Forbes Solicitors specialises in working with SMEs across the UK. The firm’s commercial team has analysed data from the past year to determine the top five most frequent causes of business disputes affecting SMEs. These include contractual disputes, professional negligence, disagreements on debts, shareholder and director disagreements and Intellectual Property (IP) infringements. 

Stephen McArdle, Partner and Head of Commercial Litigation and Business Disputes at Forbes Solicitors, looks at the underlying factors of each dispute and shares insights about how company founders and leaders can protect their interests.

1) Contractual disputes

There are many varied causes of contractual disagreements, with the most typical disputes arising from ambiguity around what’s agreed between an SME and a third party. A lack of clarity at contract stage tends to lead to conflicting interpretations and expectations. This often stems from a lack of a written contract, poorly drafted contracts, out of date or not fit for purpose contracts and vague terms, which are far from specific.

Disputes can occur about differences in what’s delivered versus what was supposedly agreed, as well as disagreements over timelines for the provision of goods and services, payment terms and performance metrics and KPIs. Ambiguous contractual terms can also cause ‘scope creep’, where a party will push for more than they’ve paid for or where a lack of performance goes un-checked and allowed, without consequence.

Top tip: Contracts must be up to date and fit for purpose – they should include a clearly defined scope of work, which is based on precise and clearly documented details. It’s advisable for a contract to be drawn up, reviewed and adapted by a specialist lawyer to arrive at a robust formal agreement, which works for all parties.

2) Professional negligence

Professional advice and the need for it, is a fact of life for businesses. Companies and business owners engage professionals regularly; be it solicitors, accountants, surveyors, architects, loss adjusters and barristers, to name but a few.

SMEs will rely on professional advice, for example, relating to company acquisitions or property transactions. An architect or quantity surveyor might be retained on a construction project, while a chartered accountant is engaged to advise on a company or share valuation and tax matter, or a barrister advises on a course of action prior to court proceedings commencing.

Unfortunately, in the cases we have helped clients with, even the most careful and experienced professionals can make mistakes. The smallest error in advice can have significant consequences, leading to substantial financial losses, loss of opportunity or disruption that may jeopardise the business itself.

Top tip: Whether an SME is selling, procuring or entering into legal relations on a trading front, it can be useful for a business to clarify exactly what its objectives are at the outset and ensure that key issues are covered in a scope of work. Any retainer agreements should be drawn up so that they clearly set out exactly what work is required.

3) Disagreements on debt and cash flow

Undoubtedly, late payments are one of the biggest causes of debt disputes for SMEs. It’s such an issue, that the government placed late payments at the heart of its recent Small Business Plan – Plan for Change, with tough reforms to ensure businesses are paid on time.

Reasons for late payments will vary from disagreements about the timing of payment dates, through to contested invoices, unclear or unreasonable payment terms, and misunderstandings due to verbal agreements. It can also be because of a failure to perform an obligation properly under a contract.

Top tip: SMEs should have robust, professionally drafted payment terms and conditions as standard, processing and delivery systems, a standard order, and also ensure they have full written and signed records for all contracts they enter into. When facing debt disputes, it’s also recommended that SMEs don’t delay in chasing down what they are owed. Professional support through qualified debt recovery solicitors can accelerate the recovery of outstanding debts.

4) Shareholder disagreements

In small to medium-sized enterprises, shareholder disputes can seem rather inconsequential to begin with, but disagreements can quickly escalate. We have identified that the owners of many start-ups and SMEs do not prioritise having in place professionally drafted shareholder agreements or articles of associations, which properly reflect how a company is run.

Many SMEs thrive because they have small agile leadership teams and tightknit groups of shareholders, often the same people. However, as a business grows, the original structure can come under strain, with owners having different views on the direction of the company, how to resolve issues and varying expectations around performance. This can prove something of a tinder box. What starts as a difference of opinion about business strategy and growth plans, can turn into warring boardroom divisions that impact productivity and profitability or, at worst, will leave the business in deadlock, with good staff leaving.

Other common causes of shareholder disputes include disagreements over exit strategies and valuations, as well as quarrels about dividends and profit distribution, and reinvestment. It’s also typical to see SME shareholders fall out over effort and contribution. In small and medium-sized companies, shareholders are usually more involved and hands-on when it comes to driving revenue and growth. Disputes arise when disgruntled shareholders feel counterparts aren’t making an equal contribution.

Top tip: Shareholders’ agreements should be developed and put in place early before shares are issued. Agreements should cover a number of critical and complex points, such as decision making powers, profit distribution, roles and responsibilities and dispute mediation and resolution processes.

5) Intellectual Property (IP) infringements

Disputes about IP are often caused by unclear ownership and can pose a significant problem for SMEs, because they work so closely with many third parties. Small and medium-sized businesses often don’t have the in-house bandwidth and expertise to fully develop ideas, meaning that innovations and upgrades will be shared and developed with contractors. Outside parties may claim that they’ve significantly contributed to the creation of a product or service, or that their input was responsible for turning an idea into a marketable asset.

Typical IP disputes for SMEs also involve passing-off claims, trademark conflicts and copyright infringements. A combination of a lack of resources and expertise, along with an eagerness to bring innovations to market, can sometimes compromise due diligence. Products and services will be launched, which are too similar to existing goods and services, or unknowingly use third-party resources without proper permissions.

Top tip: SMEs can reduce IP infringements through a number of specialist, professional routes. Taking specialist advice on IP protection and monitoring is essential. Registering trademarks early can protect ownership and can also exercise the levels of due diligence required to avoid infringing on established, owned assets. Working agreements including IP assignment clauses and clarifying IP ownership can help protect IP when working with contractors.

Stephen McArdle, Partner and Head of Commercial Litigation and Business Disputes at Forbes Solicitors,