There is no escaping that 2023 promises to be a challenging year for SMEs. The economy is precariously on the brink of a recession. The full impact of both Brexit and the war in Ukraine continues to bite while interest rates and fuel costs continue to rise. When times are hard, disputes increase.
Where are disputes most likely to arise with your customers and suppliers?
Supply contracts
Difficulties in supply chains and the knock-on effect on the underlying supply agreements are fertile ground for disputes.
Loss may be caused when goods are delivered late or not at all and replacements need to be procured at a higher price from an alternative source. A party may wish pull out of a long term supply contract if it no longer economically viable, with questions over the validity of termination and the calculation of the resulting damages leading to litigation.
Beware as well of informal attempts to vary a contract to deal with a supply issue. Always check the underlying agreement to check for a clause which requires variations to be in writing and signed by the parties – a failure to adhere to such provisions will render the intended change unenforceable.
In an increasingly competitive marketplace, the temptation for sales teams to oversell products can expose a business to misrepresentation claims, with the aggrieved party seeking to rescind the contract and/or claim substantial damages.
Debts
Difficult economic conditions inevitably place a strain on cash flow and an increase in the non, or slow, payment of invoices.
If you are a creditor, take prompt and decisive action to recover debts. Often, it is the party who acts robustly who ends up on the top of the pile and gets paid. Check that your terms and conditions provide for interest and for your costs to be paid if litigation is necessary. Ensure that you have a full audit trial to show that such terms are incorporated into and form the basis of the contract.
If you are a debtor, keep a close eye on your financial position and seek immediate professional advice if there is any risk that your liabilities exceed your assets or if you cannot pay your debts as they fall due (both of which form statutory tests of solvency). Personal liability can attach to directors who continue to trade while a company is insolvent so do keep a very close eye on your company’s financial position and document decisions around payments and credit.
Cyber fraud
Sadly, cyber fraud is here to stay. The classic scenario sees money being paid to an impostor’s account following an emails providing ‘new’ bank account details. The payment doesn’t clear the supplier’s debt and leaves the supplier with a debtor who may not have funds to pay as a result of the fraud. Always verify bank details by telephone (using a trusted number, not one on the email with the new account details). If in doubt, send a nominal amount to the designated account and check it has been received before remitting the balance.
And we predict that disputes and issues with employees will also increase this year
Employee fraud
The cost of living crisis can cause desperate people to do foolish things, particularly if they see a weakness in financial systems that they can exploit for their own personal gain. Know the red flags that can indicate that an employee may have their hand in your till – are they the first in, last to leave and rarely take time off? Who has an unexplained improvement in their lifestyle? Review and test your accounts processes for any areas of vulnerability and introduce systems that require authorisation from more than one person for transactions over a certain threshold.
Restrictive covenants and confidential information
The cost of living crisis is also seeing key personnel look for alternative employment with a competitor in order to increase their remuneration.
Review your use of restrictive covenants (which should be no wider that necessary to protect your legitimate business interests) as well as terms that protect confidential information. Are they likely to bite when you need them?
Departing employees should be reminded of their post-termination obligations and told that you will be monitoring compliance.
Swift action against any ex-employee who breaches either their covenants or uses confidential information can nip the problem in the bud and send a strong message to other employees that such behaviour will not be tolerated. New employers also need to tread carefully to avoid claims if they take steps that induce joining employees to breach their contractual obligations to their old employer.
While the above makes for pretty bleak reading, being alive to areas where a dispute may arise enables you to make small changes to minimise the prospect of the risk becoming a reality.
