Commercial Contract Disputes: What Happens When Parties Disagree About Contract Terms?

Contracts make the business world go round. They are fundamental to all types of commercial relationships, and they establish the terms and conditions under which businesses supply goods, perform services and get paid.

But they can also lead to disputes.

In some cases, commercial contract disputes are fairly straightforward. For example, if one party delivers conforming goods on time and the other party doesn’t pay as required, this may be a clear breach of contract. However, commercial contract disputes can also be far more complex, especially when the parties disagree about what the contract says.

Key Considerations for Resolving Contract Disputes Involving Issues of Interpretation

When drafting a contract, the goal is to clearly establish all of the terms of the parties’ relationship. This includes not only the terms of performance and payment but also terms relating to warranties, insurance and indemnification requirements, dispute resolution, and various other issues (or potential issues). When a contract is clear and leaves no room for interpretation, then resolving any disputes should be a matter of reviewing the contract to identify the parties’ respective rights and remedies.

But, many contracts do leave room for interpretation. While this can result from oversights during contract negotiations and drafting, it can also result from unforeseen circumstances. We saw the latter play out on a large scale during the COVID-19 pandemic. While most commercial contracts have force majeure clauses that excuse the parties’ performance when the parties are unable to perform due to factors beyond their control, prior to 2020 many of these clauses did not directly address the possibility of a global pandemic—because the COVID-19 pandemic was truly an unprecedented event.

Regardless of why a contract leaves an issue unresolved, resolving a dispute without clear contractual guidance requires a different approach from a clear breach of contract. Here are some of the key legal and practical considerations:

What Does the “Plain Language” of the Contract Say?

When dealing with any commercial contract dispute, the first step is always to look at the “plain language” of the contract. Without any amount of interpretation, what does the contract actually say?

In some cases, parties will interpret contract terms when no interpretation is warranted. The Florida courts have held that “words in a contract are presumed to have been used with their ordinary and customary meaning.” Thus, if the plain language of the contract is clear, then resolving the parties’ dispute should be a matter of convincing both parties to acknowledge the language to which they have agreed.

Are Both Parties’ Interpretations Reasonable?

If a contract leaves room for interpretation, then one of the next questions is: Are both parties’ interpretations of the relevant language reasonable?

Reasonableness is the gold standard of contract interpretation. The Florida courts have made this clear as well, writing that “a court must construe a contract in a manner that accords with reason and probability; and avoid an absurd construction.” If either party’s interpretation is unreasonable, even if otherwise arguably defensible, it generally will not withstand scrutiny in the courts—and thus should not prevail in any pre-litigation settlement negotiations.

What was the Parties’ Intent at the Time of Contracting?

Along with reasonableness, the Florida courts also focus heavily on the parties’ intent at the time of contracting. When both parties’ interpretations are reasonable, “[t]he expressed intent of the parties is the controlling factor.” The parties’ expressed intent may be determined by examining other language in the contract; or, if their intent is unclear from the contract itself, then it can be determined by examining communications and other forms of outside evidence.

Of course, if the parties disagree about how a contract provision should be interpreted, there is also a good chance that they will disagree about what was intended at the time of contracting. In some cases, emails and other forms of evidence may effectively preclude these types of disputes. However, if both parties are firm in their position that they intended a particular outcome from the outset, the likelihood of litigation can increase significantly.

How is a Court Likely to Rule if the Dispute Goes to Court?

Taking these guiding principles into consideration, both parties should assess how a court is likely to rule if their dispute goes to court. This assessment should guide each party’s next steps—whether those steps involve pursuing informal resolution, seeking an injunction, initiating mandatory mediation or arbitration, or preparing for litigation. If both parties acknowledge that one judicial outcome is particularly likely, then this should generally guide them toward an amicable resolution. But, if the parties are interpreting their agreement and the relevant law differently, then this will increase the likelihood of litigation as well.

Is It in Both Parties’ Best Interests to Negotiate a Resolution?

While the law governs, in many cases the practicalities of doing business will carry the day. If it is in both parties’ best interests to negotiate a resolution, then focusing on finding a way to compromise will generally be the right approach. With that said, neither party should completely write off the possibility of litigating until it is clear that the parties will be able to come to terms.

When negotiating a resolution to a commercial contract dispute, the parties have virtually unlimited options. Each party can use any leverage it has available to steer the negotiations in its direction, but ultimately, both parties will generally need to compromise if they disagree over which one is in the wrong. Of course, when negotiating their settlement, the parties will want to address the contractual ambiguity that led to their dispute as well.

Speak with a Commercial Contract Dispute Lawyer at Edelboim Lieberman

At Edelboim Lieberman, we represent businesses of all sizes in commercial contract disputes throughout Florida and nationwide. If your company is facing a contract dispute, we can help you make informed decisions and choose the best path forward. Call 305-768-9909 or contact us online to get started with a confidential consultation.