How to resolve startup disputes

Anthony Rose: All right. So, hello everyone. If you’re a founder, most of the time you spend building products, testing things, and talking to users. All is well, and occasionally things go wrong. There are founder fallouts, supplier disputes, and employee problems—the stuff you didn’t want in your life.

Now hopefully you’ve done your agreements on SeedLegals or with a lawyer. When there’s a problem, you look in the legal agreement and it tells you what to do. But sometimes there isn’t a legal agreement, or sometimes it’s not clear, or sometimes you don’t agree with it. Then what? Is it pistols at dawn? Do you have to hire a lawyer? Is it going to get expensive? Well, there is an interesting alternative, which is dispute resolution, mediation, and arbitration. To talk about all of that and what to do when things go wrong, we have Ian from Pinq Dr. Now Ian’s a barrister now doing a startup. I guess the SeedLegals of dispute resolution. Ian, tell us a bit about yourself and then over to you.

Iain Quirk KC: Yeah sure. Hello. So, I’m a barrister as you say. I’ve been a barrister for 20 years. I do corporate disputes and company disputes across the full range. I’m also the CEO of Pinq Dr, which is a startup online dispute resolution platform that provides binding resolution of disputes in 6 to 8 weeks, which is drastically different from the way things currently operate.

Anthony Rose: Okay, thank you. Now let’s start with the concept. You’ve got a contract and something has gone wrong. You would normally think as the first course of action to call a lawyer and end up in court. So, take us through an example. The most common one we see at SeedLegals, unfortunately, is founder fallouts. Maybe 10 or 20% of the time, people get together in a pub, have an idea, are best friends, and sometimes have a founder agreement, sometimes not. A little while later, they can’t see eye to eye, or somebody has to pay the bills, needs a proper job, and wants to leave. Now there’s a dispute over the number of shares. Sometimes they haven’t set up vesting. Sometimes the departing founder just has all their shares vested, or doesn’t have a vesting agreement, but the number of shares they’ve got exceeds the number that make the company investable in the future. They’ve got 30% of the equity. No one’s going to invest in a business that’s got a departed founder with 30%, and they now want to sort it out. In the best case, they reach an amicable agreement, which is great. But let’s say they can’t. Take us through what options they’ve got and how dispute resolution in both the negotiating friendly way and the legal way will help.

Iain Quirk KC: Yeah sure. The amicable solution, as you say, is always the best way. Always better to try and resolve these things through a commercial discussion. Of course, that doesn’t always work. So, step number one is to look at what you have agreed. If you’re a founder, you might have agreed a founders’ agreement. If you’ve had subsequent investment, you might have service agreements, sales agreements, or subscription agreements. It’s really important to check those and work out what they say because they may well deal with the situation you find yourself in. They may well have provisions that deal with how you resolve that kind of dispute.

Anthony Rose: Can I hop in quickly? For those not familiar, an agreement in the UK is fairly broad, which includes a handshake in a pub through to a deed and a binding thing. Take us through what sort of evidence might somebody have. If you’ve got a signed agreement and you’ve had a verbal discussion that is different from that, or if you don’t have a signed agreement, what things might cause issues when you have a dispute?

Iain Quirk KC: Agreements have a sliding scale. At the top level, the best kind of agreement you want, as a startup founder, is a signed written contract with a dispute resolution clause that sets out your provisions in a nice form that you retain. That’s the gold standard, always much easier to have that kind of document because you can point to it and no one can say it never happened. But as you say, as a matter of English law and most common laws around the world, and some civil law countries, you don’t need to have a signed written document. You might have a document that wasn’t signed but was exchanged between you. Let’s say you and I exchange some emails where I said this is how things are going to happen going forwards, do you agree? And you reply yes. Next level down is I send an email, and you don’t reply. I might say later, you didn’t reply, that means you agreed. Next level down is we have a discussion, and we agree on things verbally. That verbal agreement often has no record and you always want to avoid relying on an oral contract. It can be an oral contract, but proving it can be difficult. You don’t want to be in a situation where you’re relying on an oral contract, especially considering how long, expensive, and difficult legal proceedings can be.

