Cutting it fine
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30 April 2014
In the current economic climate all companies are scrutinising expenditure. Departmental budgets are being monitored and cut as the demand to demonstrate greater value for money increases. This presents a challenge but also an opportunity to improve efficiencies and day to day operations between internal departments.
In-house counsel can take this opportunity to provide a lead by giving proactive guidance to senior management on areas of the operation which, in truth, can always be improved.
Research carried out by Nabarro asked over 100 in-house counsel, risk managers and senior management involved in disputes in the private sector to identify the main cause of disputes.
From the results we were able to identify that the implementation of improved risk management policies and procedures could radically reduce or almost eliminate the chance of disputes arising.
The cause of disputes most frequently cited by the respondents were poor communication (79 per cent of respondents), failure to deliver (69 per cent), poorly drafted contracts (57 per cent), management failing to take ownership (51 per cent), no contract in place (46 per cent), and ineffective risk management procedures (44 per cent), all of which could be minimised by more efficient internal processes and systems.
One area to focus on is the day to day relationship between the sales and procurement, contract management and finance teams. These teams need to work in a seamless manner, however, in reality this internal supply chain is at the core of many disputes which occur.
Examples of disputes that can occur as a result of poor communication between these departments include:
1. When the sales team unwittingly make oral representations about the quality of the companies goods which are at odds with their terms and conditions which they had not referred to in negotiations which were concluded by a handshake with the customer’s managing director. Consequently, the company can be sued when the goods do not match the representations or promises made.
2. When the sales team fail to ensure that the company’s standard terms and conditions are incorporated into trading agreements. Consequently, the company’s retention of title provisions do not form part of the contract. The company is then unable to recover its goods when the customer becomes insolvent. The goods are then sold by the administrator and this then requires legal action against the administrator in conversion.
3. When the procurement team fail to adequately involve the contract management team in contract negotiations over plant maintenance contracts. The contract is then agreed and signed with inadequate service protection which means that the contract management team have no effective means of enforcing adequate performance from the contractor. This can lead to plant breakdown. Late performance can lead to consequential losses. In addition, lost production time can lead to the company falling behind schedule with orders. This can then result in claims for late delivery or the cancellation of orders the losses for which may be irrecoverable from the maintenance contractor.
4. When (due to a lack of communication between the contract management team and the sales team), the sales team do not understand the capacity or constraints of the manufacturing plant leading to orders being accepted which are beyond the machine’s capacity which result in claims for late delivery and cancellation of orders which cannot be fulfilled in time.
5. When the contract management team fail to give the correct contractual payment provisions to the finance department or fail to inform them of any special or particular arrangements that depart from the company’s normal terms. As a result:
(a) on the customer side, the finance department send out an incorrect invoice which leads to a dispute with a customer over the amount to be paid or the credit terms allowed. Alternatively, the invoice may be submitted to the wrong part of the company either because the finance team were given the wrong address or possibly with the wrong name of a subsidiary. This can lead to the invoice being returned (or not being processed) and the customer being sued unnecessarily. This causes disenchantment with the customer who may then take their business elsewhere.
(b) on the supplier side, this can lead to the finance department not paying the supplier on time and, hence, the supplier suing for non-payment.
These are all areas which can be vastly improved by the implementation of basic training on conflict avoidance and management. In-house counsel and senior management can be helped to improve internal efficiencies to minimise the risk of conflict. This can result in greater internal efficiency which helps control the cost of disputes which are a financial drain on the company. Ultimately, this helps preserve and boost profits, which in the current economy is a great benefit.
Gerard Khoshnaw is a partner at Nabarro