74 4.2 Contractual Defaults and Disputes

Objectives

By the end of this section, you should be able to:

1.  Identify the different types of risks, which may cause contract default.

2.  Identify the different circumstances of defaults and how they could be drafted into a contract.

3.  Explain different types of dispute resolution methods and their advantages and disadvantages.

Introduction

One of the most important skills of the contract drafter is to develop scenarios as to what can go wrong in the contract. This helps the drafting of every clause of the contract. In spite of all the efforts made, the best contract drafter will not be able to foresee every possible potential problem, which will affect performance. This is particularly true as the time for performance may be extended unlike spot purchases and regular trading, e.g., for a call-off, fixed, partnership or joint venture contract. For these cases, specialised clauses may have to be foreseen in order to address the risk from the unknown. Ultimately, it may also appear that there is something fundamentally wrong with the contract and that major updates are required to bring the contract in line with the new and more realistic expectations of the parties. We will look at how to deal with such cases later.

In the same way, all contracts, no matter how carefully worded and prepared, can be subject to some form of dispute or disagreement. It is virtually impossible to negotiate a contract that anticipates every potential source of disagreement between buyer and seller. The more complex the nature of the contract and the greater the dollar amounts involved, the more likely that a future dispute over interpretation of the terms and conditions will occur. Buyers must therefore attempt to envision the potential for such conflicts and prepare appropriate conflict-resolution mechanisms to deal with such problems should they arise.

Comments are closed.