Anthony Rose: Okay. It could also be a WhatsApp thread, as long as one of us doesn’t lose our phone. Now, what happens if the discussion doesn’t align with the agreement? You can have an agreement that says this is the complete agreement and it replaces and supersedes any prior discussions. So, talk about discussing a range of things right. I want 30, no you get 20. And now we’ve got a range of possible things and an agreement that says something different. How do people know which is the definitive one?

Iain Quirk KC: So the definitive version, i.e., the signed version, will almost always be the version that binds everybody. That’s not always the case but it’s normally the case. Sometimes at a later stage, someone might say, “Oh, actually you sent me that document. Yes, I signed it, but I didn’t read it very well, and in fact, we had a discussion before you told me something different.” In fact, I was doing a case about that very recently. There are legal routes where you can say you can’t now rely on the contents of that agreement. There are estoppel arguments and things like that. Generally speaking, that will be incredibly hard. So, if you have a signed document, almost in all cases, that’s what will govern your relationship.

Anthony Rose: Okay. Alright. So, let’s say you’ve got your signed document and you’ve got a dispute. What are your next steps as the founder in this case?

Iain Quirk KC: Have a look at those documents. They might say if there’s a dispute between the founders, it is resolved in the following way. It might also say that the direction of the company or decisions about how founders should leave and on what terms are resolved in the following way. Obviously, that then answers it, and you can follow that route. If there are disputes about that, then you then get to what you do about a legal dispute and whether you go to court or not.

Let’s assume the contract doesn’t deal with it. That’s not unusual. It’s quite difficult to provide in advance for every situation. It’s also difficult to provide for a situation where, let’s say, you have two founders each with 50% of the equity and 50% of the voting rights. There aren’t any provisions that say, “Well, I can throw you out or I can reduce your equity.” You can find yourself at a stalemate. Basically, you can’t do anything; the company is stuck.

Your options then are to try and get some sort of external assistance with resolving your dispute. The thing that people underuse, in my experience, in this type of dispute is mediation.

Mediation is an external person who will come in and give a non-binding view on the case after listening to both parties. That can be really effective in trying to resolve a dispute because it takes the emotion out of the two founders.

That’s always something to think about. The other is that you could end up in court with one of you saying either that your position as a shareholder is being prejudiced or various other legal remedies. You’re seeking a legal remedy from the court. But in this type of situation, a court-based remedy is very unlikely to be a proper solution for you.

Anthony Rose: It’s unlikely to be a proper solution because it’s expensive and it won’t lead to the outcome you want. It will lead to a random outcome, or the judge will go, “I don’t have the solution here. Figure it out yourselves.”

Iain Quirk KC: All and any of the above. Most of the agreements we’re talking about, if we’re dealing with UK parties, will probably have an English court jurisdiction clause. That’s usually the standard for this type of case. To get to court, we’re talking a year and a half before it actually gets to trial.

Anthony Rose: Right? So, the company is basically dead by then because you’re in the middle of a dispute. No investor is going to invest. So, that’s kind of terminal already.

Iain Quirk KC: Exactly. So, just because of the time it takes, it is never a solution for that reason. Even if it were, the cost of it is prohibitive. These are expensive proceedings, and most companies and founders don’t want to spend that sort of money on these proceedings.

The third is that litigation in court, given the length of the proceedings, is just really uncertain. You can get advice, and as a barrister, I can give advice, but ultimately even in the strongest case, most barristers won’t give a prospects of success greater than about 65% or 70% because you can’t account for all the things that might happen. A document turns up, a witness says something unusual in court, and that kind of uncertainty is amplified by the time it takes to get to court. So, in all practical respects, this type of dispute is not going to find a solution through the courts.

Anthony Rose: Okay. The first step is to look at the agreements you have signed because often they contain things that are surprising to one or both parties. I had someone come to me a couple of days ago with a founder fallout situation. I always brief my team at SeedLegals, “If you’ve got that, send them my way.” This person’s last round was not on SeedLegals, so it wasn’t our legal documents.

For me, it’s an interesting intellectual exercise to see what will come out when looking at the documents. I’ll be clear: I’m not offering legal advice. This is sort of founder defender advice. The first problem we have at SeedLegals is our client or customer is the company. When there’s a founder fallout, sometimes it’s not clear who the company is. Certainly, if it’s 50/50, we have to say, “Sorry, we can’t help you at all because you have to figure out which of you is still the company,” and then we can help them. If it’s the two directors and one has left, and the disputes are then clearer.

