The Contentious Side of a Business-to-business Contract
Ramona Danciu
Solicitor
Business-to-business (‘B2B’) contracts play a pivotal role in enabling commercial exchanges between companies, serving as the foundation for the sale, purchase, and delivery of goods or services. These agreements are crafted to provide transparency, safeguard the interests of both parties, and clearly define the terms of their business relationship. Yet, despite their significance, B2B contracts frequently become points of contention, giving rise to disputes that may ultimately require resolution through litigation or arbitration. This article examines the challenges inherent in B2B contracts, the essential considerations in drafting them, and the typical areas where disagreements emerge. It further explores the dispute resolution mechanisms available—particularly litigation and arbitration—and considers their broader implications for businesses.
Key Requirements of a B2B Contract
A well-drafted B2B contract is crucial for avoiding disputes and ensuring smooth business operations. The following are the key requirements for a robust B2B contract:
1. Clear and Precise Terms
In B2B relationships, the strength of a contract comes down to how clear and precise its terms are. When language is vague, it opens the door to misunderstandings that can quickly escalate into costly disputes. A well-drafted contract should spell out the essentials: the scope of work, the goods or services being delivered, timelines for completion, payment structures, and any warranties or guarantees. The more specific the agreement, the easier it is for both sides to stay aligned on expectations. Ultimately, precision in contract terms not only protects each party’s interests but also builds trust and reduces the risk of conflict down the line.
2. Compliance with Legal Frameworks
In England and Wales, B2B contracts are governed by various statutory frameworks, including the Sale of Goods Act 1979 (SGA), the Unfair Contract Terms Act 1977 (UCTA). These laws imply certain terms into contracts, such as the seller’s obligation to provide goods of satisfactory quality, fit for purpose, and corresponding to their description. A contract must comply with these legal requirements, and any attempt to exclude or limit liability for breaches of these implied terms must pass the UCTA reasonableness test, which looks at whether the limitation clauses are fair and enforceable.
3. Allocation of Risk
The contract should address the allocation of risk between the parties, particularly concerning the transfer of title and the responsibility for the goods or services. In the case of a contract for the sale and purchase or goods, the timing of these transfers is crucial, as it determines who carries the burden if the goods are lost or damaged. To manage this risk, sellers often rely on retention of title clauses, which allow them to keep ownership until payment is received. However, these clauses must be drafted with care to remain enforceable.
4. Dispute Resolution Mechanisms
An effective B2B contract should always set out how disputes will be handled. This typically involves clauses that define the governing law, establish jurisdiction, and outline the preferred resolution method, whether through litigation or arbitration. Importantly, both methods are intended to be final and the contract should not provide for both methods to be used. Including these provisions is vital for ensuring disagreements are managed in a fair and efficient way, while giving both parties a clear roadmap to follow if conflicts arise.
Common Areas of Dispute in B2B Contracts
Despite the best efforts to draft clear and comprehensive contracts, disputes can still arise in B2B relationships. The following are some of the most common areas of contention:
1. Breach of Contract
A breach of contract occurs when one party fails to fulfil its obligations as outlined in the agreement. This can include failure to deliver goods or services on time, delivering defective goods, or failing to make payments as agreed. Breaches can be classified as minor, material, or repudiatory, with the severity of the breach determining the remedies available to the aggrieved party.
2. Quality and Specification
Disputes frequently occur regarding the quality and specification of goods or services. Under the Sale of Goods Act 1979 (SGA), certain conditions are implied into contracts; in the case of a contact for the sale and purchase of goods, the SGA requires that goods be of satisfactory quality, suitable for their intended purpose, and consistent with their description or sample. Where these standards are not met, the buyer may reject the goods, pursue damages, or seek alternative remedies. However, contention often arises over whether the goods truly comply with the agreed specifications, or whether the buyer has forfeited the right to reject them by accepting delivery.
3. Delivery Issues
Delivery is a frequent flashpoint in B2B contracts, often giving rise to disputes. Common problems in goods contracts include delays, shortfalls in the agreed quantity, or goods being sent to the wrong destination. Whilst the SGA sets out statutory rules on delivery, these can be overridden by express terms within the contract. Disagreements typically occur where the delivery provisions lack clarity or where one party fails to meet its contractual obligations.
4. Payment Disputes
To promote timely settlement, sellers often include provisions such as interest charges on overdue amounts or penalties for delayed payment. Conversely, buyers may seek to preserve rights to withhold or reduce payments through set‑off or abatement clauses. These opposing interests can easily give rise to disputes if the terms are not clearly defined or fairly balanced.
5. Exclusions and Limitations of Liability
Sellers frequently seek to restrict their liability for breaches of contract, negligence, or misrepresentation by including exclusion clauses. However, such provisions are regulated by both statute and common law, notably through the UCTA reasonableness test. Disputes often arise over whether these clauses are enforceable, particularly where they are viewed as unfair or excessively restrictive.
6. Intellectual Property Rights
Contracts that involve intellectual property often give rise to disputes concerning ownership, licensing, or infringement. For instance, a seller may breach the implied condition of good title if the goods supplied infringe the intellectual property rights of a third party. To safeguard against such risks, buyers commonly seek indemnities from sellers to cover potential third‑party claims.
7. Termination
Termination clauses are a frequent source of contention in B2B contracts. Disputes may arise over whether a party has the right to terminate the contract for breach, insolvency, or convenience.
