Some forensic accountants specialise in resolving commercial disputes.
What is a commercial dispute?
The term commercial dispute describes any form of conflict that occurs within or between businesses. There are many types of commercial dispute, from failing to fulfill obligations set out in a contract, to partners falling out over conflicting opinions. More often than not, commercial disputes involve feuds over money.
Commercial disputes are often unavoidable. In the cut throat field of business, tensions can rise in the blink of an eye. Manufacturers, distributors, buyers, investors, advertisers etc., all have to coexist in the same market and use one another's services while simultaneously competing for profit. It comes as no surprise, then, that commercial disputes crop up so frequently.
Forensic accounting for commercial disputes
So what roles do forensic accountants play in commercial disputes? Forensic accountants are called in to settle commercial disputes because of their expert financial knowledge. This knowledge and experience is needed to sift through (often complex) financial accounts in order to identify any particular figures that may provide evidence for or against the alleged claim. Once the sufficient evidence is collected, the forensic accountant will then reach a reasonable and objective conclusion. With this conclusion, the defendant and claimant can either reach an agreement or take the dispute to court. This process is known as litigation support.
Litigation support involves the following three stages:
1. Acting as consultant - Locating and analysing financial discrepancies is only the first stage of a forensic accountant's job. The forsensic accountant must then communicate these findings to the client in a way that they can understand. The forensic accountant therefore acts as the bridge between the complex financial information, and the client. By presenting this information, the forensic accountant can justify the cost of any damages that may need to be paid by the defendant to the claimant.
2. Acting as expert witness - An expert witness is a qualified expert chosen to give testimony in court. Before an expert witness can give evidence, a judge must be assured of his or her skills, experience, training and knowledge regarding the subject at hand. Expert witnesses are objective and factual. They are not permitted to give a personal opinion unless justified quantitatively. Forensic accountants must base their opinions on investigations, using audited financial statements, accounting records and other business records to reach a reasonable conclusion.
3. Acting as arbitrator - Forensic accountants make good arbitrators due to their knowledge, experience and unbiased position. Arbitration is an excellent alternative to court and can produce a fair and rewarding agreement.
Types of commercial dispute
There are many different types of commercial dispute. All of them have the potential to have a negative effect on the businesses involved. According to CEDR, 80% of all commercial dispute cases have a significant impact on the normal running of business.
Types of commercial dispute include:
Contract disputes include any kind of dispute concerning a contract. This could involve the following:
- Professional negligence - An area of tort law whereby losses are incurred by an employee who fails to meet standards reasonably expected by his or her employer.
- Breach of contract - The failure to do something as outlined in a legally binding contract.
- Defective goods or services - In the UK we have what is known as the Sale of Goods Act 19792, which outlines the legal rights buyers have when receiving goods. Goods and services must meet reasonable standards according to their description and price.
Tortious interference is when an individual purposefully causes damage to another individual's business relationships. Tortious interferences usually occur between competitors and can include:
- persuading customers to breach contracts
- enticing competitor's employees to leave
- making false comments about a competing business.
Disagreements between shareholders and directors can arise when the shareholders become unhappy with the directors' decisions or methods. Shareholders have a vested interest in the running of the business and, although hold far less control than the directors, still have some say in decisions.
Because partnerships have unlimited liability, it is essential that the business relationship between all partners remains as solid as possible. Because partnerships remain unregulated by the strict rules of the Companies Act 2006, partners are obliged to draw up their own agreements, known as deeds of partnership. If they fail to do this well enough, there may be legal loopholes through which one or more partners could slip and cause disruption.
Business and shareholder valuations
Disagreements often arise regarding valuation (worth of a business). Find out more about business valuation.
Why should commercial disputes be resolved as soon as possible?
Commercial disputes can:
- cause damage to a company's reputation via public exposure
- effect employees within the company by impacting negatively on morale
- damage the personal reputation of company directors or managers
- irreversibly damage relationships and links with other businesses
- lose customers
- cause staff to leave
- use up resources to such an extent that the business can no longer meet other targets.
How to resolve a commercial dispute
There are two options for those wishing to resolve a commercial dispute:
- court proceedings
- Alternative Dispute Resolution (ADR).
Why go to court? People tend to take commercial disputes to court because they are unable to reach an agreement themselves, even with a mediator or arbitrator.
When to go to court? Usually, going to court should be a last resort, or for large-scale cases only. Taking a commercial dispute to court can be a costly and lengthy process. Whether you win or lose the case, you will be required to pay legal costs on top of any damages owed. Going to court is therefore a big financial risk.
How does court work? A commercial dispute court case begins when a claimant accuses a defendant of causing some form of loss to them. A formal letter is then sent to the defendant, who has the choice to either admit liability or deny all claims.
If the defender accepts liability, the case will go down one of three possible tracks:
- Small claims - These tend to be cases worth £5,000 or less (although occasionally larger). This is the cheapest, least formal track and small claims cases can be handled independently.
- Fast track - These tend to involve cases worth £25,000 or more. Like small claims, this track uses somewhat simplified procedures.
- Multi-track - This is the choice for more complicated cases and legal advice is strongly recommended for those hoping to take the multi-track option.
The court makes the final decision on who should win the case, along with who should pay which legal costs. Both the claimant and the defendant can appeal against the court's decision, but this will of course increase costs even further.
Alternative Dispute Resolution (ADR)
ADR is an alternative to court proceedings. The two main types of ADR are:
Mediation: This is the process whereby a third party will act as a 'middleman' between two or more disputing parties. A mediator's aim is to draw a mutual agreement between the disputants. It is the disputants who decide the terms of said agreement, and not the mediator. The mediator's role is to ensure that the agreement is realistic and achievable - namely that both parties can feasibly keep to their sides. Mediators do not necessarily have to be financial experts and the process undertaken is less formal than arbitration due to its non-binding and voluntary nature.
Arbitration: Forensic accountants are more likely to adopt the role of arbitrator due to the qualifications, experience and knowledge needed to act as arbitrator. According to the Arbitration Act 1996, the three main principals of arbitration are as follows:
a. The purpose of arbitration is to reach a fair and reasonable conclusion to a dispute without the delay and expense attributed to court.
b. As long as the agreement is unanimous, its nature is entirely the choice of the parties involved, not of the arbitrator (as long as public interest is taken into account).
c. The court is not entitled to intervene during the arbitration process.
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