So, in this particular example, the first thing you should do if you have a dispute is to look in detail at the relevant agreements. You might look at it yourself as a first pass to have a basic overview of where to look next, and you might want to engage a lawyer to do it. In this particular case, when there’s a founder fallout and someone’s a leaver, often the legal agreements will say that the departing person’s shares become non-voting shares, and they lose any director position. So, if the person’s designated as a leaver, the fact that they had 25% equity and could block votes is now sort of resolved because they have non-voting shares, which is fantastic. Always take a look.

Another important point is if there is a founder dispute, it may well go to the board, and the board could then fire somebody. But can you, if you’re a director, represent yourself on the board? Under the Companies Act, and you’re the barrister, but in the model articles, Article 18 if I recall correctly, it says that a conflicted director cannot represent themselves on the board, which is really, really bad. So, when you do a funding round, the BVCA articles or the articles created on SeedLegals will have a message wording to say Article 18 of the model articles does not apply, and you can represent yourself on the board.

It’s those little nuances that are super important. You need to do your homework to find out if you are the conflicted party, what rights you really have because that will determine your next steps.

Let’s go to mediation. Mediation is kind of like therapy, right? It’s non-binding. You’re going to go to somebody. Tell us how it works, how much it costs, and can you do this on Pinq Dr in a new kind of way?

Iain Quirk KC: Yes is the short answer to that. Is it therapy? I think most mediators would say that’s not the best way to approach it. When you’re dealing with founder disputes, they are very emotive. They might be friends, might have been together for a long time, both invested in the company, and their friends and family might be involved, incredibly emotional for all sorts of reasons.

Whilst it might seem like you need someone to give therapy, the best way to resolve any dispute is to take out the emotion and look at it in a dispassionate, principled way. The best example I saw was a case with an investment banker against his bank. He saw it as a trade. He saw it as, “This is how much it’s going to cost, this is how much I might recover, this is the time it’s going to take,” and worked it in a principled way. The same should apply to every single dispute.

Going into mediation, the best approach is to think, “What is it that I want? What is the outcome I am after? What are my parameters, and where am I willing to move?” The best mediator will find that centre ground where each side is willing to move but may not want to say that outwardly because it feels like giving up something. The best outcome is both parties come away thinking, “I’m not quite happy with that, but I’ll make do.”

The mediation process can be in-person, where the mediator shuttles between two rooms, or it can be done online, exactly as we’re doing now. You have breakout rooms, and the mediator shuttles between virtually, which is much more convenient these days. That can be really effective, particularly in situations where both parties are stuck. It’s not like one party can say, “I’m happy to sit with this unhappy situation.” It doesn’t suit anybody. Everybody wants a solution. Mediation can be really effective there.

Anthony Rose: All right. And how long does it take? How much does it cost, typically?

Iain Quirk KC: Mediation doesn’t take long. It shouldn’t cost a lot. Really, the cost is simply the time of the mediator, which obviously depends on the person involved. It shouldn’t really cost very much money at all. In terms of timing, normally there’s an exchange of what’s called position papers. You say this is why I’m right, I say why I’m right, and then we have a few hours or perhaps even up to a day with the mediator to do that shuttle position.

Anthony Rose: Yeah.

Iain Quirk KC: Now, that mediation process can be elected for once the dispute has arisen. You can say, “Look, Anthony, we’ve got this issue. I think we should have this resolved with a mediator,” and that’s fine if we agree. The difficulty of doing it at that stage is that often if I propose something, you’ll disagree because by that stage we’ve fallen out, and it’s much more difficult for parties to agree. Going back to the contract, if you can think about what goes in those final few clauses, there’s always a jurisdiction clause. Typically, it says English court. Think about that clause and consider making the first step mediation, then a quick binding solution that provides a real solution in good time, not one that takes a year and a half through the courts because for this type of dispute that’s never going to work.

Anthony Rose: Okay. I always think of legal contracts like the manual in your car. You’re driving in the countryside, the car breaks down, you open the manual and hope it has a solution. I get personally pained when I see founders looking in an agreement of ours and it not having the solution to that particular problem.

