Tuesday, March 13, 2012

Managing Claims

A party may allege a claim for a number of reasons including:
•The other party had certain obligations that they failed to perform.
•The other party made representations which they relied upon, they were not true.
•The third parties controlled or contracted by one of the parties failed to meet their commitments.
•There were mistakes or conflicts in the agreement.
•There were mistakes or inconsistencies between specifications and drawings provided by one of the parties.
•There are latent conditions that were unknown at the time of the contract was signed that were subsequently discovered.
•One party, their agents, suppliers or personnel took certain actions that affected the other party (delays, interference, re-work, etc.)

In managing and negotiating claims there are seven steps to follow.

1. The first step is to always to read the contract to determine it it says and what it allows to understand the contract position on the claim and whether it is valid.
a) Is there a contract?
b) Is the contract enforceable?
c) Is there a duty to perform and a breach of that duty?
d) Is there anything that could void the contract?
e) Is there anything that changed the commitment? (review all amendments)
f) Was there any waiver that would impact the claim? (Is there a waiver provision in the contract?)
g) What are the remedies available to the claimant under the agreement for that section? (Look at the section for remedies)
h_ What types of damages may be claimed and any limitations or caps on damages (look at both the section in conflict and the limitation of liability as that will also apply to claims)..

2. Look at the information the provided as part of the claim.
a) Is it correct in terms of calculation?
b) Is it substantiated with adequate back up documentation?
c) If it isn’t available, can it be reasonably estimated? Frequently a party may be unwilling or reluctant to provide you with the detailed information necessary for you to adequately review the basis for the claim and the calculation of the charges. When faced with this type of situation they may not have the information, they may be trying to hide something or, they may have inflated the claim amount in hopes for a reduced settlement where you split the difference. The reality is if they were to pursue the claim in a court of law they would need to prove their case and their damages so you should not agree to accept anything less. If they don't provide you with what you need to properly evaluate the claim you can refuse to take action on it, which leaves them with the only alternative of suing you. Prior to any case going to court both sides have the right of "discovery" in which they can view the opposition's case against them, the evidence, the claim, the calculation of damages, etc. At this point you will know what they have and can decide whether to try to reach a negotiated settlement or proceed with the suit.

3. For each item in their claim you check the basis for the claim.
a) Is it the result of our violation or breach of the agreement?
b) If the claim is based outside the agreement are there prior dealings between the companies? Was the activity here any different from the prior dealings? (Eliminate basis of reliance on prior dealings).
c) Is the claim the result of our violation of our responsibility? (Such as failure to mitigate losses).
d) Is the claim a request for "equitable relief" for "extenuating circumstances”? Are they really extenuating circumstances?
e) Are they risks that they assumed or should have been aware of?
f) To what extent did the activity or our actions cause problems for them as a result of those extenuating circumstances?
g) Are there areas where portions of the claim exist as a result of negligence or mismanagement on their side? What are they? How much are the worth? Highlight and immediately deduct them from their claim.

4. Review the costs included in the claim against:
a) the remedies allowed in the agreement,
b) the damage types allowed to be claimed, and
c) any limitations on the amounts of damages that may be claimed.
Exclude any costs that would not be allowed by those sections. For example if all the party can claim is direct damages, in the claim you would exclude any incidental or consequential costs.

5. Did the claimant take steps to mitigate the damage as they are required under common law to do? If they didn’t reduce the amount.If they did, any reasonable cost to mitigate should be paid

6. Did they take steps that were inconsistent with mitigating damages, such as bulk ordering of large quantities, performing operations in advance? For example, if a contractor ordered a huge quantity well in advance of need to lower their costs should the owner be responsible for a claim if they don’t get consumed? What does the agreement say about that?

If there is a dispute in the end about whether the claim is valid or the amount, the first step I recommend is to have the issue be escalated to the next level of management. It's at that level where both parties can look at the issue outside of "the heat of the battle" and consider it from a strict business decision.

7. Consider:
a) What is the relationship we have with the other party?
b) Do we need or want to continue to do business with them?
c) How many resources and of what types will it require to pursue or defend the claim?
d) What will it cost to pursue or defend the claim?
e) Do we have the right to under contract to recover legal fees if successful?
f) What is the degree of confidence that we will be successful?

If there is no agreement at that level you then need to look back to the agreement to determine: a) What the contract says about how disputes will be resolved. (Are their arbitration of mediation provisions.
b) What is the applicable law, jurisdiction and forum?

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