Misunderstanding in Claim Management

A European consortium selling customized investment goods to China assessed claims as a potential source of conflict. Hence, the consortium agreed internally on a ‘zero-claim-policy’ in order to maintain harmony with the Chinese customer. The purpose was to secure follow-up orders. The consortium did not communicate this policy to their Chinese customer as they thought it would be a basic assumption by the Chinese. However, the Chinese customer was mainly interested in getting access to innovative technology and not in purchasing more investment goods. In order to pursue his interest, the Chinese customer issued claims against the consortium after the product had been delivered and handed over to the Chinese side. The consortium was accused of having withheld technology from the Chinese. According to the Chinese interpretation of the contract, the technology in question should have been transferred to China. The consortium was shocked at this approach because they had assumed reciprocation on the ‘zero-claim-policy’. When they were confronted with claims from the customer’s side, they realized that they had made a mistake. They did not have any leverage against the customer by lodging their own claims because they had unilaterally abstained from forwarding their (numerous) claims during the course of the project.

A study (Chen and Partington, 2004) comparing Chinese and UK project managers in the construction industry has revealed different attitudes to claims and contract penalties. For the Chinese, negotiation was the only way to resolve a conflict between the customer and the contractor. Claims were considered as something extreme resulting in a loss of ‘face’. The UK managers had a more impersonal attitude. While they preferred negotiations, they saw claims and contractual penalties as normal management practice. Probably, the Western consortium had in mind what the study above revealed. But what went wrong?

  1. How do you explain the contradiction between the study and the behavior of the Chinese customer? (10 Marks)
  2. What types of contract breach do you see here? Why?(2 x 15 Marks)
  3. What type of remedies would you propose? Why? (2×15 Marks)
  4. What type of dispute resolution methods would you pursue for the selected remedies? Why? (2×15 Marks)

How do you explain the contradiction between the study and the behavior of the Chinese customer?

First, it was essential to be proactive over the claim to avoid future problems in the contract. At the same time, the Chinese customer’s expectation was completing the job within the stipulated time of the scope and budget. However, unexpected results were realized at the end of the contract due to the contract’s unclear conditions. Therefore, to prevent and avoid cultural misunderstanding, it was essential to clarify the contract conditions and terms from the beginning from the parties involved; hence, no information should be left out or ignored in defining the contract terms in the project scope. Moreover, there must be regular reports and evidence of minutes of the meetings and progress reports. Therefore, it is essential to identify critical issues or problems while analyzing the contract requirements and determine their appropriate interpretations.

What types of contract breach do you see here? Why?

Actual breach

            This is where a single party in the contract performs their duties inappropriately or incompletely (Coons, 2021). In the case study between the European consortium and the Chinese customer, an actual breach of the contract was evidenced when the consortium made internal agreements on the zero-claim policy without communicating the Chinese customer’s policy agreement. They made personal assumptions that the Chinese customer would assume the policy exists. Since the agreement was made after contracting with the Chinese customer, the consortium would be held liable for the contract’s inappropriate performance. Therefore, the consortium should contact the Chinese customer on the agreed policy to avoid customer claims.

Material breach

A material breach is where one party receives less benefit or a different result from what was specified in the contract (Stim, 2021). From the case study misunderstanding in claim management, a material breach is evidenced when the consortium delivered more investment goods to the Chinese side. In contrast, the Chinese were not interested in purchasing more investment goods but in access to innovative technology. Therefore, the Chinese customer received different results from what was specified in the contract; thus, the European consortium failed to perform its obligations as per the contract. Therefore, the Chinese customer claimed against the European consortium for failure to deliver access to innovative technology as laid in the agreement. Additionally, this resulted from the consortium’s inappropriate performance in making assumptions over the zero-claim policy they failed to deliver to the Chinese customer upon getting into a contract with them. 

What type of remedies would you propose? Why?