The most common contentious issue is definitely founder fallouts. Actually, since we met and had this discussion, I want to see if we can add to SeedLegals provisions to include an option for mediation and/or arbitration. Let’s jump in with an example. We’ll cover vendor and supplier disputes in a few minutes. The usual example is something like there’s a founder fallout. Let’s say everything is beautifully covered legally. The founder had 30% equity, they’ve been there for a year, it’s vested over 3 years, or let’s say they’ve been there for 2 years, so they now have got 20% equity.

They’re going to investors in a new round, and the investors are saying you have to get rid of this existing founder or reduce their equity because we’re not going to invest if there’s 20% of non-working equity. So they now want to reduce it. The problem is the founder with some equity says, “I put years of my life into this. You can’t just remove it or take it away.”

One thing I remind people is the nuclear option. People often suggest, “I’m just going to shut down this company and make a new one.” I explain that the whole point of a nuclear option is to have the option but not actually use it because shutting a company and making a new one comes with no end of trouble. From SEIS and EIS to the founder that now has nothing and sees you starting a new company, they might look in the agreement and see that’s in breach of the previous agreements. So, talk us through just before we get on to mediation and arbitration, what sort of nuclear options might exist. Can I close this company and make a new one? I know it’s slightly different from this theme, but this is something everyone is thinking about.

Iain Quirk KC: You’re right. The nuclear option is always to wind up the company, and there are mechanisms to do that. There are various grounds on which you can seek the winding up of a company, including on the just and equitable ground, which means there’s been a complete falling out, and the company is no longer operating as intended.

The difficulty with that is, firstly, the process needs a court process. So, you’re into the courts. Secondly, it doesn’t deal with all the pre-existing parts of the company. For example, IP, which can often be very central to startups. What happens to the IP? What happens if a new company is established to run something similar? It becomes very complicated. If one of the founders sets up a company doing something similar, is that in breach of the covenants in the contract? It is a nuclear option that needs very careful thinking before exercising. But, with all legal remedies, the better line to take is to say, “This is what we could do and what would happen.”

Just going back to the court jurisdiction provision, in some ways having a court jurisdiction clause is great because you can say to the party, “If you don’t do this, we’ll start court proceedings that will take forever. It will cost you this much; it will be awful for you.” The trouble is it’s awful for you as well. Much better to be able to say, “If you don’t do this, we have a mediation provision which will mean you have to come to mediation,” or, “We have a dispute resolution clause which will resolve our disputes in a very short time.” Then you’ll have a decision against you in a very short space of time.

Including, I should add, that the winding up process could be heard via a short arbitration. It doesn’t have to go through a full court proceeding. So, nuclear is there, but be very careful about exercising it.

Anthony Rose: Okay, cool. So, mediation—what percentage of the time do you think it gets a resolution that parties ultimately agree with?

Iain Quirk KC: If parties go into mediation voluntarily, not forced into it, the success rates are good. Something like two-thirds of disputes that go into mediation will result either in an agreement on the day or in the time that follows because the parties have been brought closer together.

Anthony Rose: I think the mediator explains when they take them into different rooms why each of them is going to absolutely lose the case. “You’ve got no grounds to stand on. It’s terrible,” and then tells the other side that. Then both parties go, “Oh my God! I didn’t realise it was so bad for me. I better agree to something halfway.”

Iain Quirk KC: Yeah, definitely.

Anthony Rose: Mediation on its own is non-binding, but you could make it binding by saying in the agreement that the first port of call is the parties will go to a mediator and accept the outcome. Is that something you can do?

Iain Quirk KC: Yes, you can provide for a binding arbitration procedure. Mediation will always involve a mediator saying, “This is what I think you should agree,” but the parties ultimately have to agree. However, you can provide for a binding procedure in a quicker time. This is what Pinq Dr does. You can provide for a procedure which means neither party goes to court but goes through an arbitration process, which is akin to a court process but much quicker. Both parties say, “This is why I’m right,” they exchange views, and you could have a short Zoom hearing with an arbitrator. The arbitrator then produces what’s called an arbitration award, which is like a judgment, binding in exactly the same way as a judgment but much quicker. We’re talking months rather than years and it achieves the same outcome.

