Contract problems rarely arrive neatly labelled. They arrive as a late payment, an invoice for extra work, a supplier’s angry email, a disputed delivery, a customer claiming something was promised, or a site instruction nobody remembers giving. The first reaction is usually about the symptom: is the amount reasonable, who is right, how annoyed are we? The real question is often somewhere else.
Law students learn a simple method for working through legal problems called IRAC: identify the Issue, state the Rule, Apply the rule to the facts and reach a Conclusion. Its value is that it stops two common failures: repeating facts without analysing them, and quoting rules without applying them to the situation. For a business owner or manager, the same discipline, with a few additions, turns a messy commercial problem into a decision that can be explained and defended.
This article describes an extended version of that method for business use, shows how to separate the strength of a legal position from the best commercial response, offers a one-page decision brief, and explains how to set up projects and sales so fewer problems arise in the first place. It is general information, not legal advice. The method helps you think clearly and brief a lawyer well; it does not replace advice on significant matters.
Symptoms and issues
Commercial problems become expensive when symptoms are mistaken for issues:
- A contractor claims extra payment. The instinct is to argue about whether the amount is reasonable. The real issue may be whether a valid variation was ever made.
- A losing bidder complains about a tender. The instinct is to defend the winning price. The real issue may be whether the tender documents promised a process that was not followed.
- A supplier says a verbal assurance changed the deal. The instinct is to compare memories. The real issue may be what the written contract says about earlier discussions, and what can actually be proved.
Many problems also contain several questions at once. A payment dispute may involve scope, authority, evidence, timing and remedies. Separating them is the first step to resolving them.
An extended method for business problems
Seven steps work well for most commercial problems:
| Step | Question |
|---|---|
| Issue | What exactly must be decided? State it as one precise question. |
| Rule | What contract clause, policy, legislation or legal principle governs it? |
| Evidence | What facts can actually be proved from records? |
| Application | How does the rule apply to those facts? |
| Alternatives | What other reasonable interpretations exist? |
| Consequence | What happens to cost, time, relationships and reputation under each option? |
| Decision | What should the business do now, and what advice is needed? |
The first four steps are the traditional method. The last three connect it to business reality.
State the issue precisely
“There is a dispute with the plumber” is not an issue. “Is the plumber entitled to be paid for rerouting pipework that was not in the original scope?” is. A precise question tells you which rule to look for, which evidence matters and who needs to be involved.
Find the rule
The governing rule is usually in the contract first: a clause about variations, payment, acceptance, delay, notices or termination. It may also be in a purchase order’s terms, a quotation’s conditions, an internal policy, legislation or general legal principles. In the construction industry, for example, every state has security of payment legislation that sets out how payment claims and responses must be handled, with strict time limits. Know which documents form the contract and which rules apply before forming a view.
Separate evidence from memory
In a dispute, what matters is what was communicated, documented and done, not what someone intended or remembers. Sort facts into two lists:
- Established: supported by emails, signed documents, site diaries, photos, delivery dockets, invoices or payments.
- Uncertain: disputed, missing or based only on recollection.
The uncertain list often shows exactly where the problem lies, and what additional evidence might resolve it.
Test the label
It is tempting to grab a familiar label: “that’s a breach”, “they’re trying to bully us”, “that’s misleading”. Labels feel decisive but may be wrong. A claim for extra payment might involve variation, authority, an agreed change in price or something else entirely. Before acting on a label, ask whether another explanation fits the facts better. Reaching the conclusion first, then selecting evidence to support it, is the most common way businesses talk themselves into bad positions.
Legal strength and commercial sense are different questions
A strong legal position does not automatically mean the best response is to insist on it. A legally sound rejection can still be commercially poor if it:
- damages a relationship with a supplier the business depends on;
- costs more to fight than the amount in dispute;
- sets a precedent that causes problems on other jobs;
- delays work the business needs finished;
- consumes the owner’s time and attention.
The opposite is also true. A convenient compromise can be unwise if it rewards behaviour the business cannot accept repeatedly or creates an inconsistent precedent.
A useful habit is to rate each option on two separate scales:
- Legal confidence: how strong is our position on the rules and evidence?
- Commercial attractiveness: how good is this response for the business overall?
Keeping them separate stops a strong legal position from automatically becoming a decision to escalate, and stops a desirable outcome from being mistaken for a strong position.
A one-page decision brief
For any significant contract problem, write a single page:
- Decision required, in one sentence.
- Governing rule: the clause, policy or principle.
- Established facts, with their sources.
- Uncertain facts: what is disputed or missing.
- Competing interpretations: the strongest case for each.
- Options and consequences: accept, reject, negotiate or escalate, and what each would mean.
- Recommended action and any advice needed.
A brief like this lets the owner see not only the recommended answer but how good the answer is. It also makes a lawyer’s time far more productive, because the question and the facts are already clear.
Prevent problems: commitment points, authority and records
Many contract problems begin long before anyone realises it. A project starts before the contract is signed. A site supervisor approves a change by text message. A salesperson promises a delivery date. Two sets of standard terms are exchanged and nobody resolves which applies. By the time a dispute arises, the important events have already happened.
