Focus on Manufacturing | Irwin Mitchell | An Inside Job

The existential threat from within a business – be it the ill-advised or even unscrupulous actions of its employees – poses possibly the greatest danger to that business’ reputation and prosperity.

As well as facing up to the constant challenges posed by competitors, customers and regulators, manufacturing businesses must also be unyielding in policing the actions of their employees. For one client, an international manufacturing firm, concern about an employee’s actions became the most urgent consideration when it learned that a senior director had misappropriated the company’s products and resold them online for his own profit.

Their situation was made even more precarious as, prior to the directors’ dismissal on the grounds of gross misconduct, a major customer had learned of the subterfuge and made clear that they would take their business elsewhere unless the director was removed from his position. This would have devastated the company’s order book and so our client’s hand was forced in needing to take swift and decisive action to remove the director whose position had become untenable. Our employment law experts were able to assist in implementing the company’s disciplinary process and removing the director from his position before engaging our specialist litigation team in respect of the shareholders’ dispute which followed.

Initial investigations into the directors’ deceit – including CCTV evidence from the company premises - yielded further evidence of various thefts from the company and our team acted rapidly to successfully apply for an injunction which ordered the director to deliver up a number of incriminating items and documents including information he had been seen removing from company computers on a USB stick. A forensic IT specialist was engaged to look into what had been removed and, on the strength of the evidence obtained under the injunction, the director acquiesced.

He entered into a settlement agreement on terms highly favourable to our client which included the buy-back by the company of the director’s shares. Having successfully removed the corrupt director from his position, our client was able to secure the subsequent sale of the director’s former shareholding to another director, an aspect on which our corporate law specialists advised, and the company is now looking forward to the most successful year in its history and unprecedented growth without the distraction of on-going legal proceedings and without the threat from within posed by the dishonesty of a director.

The importance to the client of a successful outcome could not be overstated. The company’s survival hinged on being able to maintain commercial relationships severely strained by the actions of the rogue director and its exposure to embarrassment within the manufacturing sector, on account of the actions of one employee was significant and potentially very damaging.

Our experienced manufacturing sector team was able to employ a broad portfolio of skills and expertise across specialisms including employment, commercial and corporate law as well as dispute resolution and litigation. The various facets of this matter reinforce the importance of engaging, as early as possible, a legal team possessing the necessary expertise across specialisms, some of which may not appear relevant to the initial dispute.

Considering alternatives in Dispute Resolution

Whether bringing legal action against a supplier, or facing a prospective lawsuit from a dissatisfied customer, manufacturers should accept the potential for legal disputes as an ongoing business risk.

Whilst a company may be hopeful that a potential dispute will disappear, or be resolved before the commencement of legal action, it would be prudent to consider alternative methods of dispute resolution at an early stage. Alternative Dispute Resolution

Whilst companies have traditionally turned to the Courts for the judgment of a neutral third party, commercial organisations have increasingly sought to resolve disputes outside the Court using Alternative Dispute Resolution (ADR). Arbitration and mediation have bec

Some popular alternatives to litigation. Companies engaged in commercial disputes may find that ADR to be beneficial due to reduced time, costs and procedural complexity. Further, rather than being heard in open Court, matters can be discussed privately between parties to protect commercial sensitivities.

The Contract

The first step in considering how to resolve commercial disputes should be to look at whether there is a contract between the parties and, if so, whether it specifies the method of dispute resolution that should be used in the event of a disagreement between the parties. For example, a contract may specify that arbitration should be used to provide a binding decision in the event of a dispute, specify the number of arbitrators and how they should be appointed.

Should a company have a strong preference for using ADR over litigation, it may be worth seeking legal advice on including such a clause in the company’s contracts with third parties.

The ADR Directive

The UK Government is required to transpose the requirements of the EU ADR Directive into national law by 9 July 2015 and the Alternative Dispute Resolution for Consumer Disputes (Competent Authorities and Information) Regulations 2015 have now been published implementing the majority of the ADR Directive. The Regulations aim to ensure that ADR is available (although not mandatory) for any dispute concerning contractual obligations between a consumer and a business. The Regulations provide that businesses who sell their goods or services online will also be required to provide information about certified ADR providers on their websites or sale contracts in some circumstances and, in the event of an unresolved dispute, all business may be required to provide information about certified ADR providers.

Significantly, where an ADR process is on-going, the six year limitation period for commencing litigation will be extended by eight weeks. This extension would give parties further opportunity to resolve their dispute prior to the issue of legal proceedings.

Online Dispute Resolution (ODR)

The ODR Regulation will automatically take effect in the UK on 9 January 2016. The ODR Regulation provides for the establishment of an ODR platform, an online service which offers EU consumers and traders a single point of entry for the out-of-court resolution of online disputes. ADR providers for the relevant national jurisdiction will then be linked with disputing parties to progress with ADR.

ODR has the potential to become a useful tool for parties in settling disputes in a cost effective and time efficient manner. However, the success of ODR is dependent on the ADR framework that it is built on and is a technological extension of current ADR options as opposed to constituting a separate method of dispute resolution.

Where manufacturers are not dealing directly with consumers and are predominantly dealing with other businesses, parties may still consider using online mediation platforms in the event that this would ease the dispute resolution process.

The selection of methods available for resolving commercial disputes will be highly dependent on the circumstances of the individual dispute and it is therefore recommended that manufacturers seek legal advice in considering how to approach dispute resolution.