The advantage of that is not only the process itself but also, if you have a clause like that in your contract or a mediation clause, you can say to the party, “If you don’t do what I’m asking, I can get a remedy in a matter of months. It won’t put the company out of business.” The other side loses the ability to say, “There’s nothing you can do about it because the court will take so long.”

Anthony Rose: So, the mediators and arbitrators are ex-lawyers, ex-judges? You can find them on your site, but otherwise, you look up online, Googling for an arbitrator in London or something like that?

Iain Quirk KC: Yeah, exactly. Arbitrators are almost all lawyers. They may be in practice or may have stopped being in private practice and now just be full-time arbitrators. They can be ex-judges. Some of these people also sit as mediators. There’s a crossover sometimes between those two sets of people, but essentially they are neutrals who know something about the relevant law of your dispute. So, if it’s an English law dispute, typically they’ll be an English lawyer.

To find them, usually you want to go to a recognised institution or place to find an arbitrator. Yes, you could search on the Internet, but like searching for anything, you might come up with all sorts. Generally speaking, we have a list of arbitrators, but various other institutions have lists of arbitrators.

Anthony Rose: Okay. So, we’ve got a couple of interesting questions. The first one is probably more for me: If you have a departed founder, what percent equity is it okay for them to still hold to not be objectionable to later investors? It’s a difficult one. It’s a double-edged sword. If you’re a founder who has put years of your life into a company and ultimately, maybe you’re ill and there’s no real fault, you leave and you’ve got 25% equity. You’ve really earned that. An investor who put money into the business, the money’s been used up long ago, and they’ve still got equity. You’ve put time into the business, so you don’t want to give up your equity. On the other hand, typically, in early-stage companies, if a departed founder has more than 10%, and in super early-stage more than 5% equity, that’s seen as problematic for a company. It’s seen as dead equity, rightly or wrongly.

The real problem is when you’ve got a company, let’s say shares vesting over 3 years. Somebody’s been there for the first year. Not much has happened in the first year, right? If you think about your company over 5 years, maybe you’re 100 or 150 people, and you put 5 years of your life into it, and that’s the point it’s doing 10 million pounds a year in revenue. That’s where the value is. But there’s someone who’s been around for the first year, maybe not even full-time, and they have, let’s say, kept a third of their 50% equity, so they’ve got 15% equity. Maybe it’s been diluted since then, and this is seen as unfair and unwanted. Now you, as a founder, are personally pained by this other person who still has equity, but you’re probably not losing too much sleep over it, just annoyed. Then comes a VC, and they go, “Oh no no! You have to get rid of that person and reduce their equity to 5%.” Now you’re stuck because they are entitled to that. It’s quite late in the game, you’ve got a thriving business, and you can’t just shut it down and make a new one. You’ve got few options available. Are there any options? What offer can you make to a founder in that case, or is it really an intractable problem?

Iain Quirk KC: Well, there isn’t an obvious solution. It’s a solution you need to try and work out, whether that’s between you taking emotion out, finding a solution, or involving a third party. There can be legal claims; it depends on what the agreements say and what you’ve agreed. But typically, it is something you need to resolve without court involvement. It’s not going to be something that gets a neat solution from the courts.

Anthony Rose: Okay. The next question is not atypical. You’ve got a founder dispute, and you want to resolve it, but you keep writing to the departed founder, and they never respond. You want to do resolutions, they don’t respond. Sometimes their vote is needed because they’ve got more than 25% equity and you need that to waive preemption, and sometimes not. What now? Legal agreements may sometimes have provisions that they’ve lost their voting rights, or on SeedLegals, we have “you snooze, you lose” provisions. We say if you don’t reply within 15 business days, your agreement is deemed given. What can you do if someone just never replies and may not even respond to a mediation request?

