How to deal with threats of claims for negligence and breach of contract

posted on 5th June 2018

By Phil Walton (Partner in Mundays Corporate/Commercial Department)

And

Oliver Jackson (Senior Associate in Mundays Dispute Resolution Department)

 

The aim of this article is to give practical tips and guidance on what to do when the unthinkable happens, and you are threatened with a claim for negligence or breach of contract. This is not to say that the company, its directors and employees are in fact negligent or indeed in breach of contract but threats such as these are often made, sometimes as a result of the actions of subcontractors engaged by the company.

In the context of a deteriorating and tense situation, a company needs to know how to handle the situation from a legal perspective to ensure that a bad situation does not become worse but also how to prevent and deal with spurious threats designed to take the heat off the other contracting party.

We will look at effective preventative methods and procedures to adopt to minimise a company’s exposure to liability, and even how to go on the offensive should the opportunity present itself.

Internal management of claims

Before we look at what to do when a claim or threat of a claim arrives, there are some measures that can be put in place to minimise the impact on your company.

The simplest most effective measure is training. Train your company’s employees at all levels so that everyone knows the company’s business, how its contracts work and how its contracts are formed. Think about the order process, who has the authority to conclude contracts and who has the responsibility to run the contract. Quite often, contracts in this industry are concluded on IATA or similar standard terms but these contracts can and are also augmented by a party’s standard terms, which a party may seek to include at any stage prior to forming the contract.

Ensure that the company’s employees do not simply accept another party’s terms in their eagerness to conclude a new piece of business. This can be achieved through the use of simple flow charts explaining the legal process to forming a contract and where alarm bells should be raised, including how to refuse or prevent another party’s standard terms from applying to the contract.

This will ensure that the contract is set up properly in the first place, so that for example, there are proper and clearly identified limits of liability, time limits for bringing claims, arbitration procedures, etc in place.

Put in place clearly identifiable lines of reporting so that if something does go wrong, for any reason whatsoever, someone in authority in the company is informed on the very same day as the alleged incident so that decisions can be made at the very top quickly, effectively and in full possession of the facts so as to minimise any potential damage to the company, its customers and trading relationships.

The worst thing that can happen is that a company is not able to respond to claims or threats within applicable timescales due to critical information not being in the hands of the directors. Encourage the company’s employees to report incidents without fear of reprisal – they will be saving the company money.

Appoint a claims handler who is familiar with claims procedures, how the system works and with experience of dealing with claims. This person may be very effective at handling the claim as they will be familiar with any time limits which may be in the contract or with any exclusion or limitation clauses which may apply. This person should be the “go-to” person in such circumstances.

Undertake a thorough review of the company’s policies of insurance – do they, for example, cover legal expenses?

When the claim or threat arrives

If you have appointed a claims handler at this stage, a good experienced claims handler will know what to do next, including if necessary getting lawyers involved, depending on the seriousness of the situation. Log the date of receipt of the claim/threat, ensure a proper file is kept and available for inspection at all times. Note any deadlines in terms of responding to claims or threats and ensure adequate and proportionate responses are sent in due time.

Avoid panic, or knee-jerk reactions, quite often an accusation of negligence or breach of contract alone may induce a worried party inadvertently to admit liability. On many occasions, the threat of negligence or breach of contract is without evidence or basis in fact.

Check your contracts to see which terms apply to claims for breach of contract and/or negligence. Some claims on both negligence and breach of contract may in fact be out of time, for example, for negligence, in the absence of a contractual term to the contrary, the time limit for bringing a claim is 6 years from the date that the cause of action accrued, for breach of contract, in the absence of a contractual term, 6 years (in some circumstances it may be twelve). However, standard industry terms often drastically reduce such time limits, sometimes to a matter of days.

The contract may contain (often in IATA agreements) arbitration clauses which will apply to both claims for breach of contract and claims for negligence and therefore strict procedural guidelines should be followed. It could be that the threatening party has failed to comply with such guidelines which can often result in a claim being struck out.

Be proactive, if the company is presumably insured, notify insurers as early as possible but make sure they act in accordance with your wishes (i.e. do not accept liability without your consent) but equally do not invalidate your policy by acting outside its terms.

Notify the customer of any problems and the reason, manage their expectations and offer a solution. To avoid the risk that your customer may seek to exploit a situation where something has gone wrong, ensure that any admission of liability is expressed on a “without prejudice basis”. This means that the contents of the communication cannot be referred to or relied upon in the context of any litigation as being an admission or wrongdoing/liability.

What is negligence?

To succeed in an action for negligence at common law, it is necessary for a claimant to establish that:

  • The defendant owed a duty to the claimant.
  • The defendant breached the duty owed to the claimant.
  • The defendant’s breach of duty caused the claimant to suffer recoverable loss.
  • The damage must be reasonably foreseeable.

There are many statutes, regulations and cases that explain the above and this article is not designed to explore this in any depth. Negligence is difficult to prove, albeit expensive to have to defend against.

Breach of contract

There are many types of breach of contract, many of which, if the company acts quickly enough, can be remedied so that the claiming party suffers no actual loss and therefore the prospect of a claim can be greatly reduced.

This goes back to our earlier point about clear lines of reporting and quick actions: remedy a breach before matters get out of hand, do not put your head in the sand.

On the offensive

It is often the case that a company may be able to counterclaim (rarely for negligence) but more likely that the claiming party is in fact in breach of contract itself. Check the provisions of the contract, the company may be able to exercise a right of set off or deduction from monies owed to it or the claiming company may be trying to mask something where it is vulnerable.

Take advice as appropriate and do not allow yourself to be bullied just by the threat of a claim. Just as with contractual negotiations, when dealing with contractual disputes and threats of neg ligence, the first backward step a company takes could be the first of many.