Legal Issues in Business: Common Pitfalls When Handling Contractual Disputes

Key Takeaway: Life is full of irony, and the handling of contractual disputes is no exception. It is essential to approach such disputes cautiously, as conventional methods may inadvertently backfire, leaving the innocent party liable instead of the guilty one.

When facing contractual disputes, it’s natural for aggrieved parties to want to protect their interests and exert some pressure on the defaulting parties. However, the irony lies in the fact that in some cases, these efforts may backfire, leaving the innocent party liable for compensation when the matter goes to court. Here are some common pitfalls to be mindful of when addressing contractual disputes:

1. Overreacting to Disputes

   In contract law, a crucial distinction exists between major and minor terms. Major terms represent the fundamental elements of a contract, while minor terms are subsidiary to the major ones. Distinguishing between these terms can sometimes be challenging, and the label attached to a term may not always be conclusive in the eyes of the law. However, understanding this distinction is vital, as it determines the rights available to parties in the event of a term breach. If a major term is breached, the innocent party typically has the right to terminate the contract and claim compensation. In contrast, a breach of a minor term only permits a compensation claim.

   It’s not unusual for aggrieved parties to threaten contract termination when a dispute arises, especially if they believe a term has been breached. Some may even terminate the contract outright. This aggressive approach is often used to pressure the other party into resolving the issue. However, it’s essential to tread cautiously, as this tactic can backfire when the breach pertains to minor terms or not serious enough to warrant a termination. In such cases, the guilty party may counterclaim unlawful termination and seek compensation, potentially allowing them to avoid their initial breach and ongoing obligations, especially if they perceive the contract to be a bad bargain. It is therefore crucial not to overreact to a dispute and take a much more measured approach.

2. Failing to Act Swiftly or Adequately

   On the flip side, taking a passive approach can be detrimental as well. This is frequently seen when the innocent party is not doing adequately enough or swiftly to protect his contractual rights.

   Consider the following scenario: a sale and purchase contract for a piece of land, where the buyer is obligated to make the full payment within three months. This three-month payment period is undoubtedly a major term of the contract. However, in this case, the buyer defaults on the payment.

   The seller’s response is noteworthy. Instead of promptly addressing the breach and taking sufficient action to protect his contractual rights or even terminating the contract, the seller allowed the buyer to negotiate for more time to pay.

   Several months elapse during these negotiations, and eventually, the buyer makes the full payment. In the meantime, the seller discovers another potential buyer willing to offer a better price for the land.

   Here is where the legal complication arises. Due to the seller’s conduct of negotiating and allowing time to pass, he might no longer have the immediate right to terminate the contract based on the strict contractual terms and sell to the potential buyer. Under the law, the seller’s actions could be interpreted as having waived the original time for performance. If the seller insists to terminate the contract, the buyer can ironically sue the seller for compensation or for the seller to honour the original contract.

3. Reading Contractual Provision in Isolation

   Human nature often leads us to focus on what we want to see while disregarding other aspects. This tendency extends to reading contractual terms. It’s not uncommon to observe that parties in dispute tend to fixate on a single clause or provision in the contract to support their case, often disregarding other relevant provisions. Is this the right approach?

   Consider a contract with one provision allowing the innocent party to terminate with 30 days’ notice in the event of a breach. Another provision, found at the last page of the contract, suggests giving the guilty party a chance to rectify the breach. The aggrieved party terminates the contract by giving 30 days’ notice without giving the guilty party the chance to rectify. Relying solely on the first provision as such is likely be construed a wrongful termination as the law would often interpret all the contractual clauses harmoniously and not in isolation. The other provision affording the chance to rectify could not be ignored.

4. Failure to mitigate losses

   It’s also important to note that an aggrieved party must act reasonably when handling contractual disputes, especially in the case of a serious breach of contract that leads to termination. In such a situation, the aggrieved party must be mindful of the opportunity to mitigate their losses.

   Consider this scenario: in a sale and purchase contract for certain goods, the buyer agrees to purchase certain goods but later rejects them before the scheduled delivery. The seller, upon being notified of the rejection, has the option to sell the goods in the open market at a higher price. However, the seller does not take advantage of this opportunity, and as a result, the goods remain unsold after some time has passed. Subsequently, the seller requests compensation from the buyer for the rejected goods and losses incurred.

   Under these circumstances, the court is likely to determine that because the seller does not reasonably mitigate their losses, they may be disallowed from pursuing the losses suffered against the buyer

5. Delaying Legal Consultation

   Unless you have a deep understanding of contract law, consulting a lawyer early in any contractual dispute is always a wise decision. In a situation where a party believes they can handle the dispute without legal counsel and later changes their mind, the delay in consulting a lawyer can lead to missed opportunities for efficient dispute resolution. In summary, navigating contractual disputes requires a cautious and informed approach to avoid unexpected outcomes. Life is full of ironies, and legal matters are no exception. What you think can be done may well turn out to be the opposite.

If you have any questions or require any additional information, please contact our lawyer that you usually deal with.

This article is written by 

Colin Liew
Principal Associate, Low & Partners