Iain Quirk KC: This is a key area where it’s important to have something in your contract because it makes your life much easier. If you haven’t got something in your contract like a “snooze, you lose” provision and the party is not responding, which is not untypical at all, as they may want to disrupt the running of the company, there are a few options. Mediation is not going to work there because this is a deliberate non-engagement. Option number one is to seek an injunction, either through a court or an arbitral process, either within Pinq Dr or something akin to it, or in court. You can seek an order that requires that person to act or an order that the court deems that step to have been taken. We see that a lot. One of the cases I’m doing at the minute is exactly that. There is deliberate non-responsiveness by the other party, and my clients are seeking an order from a tribunal that the party do as they’re required to do. Again, it goes back to whether you want that from a speedy process or something that will take a long time. That’s typically where the OP clause is very useful or something like it.

Anthony Rose: That’s super interesting. How long would it take to get that court order?

Iain Quirk KC: From Pinq Dr, you’re talking 6 to 8 weeks. From court, it depends. If you’re able to persuade the court that this is required urgently, you’re talking a couple of months. There’s usually a return date which means you come back for a follow-on hearing. You don’t do it without taking advice. Court injunctions can be involved proceedings, and there are specific rules. You might see over my shoulder the White Book, which are the court procedure rules. You don’t want that. You want a procedure that has narrow rules that are simple to understand. If you’re going to court, take some advice.

Anthony Rose: I’m delighted you have court procedure rules as your Zoom background. That’s not every day! So with arbitration, I’m sure everyone’s thinking, “Okay, but what if it gives the answer I didn’t want? Wouldn’t a court thing be better?” Take us through that process.

Iain Quirk KC: Whether you go through a court process or a Pinq Dr process, the decision you get at the end is a binding decision, a final binding decision. There are limited grounds to appeal both within a court and within the Pinq Dr process, but they are very limited. You are signing up to a process which is final and binding. In most instances, that’s what you want. The last thing you want is a process that goes on and on with opportunities for both parties to say, “I’m not happy with that. I want something else.” Ordinarily, what you want in these disputes, if you can’t reach an agreement yourselves, is to say, “We hand this to a third party, a neutral, who will hear what we’ve got to say in a fair way and then make a decision so we can all move on with our lives.” The cases where that has not happened and where there have been multiple levels of appeal are very unhappy sets of circumstances for everybody. No one wins.

Anthony Rose: How does the arbitration process help with the non-responsive party? If they don’t pitch up, does it proceed without them, or does it need to wait on them?

Iain Quirk KC: It goes ahead without them. The arbitral rules say that if one party isn’t responsive, the arbitrator can proceed just in another way.

Anthony Rose: Okay. I’m guessing applying for a court order also helps with the non-responsive party because then they are forced to respond, or they just have something that goes against them, presumably.

Iain Quirk KC: Exactly. If you’re not there, whether you’re in a big deal or not, you’re not going to do tremendously well usually.

Anthony Rose: Okay, cool. Anything else on the founder side of things? Otherwise, I’ll hand over to you to talk about vendor and supplier disputes. What are the most common ones?

Anthony Rose: With founders, it’s a lot more emotional. With vendors and suppliers, it’s just business, right? Our widgets didn’t work. We want our money back. We won’t give you the money back. The amounts are probably often more modest. It’s not like you’ve got a third of my company. Bastard. So, take us through the most common things there.

Iain Quirk KC: The most common issue you’re going to find as a small business or startup is non-payment of debts. That’s 99% of the type of dispute you’ll have with suppliers and customers. Of course, that can strangle the company. Cash flow is incredibly important, and non-payment of debts can be massively problematic.

In many ways, the advice is similar. Number one, look at the contracts you have entered into. But perhaps even before that, think about the contracts you are entering into. Depending on who your counterparty is, you may not have very much bargaining power, and sometimes you have to sign up to terms you don’t particularly like but do it because you want the business. That might include very long payment terms, which can be difficult but sometimes necessary. Try to negotiate good payment terms and think again about the dispute resolution clause. If there’s something in there, look at it. Many people don’t get that far in the contract, but it can make such a difference. You want a mediation clause and something that deals with your dispute quickly. If you simply have a court clause, it’s not going to provide any solution at all because by the time you’ve gone through the court proceedings, you’re out of business.