Five questions help prevent this:
| Question | Why it matters |
|---|---|
| Authority | Who can commit the business, approve changes, accept work and settle claims? |
| Commitment point | What event turns a discussion into an obligation: a signature, an order, an email, starting work? |
| Records | What will show what was agreed, by whom and when? |
| Escalation | Which decisions must go to the owner or an adviser before being made? |
| Dispute path | If disagreement arises, what happens: discussion, escalation, mediation, adjudication, court? |
Good records are not bureaucracy. They are the business’s memory. The when a conversation becomes a commitment article covers how agreements form and change.
Know your dispute options
Not every disagreement needs lawyers and courts. Common options include:
- Direct discussion between the people involved, then between more senior people.
- Mediation, where a neutral person helps the parties reach agreement. Several states have small business commissioners who offer low-cost mediation, and the Australian Small Business and Family Enterprise Ombudsman provides dispute support.
- Expert determination, where an expert decides a technical question.
- Adjudication under security of payment legislation for construction payment disputes.
- Arbitration, tribunals or courts for disputes that cannot be resolved otherwise.
Many contracts set out a required dispute process. Follow it, because skipping steps can weaken a position.
A worked example
This is an illustration. A small commercial builder receives an invoice for $18,500 from a plumbing subcontractor for “rerouting pipework around the new beam”. The owner’s first reaction is that the amount is far too high and should be rejected.
The owner works through the method instead:
- Issue: is the subcontractor entitled to payment for the rerouting, and if so, how much?
- Rule: the subcontract says variations must be directed in writing by the builder’s site supervisor or project manager, and valued using the schedule of rates where possible.
- Evidence: the site supervisor sent a text message saying “go ahead and reroute around the beam, will sort out cost later”. The site diary records the work over three days. The subcontractor’s invoice lists hours and materials.
- Application: the text message is written, came from the site supervisor and directed the work. A valid variation probably exists. The amount should be valued under the schedule of rates.
- Alternatives: the subcontractor may argue for its own rates because the work was urgent; the builder could argue some of the work was already in scope. The drawings show the rerouting was not in the original scope.
- Consequence: rejecting the invoice outright would likely fail, damage a relationship with a reliable subcontractor and, if the claim is made under security of payment legislation, start strict time limits for a response.
- Decision: accept the variation in principle and value it under the schedule of rates.
Valued at the agreed rates, the work comes to $12,300. The subcontractor accepts after reviewing the calculation. The owner then fixes the underlying problem: site supervisors are reminded that directions must include an agreed price or a statement that the schedule of rates applies, and a simple variation form replaces text messages for changes above a set value.
How this applies to a small Australian business
Small businesses often handle disputes reactively, through emails and phone calls. A little structure helps a great deal:
- Write the issue as one precise question.
- Find the governing clause before forming a view.
- List established and uncertain facts separately.
- Test the label you are tempted to use.
- Rate legal confidence and commercial attractiveness separately.
- Use a one-page brief for significant problems, and share it with your lawyer.
- Clarify authority, commitment points and records on every project.
- Know your dispute options, including small business commissioner mediation, and follow the contract’s dispute process.
- Act quickly on time limits, such as those under security of payment legislation.
The articles on when a contract is broken and matching the contract to the work cover remedies and contract design.
Signals worth watching
- Long email chains that never state the question being argued about.
- Conclusions reached before anyone checks the contract.
- Meetings spent debating facts that records could settle.
- Legal labels used without evidence.
- Work starting before terms are agreed.
- Changes approved by text message or verbally.
- Two parties’ standard terms in circulation with no agreement on which applies.
Common mistakes
- Arguing about the symptom instead of the issue.
- Deciding first and finding evidence later.
- Relying on memory instead of records.
- Assuming a strong legal position means the best response is to fight.
- Missing time limits in contracts or legislation.
- Leaving authority unclear until a dispute exposes it.
Frequently asked questions
Do we need a lawyer for every contract problem? No. Many problems can be resolved with clear thinking and good records. Get advice when the amount or consequence is significant, the law is unclear, time limits apply or the other party has involved lawyers.
How do we brief a lawyer efficiently? Give them the one-page brief, the contract and the key documents. A precise question and organised facts save time and money.
What if the contract does not cover the situation? Then the general law and the parties’ conduct become more important. This is a good time to get advice, and to fix the gap in future contracts.
What is security of payment legislation? Each state and territory has laws giving people who carry out construction work a fast process for claiming progress payments, with strict deadlines for responding. If you are in the construction industry, learn the rules in your state.
How do we stop disputes recurring? Look for patterns: the same kind of problem, the same unclear clause or the same communication habit. Fix the cause, such as an authority rule, a form or a contract clause.
What if the evidence is mostly on the other side? Then the method has done its job early. Consider whether a negotiated outcome is better than a weak argument, and use the experience to improve your records and authority rules for future work.
Questions to ask
- What exactly are we being asked to decide?
- Which clause or rule governs it?
- Which facts are established, and which are assumed?
- What is the strongest argument against our view?
- What are the commercial consequences of each option?
- Who in our business can commit us, and do they know their limits?
Bringing it together
Contract problems are easier to resolve when they are framed as precise questions and worked through in order: issue, rule, evidence, application, alternatives, consequence and decision. Keep legal confidence and commercial judgement separate, use a one-page brief for significant matters and know your dispute options. Above all, prevent problems by clarifying authority, commitment points and records before work starts. The strongest decision is the one that can show its reasoning.
Source: KEVOS notes, drawing on teaching material on the IRAC method of legal problem solving and on the legal environment of projects. Examples and figures in this article are illustrations. This article is general information, not legal advice.
