The Contract Covers the Dispute. But Who Explains It?

A European manufacturer supplies a critical component to a New York-based distributor. Shortly after delivery, questions emerge about whether the product complies with U.S. safety requirements. The distributor pauses shipments while the issue is reviewed.

Customers want to know when orders will resume. Sales teams are fielding questions. A trade publication calls for comment. Regulators want information.

The distributor tells customers that shipments have been paused while the issue is investigated. The manufacturer believes that explanation is incomplete and may leave customers with the impression that the product is unsafe or that the manufacturer caused the problem.

The contract is detailed. It says what happens if a party defaults, who can terminate and where a dispute will be heard. It also deals with confidentiality and public disclosure. What it does not say is how the parties should communicate when the problem becomes public and both need to respond.

The legal position may still be unclear. The facts may still be coming together. But someone has to answer the customer asking why a shipment has not arrived or the journalist seeking comment.

And what one party says can quickly become the other party’s problem.

Publicity clauses only take you so far

Most international agreements already deal with confidentiality and public announcements. Some commercial contracts may restrict the use of a counterparty’s name or the disclosure of information about the relationship.

Those provisions usually focus on consent and disclosure. They are less useful when both parties need to respond to the same event at the same time.

The communication that causes trouble may not be a press release at all. It could be a customer email saying, “Our supplier has failed to deliver.” It could be a technology company telling users that an outage originated in its client’s systems.

The sender may see the wording as factual. The other side may see blame being shifted.

By the time lawyers are debating whether the statement breached the agreement, customers may already have formed their own conclusions.

Cross-border relationships make coordination harder

Time zones are the obvious example.

Suppose the problem comes to light in New York after the European working day has ended. Customers want an answer. Reporters are calling. The people who would normally approve a statement are in Paris, Frankfurt or Milan and cannot be reached.

A requirement for prior consent to every external statement may look sensible on paper. In practice, it may be impossible to follow.

Some of these practical issues can be settled in advance. The contract can identify the types of events that require consultation, the right contacts on each side and expected response times. It can also say what happens if one side cannot be reached, including whether the other may issue a holding statement.

The clause can be short. Consultation, advance notice where practicable and enough information-sharing to keep communications accurate may be all that is needed.

The contract does not need to become a crisis plan. It just needs to give the parties a process they can use when the problem is already unfolding.

One party may also have to speak before the other is ready. A public company may face a disclosure deadline even while its commercial partner is still investigating the facts.

In the United States, for example, a public company generally has four business days after determining that a cybersecurity incident is material to file the required disclosure on Form 8-K. In that situation, consultation and advance notice where possible usually make more sense than giving either party an absolute veto.

When the stories start to diverge

The bigger challenge is when the two sides no longer agree on what happened.

One party may think the other is giving customers an inaccurate account and want to correct it. It may want to contact shared customers directly. The other party may see that as an escalation.

The same issue can continue after termination. Each party may want to reassure customers and employees and explain why the relationship ended. Their accounts may not match.

If the parties want consultation requirements or restrictions on naming one another to continue after termination, the contract should say so.

Keep it practical

There are limits to what a communications clause can do.

It cannot override a legal disclosure obligation. It cannot make two companies agree on disputed facts. It should not require either side to disclose privileged or otherwise protected information, or give one party an open-ended right to stop the other from speaking.

Commercial contracts are usually very detailed about what happens if the relationship breaks down. They specify who can terminate, what remedies are available, where disputes will be heard and which law applies.

They are often less useful once the problem becomes public and people outside the contract want answers.

By then, what each side says may be affecting the commercial relationship as much as the dispute itself. Agreeing in advance on who needs to be consulted and what happens when time is short can prevent the communications problem from becoming another dispute.