If a dispute has arisen, say you’re owed a debt and it hasn’t been paid, pick up the phone. I suggest doing that rather than engaging lawyers. Don’t immediately instruct a lawyer to send a letter because as soon as you do that, everybody’s guards go up, you get one back, and then you’re in a legal process that will take a long time to resolve.
Try to resolve it informally and amicably at that stage. Keep a log of all the communications you have. If you have a phone call, once it’s finished, send an email to the supplier or customer saying, “This is what we discussed, and this is what you said.” It’s so important to have a record because otherwise, if it comes to a dispute later, it’s your word against theirs.

Also, don’t write anything down you wouldn’t be happy to have read out in open court or in an arbitration or mediation process. Don’t write vitriolic emails. Keep it measured, straightforward, and rational. Take the emotion out, explain why you’re right, and don’t write anything you wouldn’t be happy to have read out in open court.

Anthony Rose: This includes internal communications because they could be obtained under discovery later, right?

Iain Quirk KC: Yes. WhatsApp messages, text messages, anything written, handwritten notes—all of that can ultimately be produced. Do write things down to record what has happened, but bear in mind that it might be read out in open court later.

Anthony Rose: That is an excellent point. I discovered this about 20 years ago when I was working with Kazaa, the music file-sharing company, and they got sued. All the emails were obtained under discovery, and my emails were read out in court. Since then, every time before I hit send, I think, “Would I be happy with this being read out in court?” If not, I don’t write it.

Anthony Rose: What’s apparent here is the value of having mediation and arbitration clauses in agreements. It’s surprisingly infrequent that they’re included. Is that the case?

Iain Quirk KC: In startup disputes and small business contracts, yes. It is unusual. You see them in higher-value contracts where arbitration has become more prevalent than court. For example, energy contracts, mining, and big infrastructure projects typically have arbitration, often for reasons of confidentiality and because it’s more flexible, quicker, and can be cheaper depending on the process.

In these kinds of disputes, people just don’t think about it. If you’re a startup entering into an agreement with a new supplier or client, the last thing on your mind is what happens if it goes wrong. So people don’t think about that.

Anthony Rose: Whenever I sign contracts at SeedLegals, I look at two things. What’s the maximum upside if things go well? But actually, that’s not that important to me. The biggest thing I always focus on is what’s the downside if things don’t work? If someone has a contract with a 30-day termination date and the maximum liability is the amount one party paid to the other, it’s easy to sign. But if it’s got warranties, disclosures, and director’s personal liabilities, with no cap, and it’s a multi-year contract, then it’s much harder to want to sign it. My colleagues in the marketing team might focus on the upside, but I always jump to the termination clause. What gets me out if things don’t go well, and what am I liable for? If it’s a month’s worth of payment, it’s not the end of the world. But if it’s personal liability and a year’s worth of payments, that’s probably not going to happen.

Iain Quirk KC: I completely agree with that. Looking at the clauses to see your maximum downside is something we at Pinq Dr offer now. We look at your contract and say, “This is your downside risk.” It’s so important to consider what happens if things go wrong because sometimes they do.

Anthony Rose: What if one of the parties is not in the UK? If it’s a European supplier or US supplier, does that change things? And sometimes your supplier will send you their agreement, which will be under French law, Delaware law, or something like that. How important is it to get English law and English courts as opposed to someone else’s?

Iain Quirk KC: In cross-border contract situations, arbitration has been very popular for one main reason. An arbitral award, including a Pinq Dr award, is known as a New York Convention award. This means it’s an award under an international convention called the New York Convention, to which 160 countries have signed up. These countries have agreed to enforce an arbitral award as if it were a judgment of their own courts. There is no equivalent for court judgments. An English court judgment, for example, has very few countries with which the UK has reciprocal treaties for enforcement.

A well-known arbitrator once said that for international contracts, arbitration is the only game in town. The other reason arbitration is often chosen is because if your counterparty is in the US or France, they may prefer their own courts. Arbitration gives you the option to avoid national courts and have the dispute resolved pursuant to US law or another jurisdiction, seated in a neutral location. This can be done via a Zoom hearing or in any location.

However, this doesn’t mean arbitration is always the answer. In some cases, a French party, for example, may insist on French law, and you may have no choice but to agree, especially if you lack negotiating power. In such cases, hope nothing goes wrong, and if it does, seek French legal advice.

Anthony Rose: If a bigger company insists on its choice of law, there’s little you can do other than walk away. What about small claims court? When can you go there? Would that work with a founder dispute? What’s the maximum you can take to small claims court? Can you have an agreement that says you’ll go to small claims court first?