Contract termination

From the case study between the Chinese customer and the consortium, I propose contract termination to remedy the contract’s breach. This will help maintain peace between the two parties without further claims, which may cause Ruggles between them or claims of specific performance, damages, or other forms of remedies (Treitel, 2020). I think applying the contract’s termination will be more appropriate since it is easier to conduct than other, more detailed remedies. This would apply to the actual breach identified in the case study where the consortium failed to communicate about the internal agreement they made on zero policy. To avoid issues on why the agreement was made and not displayed, contract termination will be more appropriate to end the contract between the two parties.

Punitive Damages

            I would propose damages as a remedy to breach of contract, mainly punitive damages. This will help award the Chinese customers the wrong done by the consortium by delivering what was not specified in the contract. As a way of compensating the offended party, this remedy also acts as a form of punishment to the offender and aids in preventing similar acts in the future by other parties from getting into contracts (Mullen, 2016). Therefore, it will help the consortium be more careful while handling arrangements by having explicit knowledge of the contact obligations to avoid wrong delivery. Moreover, the offended party will request punitive damages though it is the mandate of the court to decide if the offended party will be awarded or not.

What types of dispute resolution methods would you pursue the selected remedies? Why?

Mediation

            Mediation and reconciliation involve a situation where the consortium would involve a mediator to address the conflict between the company and the Chinese customer. The mediator’s role will help the Chinese company decide whether to terminate the contract or not concerning the clarification provided by the mediator. The mediator will allow each party to explain themselves over the conflicting issues; thus, the outcome will be determined by the parties with the mediator’s help on whether to terminate the contract or not (Shonk, 2021). Therefore, the main reason for selecting mediation for contract termination is to help the two parties get more clarification on the contract and source of conflict before the offended party terminates the contract through a mediator’s help.

Negotiation

Negotiation is a dispute resolution technique that will help the Chinese customer and the consortium exchange views and agree on whether the consortium should compensate the Chinese customer through punitive damages. The parties are exposed to two different negotiation types depending on the approach taken by the contractual parties (Rajavel and Thangarathinam, 2015). First, positional bargaining, where the party seeks to maintain a particular position through intimidation, convinces the other party to give in to the position. Second, interest-based, which focuses on ensuring each party benefits in the long run.

 Moreover, the negotiation process can be facilitated by unfacilitated. Being facilitated means involving a third party to aid in the negotiation, while unfacilitated is more of the parties solving their disputes with or without legal counsel. Therefore, negotiation will help the Chinese customer and the consortium agree on how the Chinese will be compensated and come to clear terms with each other. Moreover, they will be able to explore each party’s interests.

 References

Coons, S. (2021). Breach of Contract: Actual vs. Anticipatory Breach. Retrieved 27 March 2021, from http://shanecoonslaw.com/breach-of-contract-actual-vs-anticipatory-breach/

Mullen, S. (2016). Damages for breach of contract: quantifying the lost consumer surplus. Oxford Journal of Legal Studies36(1), 83-109.

Rajavel, R., & Thangarathinam, M. (2015). Optimizing negotiation conflict in the cloud service negotiation framework using a probabilistic decision-making model. The Scientific World Journal2015.

Shonk, K. (2021). What is Conflict Resolution, and How Does It Work? Retrieved 27 March 2021, from https://www.pon.harvard.edu/daily/conflict-resolution/what-is-conflict-resolution-and-how-does-it-work/#:~:text=Conflicts%20can%20be%20resolved%20in,mediation%2C%20arbitration%2C%20and%20litigation.&text=Negotiation.,that%20you%20use%20in%20dealmaking.

Stim, R. (2021). Breach of Contract: Material Breach. Retrieved 27 March 2021, from https://www.nolo.com/legal-encyclopedia/breach-of-contract-material-breach-32655.html

Treitel, G. H. (2020). IV. Termination of The Contract. In Contracts in General, Chapter 16: Remedies for Breach of Contract (Courses of Action Open to a Party Aggrieved) (pp. 110-152). De Gruyter.