If your business is struggling, check your contracts - Nicola Ross

The current labour crisis is now an issue across numerous sectors and the CBI has predicted the labour shortages will last for another two years, putting businesses under operational and financial strain.

Nicola Ross is a partner in the commercial litigation team at independent Scottish law firm, Morton Fraser

In some ways, this challenge mirrors some of the issues caused by coronavirus lockdowns. Many companies became unable to deliver what they had committed to, resulting in an increased need for flexibility between buyers and suppliers and a closer look at the precise wording of commercial contracts.

Businesses may now be in a similar place, and if they are, they should review their commitments as a priority. It’s important to review commercial contracts to see whether timings are included in the essential terms of the contract, and whether liquidated damages clauses are included. If a business is likely to breach a contract, liquidated damages clauses can come into play, which can create significant financial pressure.

A breach of contract will typically lead to a dispute between the businesses involved in the contract. If the dispute cannot be resolved quickly or simply, there is potential for it to escalate into litigation which, for a business already at risk of losing a contract, is likely to be an unwanted process.

The CIPD says the proportion of employers with hard-to-fill vacancies has jumped to 47 per cent from 39 per cent. Picture: Christopher Furlong/Getty Images.

It is crucial for any business on the verge of breaching a contract to seek legal advice to review contracts and secure advice on the best recourse, reducing the potential for a dispute to escalate into full-scale litigation.

Often, the best way to address a potential issue with fulfilling a contract is to work with the customer to find a commercially favourable way to work around the issue. This can involve delaying delivery, or delivering and being paid less. If a resolution can be negotiated before engaging in formal proceedings, both businesses are more likely to spend less and maintain a good commercial relationship.

When it comes to a breach, for directors who may already be in financially uncertain waters, they must consider whether the breach could be financially ruinous for the business. This is more often only the case when a major customer or contract is impacted. Again, legal advice is important to guide through the breach as well as potential restructuring considerations.

While interpretation of commercial contracts is one important element for businesses to pay attention to during a labour shortage, they must also consider their roles as employers.

Indeed, many have responded to the shortages through providing hefty signing bonuses, and a report by the Recruitment and Employment Confederation and KPMG shows that UK employers increased starting salaries to record amounts in November to attract talent.

For the employee, particularly those who were previously in lower paid jobs or potentially on zero hours contracts, this is a positive development.

But businesses must consider whether this is sustainable in the longer term. If not, there are other motivators in recruitment and employee retention. For example, employers can improve support for flexible working, or increase holiday time. Improved working conditions could also be the choice between one employer and another for some.

It is becoming clear that we are unlikely to find a silver bullet solution to the current labour crisis within the UK. But for businesses feeling the impact, they should start by reviewing contracts – both commercial and employment.

Nicola Ross is a partner in the commercial litigation team at independent Scottish law firm, Morton Fraser