Iain Quirk KC: The small claims court in England and Wales deals with claims up to around £10,000. You can’t contractually mandate that all disputes go to small claims court; it’s determined by the value of the claim. Small claims court can be advantageous because it’s usually quicker, but last year, the average time from issue to decision was about a year. Additionally, the decision-maker can be quite variable, leading to greater uncertainty. For higher-value claims, you’ll have more consistency in the High Court.

Anthony Rose: If it’s a £5,000 dispute, it’s not going to kill your business. You’ll be annoyed but can handle it. What advice would you give to anyone on the call when creating a new contract or dealing with an existing contract? Are there three key things to do or avoid?

Iain Quirk KC: There are probably more than three, but here are the top three:

1. Treat your contract seriously. The temptation with growing businesses is to sign whatever comes your way because it’s exciting to have new deals and suppliers. Carefully review contracts, focusing on dispute resolution provisions. You want provisions that provide a real solution, not just an English court clause that won’t help much in these disputes.
2. Keep a record of everything. You’d be amazed how many people don’t. Having a written record of your interactions and agreements is invaluable in proving your case. Documents win cases.
3. Always take legal advice when things are heading to court or problems arise, but generally, it’s better to have a frank commercial discussion rather than focusing on legal rights. Emphasise the rational, commercial reasons why a resolution is needed. For example, if you’re a small company, explain that non-payment affects your ability to provide services. This is often more effective than threatening legal action.

Anthony Rose: Understand your legal position by reviewing the contract, as it affects your strategy. If you can appeal to emotions, particularly with vendors and suppliers, it’s often effective.

Iain Quirk KC: Absolutely.

Anthony Rose: Lastly, about founder fallouts. They are the most common and emotional issues. If you’re representing the company and there’s a founder dispute, you might feel they should lose their shares. But company law protects both parties, preventing a company from just taking shares away. You could issue more shares and dilute theirs, but there’s the concept of shareholder oppression. Can you talk about the checks and balances and how that might play out?

Iain Quirk KC: Company law has evolved to protect both parties. If someone owns shares, they generally can’t just be taken away. Issuing more shares to dilute theirs is possible but must be done carefully to avoid claims of unfair prejudice. This concept protects minority shareholders from actions that unfairly disadvantage them. If a founder believes they are being treated unfairly, they can bring a claim, leading to potentially lengthy and costly legal battles. It’s essential to seek legal advice before taking any actions that might be seen as oppressive.

Anthony Rose: Thank you. That’s a great wrap-up.

Iain Quirk KC: What you’re really touching on there are the protections for minority shareholders. The most obvious one is something called an unfair prejudice petition, which means there has been some conduct that is unfair to you as a minority party in the company. This might include being excluded from decision-making, the direction of the company being contrary to your interests, or being diluted in an unreasonable way. It could also include the company being run to benefit the family of your co-founder or extreme cases like fraud and diverting assets out of the company. You do have remedies, whether in arbitration or in court, and you shouldn’t feel like you don’t.

Anthony Rose: Okay, thank you. So how can people get in touch with you, Iain?

Iain Quirk KC: You can get in touch with me at Pinq Dr. If you want to email me, please do at [email protected]. That’s Pinq with a Q.

Anthony Rose: All right, and I guess on LinkedIn as well. You know where to find me: [email protected], or hit the SeedLegals web chat, or on LinkedIn: Anthony Rose. I hope this was helpful. My goal is to be here when things are going well and when not well. I’m delighted to see other things we can do to help improve documents by providing arbitration and mediation provisions.

By the way, if somebody is doing a document, is there some wording that you can provide that we can share for them to suggest putting into any document? Like two paragraphs about mediation and arbitration. If there’s not such a provision, that would be great. We can put that on the page alongside this video afterward.

Iain Quirk KC: We can definitely do that. We’ll provide that to you.

Anthony Rose: Amazing. Thank you, everyone. I know joining a call on mediation is not something you’d ordinarily do over lunch, but I hope this was valuable and will provide advice for if/when things don’t work out. Thanks, everyone.

Iain Quirk KC: Bye bye.