formalise those complaints in a ‘breach notice' in order to comply with the contract and preserve your rights.

• Keep good records. These could be notes of meetings or documents recording any changes or variations that have been agreed. Failure to do so could weaken your case.

• Preserve documents and do not tamper with them. It is not unheard of for parties to attempt to conceal or obliterate parts of documents. This is something that can severely undermine a case if and when the truth comes out at trial.

• Get legal advice on how to set up escalation meetings, particularly where these occur at the same time as routine Project Board type meetings. Most escalation meetings will be held on a without prejudice basis, which means they will be protected from disclosure in subsequent legal action because the parties are trying to settle their differences and need to talk openly. However, project meetings will be ‘open' and on the record. It is therefore important to be clear on which meeting (or part of a meeting) is a settlement meeting and which is not.

• Avoid own goals. Open admissions of fault or liability can be used in court. Beware coffee machine discussions or discussions in the pub; they all count and may be used against the party making the concessions.

• Prepare well for escalation meetings. These may present your best opportunity to resolve matters before it's too late. Think carefully about who attends those meetings. Ensure you are injecting independent people (i.e. senior management) who have taken time to fully understand the background to the dispute and the issues involved, and can therefore direct the meeting/s and overcome any problems associated with people who may lack objectivity due to prior involvement on the project or account concerned.

• Prepare fully for any mediation proceedings. Do not under-estimate how much preparation is required and just how tough a mediation can be. Ensure that those directly involved are given the time they need (i.e. away from their day jobs) to get ready. If you have not participated in a commercial mediation before get some detailed guidance from your legal team on what to expect and the pitfalls to avoid.

• If mediation ultimately fails, consider carefully the pros and cons of arbitration versus litigation. For example, arbitration is a private process so the risk of adverse publicity may be reduced. On the other hand, litigation in the courts enables you to oblige third parties such as sub-contractors to be made part of the case, something that can only be done by consent in arbitration. Test all the alternatives.

Michael Bywell is an IT partner at law firm Arnold & Porter LLP.