Taking time to put mechanisms in place that will aid dispute avoidance and plan for alternative scenarios and potential outcomes is crucial to managing any commercial relationship. Often, where issues arise, there are ways to de-escalate matters, mediate and reach a resolution outside of the courts.
This is the second in a series of insights designed to help identify some of the common areas where disputes can arise, how risks can be mitigated and what to consider if you do find yourself in a breach position. Here, we look at the early onset of a dispute and what businesses can do to take a proactive approach.
You can also read the first insight in this series – How to avoid disputes arising from key financial clauses to learn more specifically about some of the key risk areas for disputes in relation to the financial terms of an agreement.
Assess your risks and plan ahead
Through helping clients resolve disputes in the life sciences sector over many years, experience points to a number of precautions/steps that can help to reduce the risks and costs of disputes, if acted upon early.
This is in the parties’ interests, as so many life sciences contracts are only really successful if there is some symbiotic collaboration. Those involved usually want the same end-results, but how might that be achieved? Sorting out nascent disputes before they fester and grow is to everyone’s advantage.
1) Understand contractual terms in their context
As an example, commercially reasonable efforts (CRE):
- CRE may not be as onerous an obligation as it may seem. In a development and/or commercialisation agreement, a court or arbitrator is likely to think that the real incentive for the developer’s performance is to make returns on investment (including recouping milestone payments). Therefore, whatever the frustrations with lack of progress, claiming a breach of CRE (and the material breach sanction that often comes with it) is a hard task, with a high bar for success.
- Who is the counterparty to the contract? If the developer is financially dependent on others or a recently incorporated entity (such as a special purpose vehicle), then CRE may not be as potent a lever as otherwise.
- The trend has been for development contracts to define CRE – usually to some theoretical entity of equivalent attributes. This is to add an element of objectivity. But does a real-life example exist that can be used to further the argument by reference?
2) Make better use of the contractual machinery before you reach for the dispute escalation procedures
- Many life sciences agreements contain provisions for joint steering committees (JSCs). Often we have found that the meetings of the JSCs do not cover strictly enough the topics that they are intended to monitor. For instance, one party might not want to address potential issues with the performance of its obligations and therefore will skirt around these issues at JSCs meetings. This is not always picked up by the other party at the time; perhaps because of a reluctance to appear confrontational. Taking issues early can help avoid things getting worse and will also improve the evidence in the event that the dispute escalates.
3) Escalate mindfully
- Contracts often provide for an escalation procedure, sometimes detailing several steps before formal proceedings are to be commenced. These steps can help:
- inject objectivity by involving more senior people who may not be as personally invested;
- understand the strengths and weaknesses of the parties’ respective positions before significant costs are incurred; and
- increase pressure to help achieve a negotiated settlement.
4) The three most important things in litigation/arbitration are….
- Documents, documents and documents. Contemporaneous documentary evidence of the claims made, or defended, is vital. So, recording the facts and matters relevant to the dispute is key.
In life sciences contractual disputes catching issues early and thinking through how to avert them turning into full-blown disputes is important. Once disputes have crystallised and become formalised it can be quite difficult to turn things around.
These steps are all tools that can help build your business’ resilience and provide you with options to help manage disputes and effective commercial relationships.
Gowling WLG is a multinational law firm formed by the combination of Canada-based Gowlings and UK-based Wragge Lawrence Graham & Co in February 2016, in the first multinational law firm combination co-led by a Canadian firm.
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