The Art of War and Commercial Disputes – Part IV

Reflections on Lessons from Sun Tzu by David Middleburgh, Founder MCS

Part 4 – Strategy

Sun Tzu said:

Ancient generals defeated the enemy army, but not by battle. They overpowered the enemy’s country, but not by force. The goal was to take things whole. A general who wins all his battles by destroying other armies is not the ultimate general. The ultimate general is one who wins the war by forcing the enemy to surrender without fighting any battles..

Sun Tzu’s Art of War, a 2,500 year- old military manual recording the strategies of a Chinese Warrior who lived around the time of Confucius, is a classic military manual which influences five-star generals to this day. It has also become an essential tool for business executives around the world. For over 20 years I have been interested in the work as a rich vein of ideas for fighting and winning modern day commercial conflicts. I am writing regular blog posts scavenging the manual to illustrate the lessons I learned and applied fighting disputes for clients in my 30-year career as a commercial lawyer.

Last time we looked at the role of planning when preparing for a negotiation. Most importantly, we considered the importance of intelligence, considering all of the facts, the respective parties’ strengths and weaknesses – legally, commercially and contextually. This time we look at the importance of strategy in dealing with commercial disputes.

Devising a strategy is the stage which follows planning. Or rather it is not possible to prepare a strategy until you have thoroughly completed the investigatory stage of planning.

The strategy must identify the party’s objectives. The strategist should think outside the box: if the party says the objective is X, can that objective be achieved through other means. Let’s take an example.

Smith has a dispute with Jones Co relating to a building contract – Smith entered into a fixed price contract for Jones Co to carry out a substantial refurbishment and attic extension of Smith’s home. The fixed price was £220,000 and the contract was to be completed in six months. Smith moved into rented accommodation signing a six month assured shorthold tenancy. The latter tenancy is due to expire in six weeks and the landlord has given notice requiring vacant possession when the tenancy expires. Smith has paid Jones Co £180,000 but the works have ground to a halt. There is a dispute brewing – Smith says that he has overpaid based on the work done. There is a long list of items which Smith says are not up to standard as regards the work already done. There is a long list of items still to be done. Despite a liquidated damages clause in the contract for delay, Jones Co refuses to carry on until Smith confirms he will honour the contract as regards a further payment which Jones Co Claims is about to fall due.

This sort of messy building dispute is sadly very common. If Smith instructs lawyers, things can get much more difficult – the instruction of lawyers further raises the temperature and the danger is that Smith’s action will be seen as an act of war leading to pre-action correspondence, the issue of proceedings, further entrenchment of the parties’ positions and a long delay to the project. Costs spiral, Smith’s tenancy ends and he has the added stress of having to arrange a further short term tenancy and moving elsewhere. Smith’s mental wellbeing deteriorates with every day representing a groundhog day of anger and resentment.

It is suggested that rather than heading straight to lawyers, Smith should approach the problem with a representative who devises a strategy designed to resolve the dispute quickly, getting Jones Co back on site to finish the job.

What would that strategy look like?

I said above that establishing the client’s objective is a pre-requisite. Here the objective is clear, ideally Smith wants the project done to the requisite standard for the contract price. Sounds simple but we all know stories of nightmare building projects where time and costs spiral out of control.
This is where out of the box thinking comes in. If lawyers get involved, the approach on behalf of Smith will be, correct the faults, carry out the remaining work, and the client will pay Jones Co the balance of £40,000. It is however obvious that Jones Co’s lawyer will deny that there are any defective works and will say that under no circumstances will Jones Co take action to rectify works which do not require correcting. Unless Smith drops these demands, Jones Co will not complete the project.

So how should Smith’s representative proceed?

First up, the representative needs to tell Smith a few home truths. If Smith gets locked into litigation or even pre-action correspondence, this will be costly and Smith is likely to be throwing good money after bad. Smith should bear in mind that compromising will be in his best interests. In a good settlement, neither party gets 100% of its objectives.

Secondly, identify ways of lowering the temperature. Consider which of the “defects” are a substantial problem. Then offer a sum of money to get the project moving again provided Jones Co eliminate those defects. Recognise that completing the project is likely to cost more than the original contact price. Move towards a settlement where a series of agreed phased works and a series of revised payments will get the project completed to a good standard.

When you have thoroughly thought through the strategy, you are ready to begin the negotiation. But the final thing is to allow for flexibility. Your opponent may not react how you expect. You then need to pivot and revise the strategy.

If you devise a strong enough strategy you truly can win the “war” by resolving the dispute at minimal cost without fighting any “battles” in terms of the attrition of pre-action correspondence and litigation.

David Middleburgh runs Maxwell Commercial Services. His a Solicitor Advocate and an Insolvency Practitioner. He gives strategic legal, commercial advice on complex and contentious commercial disputes and on business strategy generally.