Resolving Disputes: Litigation vs Arbitration
When disputes arise in B2B contracts, the method of resolution depends on the terms of the contract and the preferences of the parties. The two primary methods of dispute resolution are litigation and arbitration, each with its own advantages and disadvantages. In this section, we will explore the key differences between the two.
Litigation
Litigation involves resolving disputes through the court system. In England and Wales, commercial disputes are typically heard in the High Court or County Court, depending on the value and complexity of the case. The key features of litigation include:
1. Public Process: Court proceedings are generally public, which can be a disadvantage for businesses seeking confidentiality.
2. Binding Decisions: Court judgments are legally binding and enforceable.
3. Appeal Rights: Parties have the right to appeal a court decision, which can provide an additional layer of scrutiny.
4. Costs and Time: Litigation can be expensive and time-consuming, with cases often taking years to resolve.
Litigation may be appropriate for disputes involving complex legal issues, where a binding decision is necessary, or where one party seeks to set a legal precedent. However, the public nature of litigation and the potential for high costs may deter some businesses from pursuing this route.
Arbitration
Arbitration is a private dispute resolution process where an independent arbitrator or panel of arbitrators is appointed to resolve the dispute. It is a popular choice for resolving B2B disputes, particularly in international contracts, due to its flexibility and confidentiality. The key features of arbitration include:
1. Confidentiality: Unlike litigation, arbitration proceedings are private, and the details of the dispute are not disclosed to the public. This is particularly advantageous for businesses that wish to protect sensitive information or avoid reputational damage.
2. Flexibility: Arbitration allows parties to tailor the process to their needs, including the choice of arbitrators, the location of proceedings, and the applicable rules. This flexibility can make arbitration more efficient and cost-effective than litigation.
3. Expertise: Arbitrators are often chosen for their expertise in the subject matter of the dispute.
4. Finality: Arbitration awards are generally final and binding, with limited grounds for appeal. This can provide greater certainty and faster resolution compared to litigation.
5. Enforceability: Arbitration awards are enforceable internationally under the New York Convention, which is recognised by over 160 countries. This makes arbitration particularly suitable for cross-border disputes.
Arbitration is often preferred for disputes involving technical or industry-specific issues, international contracts, or situations where confidentiality is a priority. However, it may not be suitable for disputes requiring urgent remedies, such as injunctions, matters involving questions affecting the general public or where questions of public policy arise or where one party is unwilling to cooperate in the arbitration process.
Choosing Between Litigation and Arbitration
The determination of whether to pursue litigation or arbitration hinges upon a variety of factors. These typically encompass the nature of the disagreement, the existing relationship between the parties involved, and the specific provisions outlined in the relevant contract. The following must be taken into account to determine which method is more appropriate:
1. Contractual Provisions
A significant number of business-to-business (B2B) agreements incorporate specific dispute resolution clauses. These provisions definitively state whether disagreements shall be resolved via litigation (recourse to the courts) or arbitration (private resolution).
Furthermore, these clauses often prescribe the governing law, the jurisdiction (location of the legal forum), and the procedural rules that must be adhered to. It is imperative that the contracting parties undertake a meticulous review and negotiation of these clauses during the drafting stage. This careful attention ensures that the stipulated mechanisms are fully aligned with their strategic preferences and commercial requirements.
2. Costs and Time
Arbitration is frequently considered to be a swifter and more economical substitute for litigation, especially when addressing intricate commercial disagreements. However, it is pertinent to note that arbitration can, at times, still prove costly. This is particularly true if the process necessitates the appointment of multiple arbitrators or if the proceedings become unduly protracted. Businesses must therefore judiciously evaluate the potential costs and expected timescales associated with each method before making a definitive choice.
3. Confidentiality
For disputes involving sensitive information or reputational risks, arbitration may be the preferred option due to its private nature. Litigation, on the other hand, is a public process, which may not be suitable for all disputes.
4. Enforceability
In international contracts, arbitration is often favoured due to the ease of enforcing awards under the New York Convention. Litigation may be more challenging in cross-border disputes, as enforcement of court judgments depends on the existence of reciprocal enforcement agreements between countries. You can find out more about enforcement of foreign judgments in England and Wales in our last month’s article.
5. Expertise
Arbitration affords the parties the significant advantage of selecting arbitrators who possess specific expertise pertinent to the dispute’s subject matter. This is particularly advantageous for highly technical or industry-specific disagreements. In contrast, litigation generally relies upon judges whose mandate is general law, and who may not possess specialised knowledge in the relevant commercial or technical field.
6. Relationship Preservation
Arbitration is generally less adversarial than litigation, a feature which can assist preserving business relationships.
Conclusion
Commercial contracts are incredibly important for setting out the rules of your business dealings and making sure things like buying and selling goods or services run smoothly.
However, these contracts can also be the cause of disputes. To stop these disagreements before they start, it’s vital to write clear, thorough contracts that follow the law of England and Wales and which properly assign the risk, and include solid ways to address any issues that might come up.
When disputes do arise, the choice between litigation and arbitration depends on the terms of the contract and the specific circumstances of the case. Litigation offers a public, binding process with appeal rights, while arbitration provides a private, flexible, and expert-driven alternative. Both methods have their advantages and disadvantages, and businesses must carefully consider their priorities when selecting a dispute resolution method.
We can advise you both on drafting robust commercial contracts and on how to approach disputes that arise. This includes helping you decide whether to agree to arbitrate instead of going to court based on your unique commercial needs and representing you in both arbitrations and court proceedings.
For specialist advice and support. Please get in touch with our corporate solicitors in London by contacting the GOOD LAW INTL office.
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