Is this a contract dispute, or an unpaid invoice?

The distinction matters more than it sounds, because it decides which route you take. If the other side accepts that the work was done and the sum is due, and simply has not paid, that is a debt to be recovered, and the procedure, the costs and the tactics are different. That is dealt with separately on our page about recovering money you are owed. This page is about the other situation: where liability itself is disputed. The invoice is unpaid because the goods never arrived, or the work is said to be defective, or the parties cannot agree what a clause means, or one side says the contract was brought to an end and the other says it was not.

You may have a contract even with nothing signed

Section 1 of the Requirements of Writing (Scotland) Act 1995 provides that writing is not required for the constitution of a contract. A commercial agreement reached by email, on the telephone or by conduct can be perfectly enforceable in Scotland. The main exceptions are contracts for a real right in land, gratuitous unilateral obligations undertaken outside the course of business, and a trust a person declares over their own property.

That cuts both ways. It means a business that never got round to signing the terms may still be able to sue on them. It also means a business may be bound by something said in a meeting or confirmed in a hurried email. The practical question is rarely whether writing exists, but whether the parties reached agreement on the essentials and intended to be bound.

What the contract says, and what was actually agreed

Most commercial disputes turn on interpretation rather than on grand questions of principle. Which document governs, the customer’s purchase order or the supplier’s terms and conditions? Were standard terms incorporated at all, or sent after the deal was done? Was the contract varied by a course of dealing, and did the variation clause permit that?

Where a document genuinely fails to record what both sides intended, section 8 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985 allows the court to order rectification so that the document gives effect to the common intention at the time it was made. Notably, the court is entitled to have regard to all relevant evidence, whether written or oral. That is a real remedy, not a technicality, and it is worth considering before conceding that the paperwork is fatal.

Material breach, and why the label matters

Scots law distinguishes between a material breach and one that is not material. A material breach is one which goes to the root of the contract and gives the innocent party the option of accepting the breach and bringing the contract to an end, as well as claiming damages where loss has been caused. A breach which is not material does not, merely because it is a breach, carry that common-law right to terminate, although damages or other remedies may still be available and the contract itself may contain separate termination rights.

The distinction matters because termination is not risk-free. If a party purports to bring the contract to an end without having a contractual or common-law right to do so, that conduct may itself amount to a repudiatory or material breach. The contract and the seriousness of the original breach therefore need to be examined before termination is treated as the answer.

Withholding your own performance

Scots law’s principle of mutuality can allow a party to withhold its own performance where the obligation it is withholding is the counterpart of an obligation which the other party has failed to perform. Whether that principle applies depends on the relationship between the obligations and on the terms of the contract, which may qualify or exclude rights that would otherwise exist. It should not be confused with the separate right of retention, which can operate as security for future contractual performance. Withholding payment simply because there is some other dispute between the same parties is therefore not automatically justified.

What you can claim

Damages for breach of contract are compensatory. The purpose is to put the innocent party, so far as money can, in the position it would have occupied had the contract been performed. That ordinarily includes losses that flow from the breach and were within the contemplation of the parties, and it can include lost profit where that is proved rather than asserted.

There is not, strictly speaking, a duty owed to the contract-breaker to mitigate loss. The rule is instead that loss which the innocent party could reasonably have avoided will ordinarily not be recoverable. A business which could reasonably have obtained replacement goods or services may therefore be unable to recover losses attributable to an unreasonable failure to do so. Keeping a record of the steps taken in response to the breach can be as important as recording the loss itself.

Making the other side perform

Scots law does not treat damages as having priority over performance. Specific implement is an order requiring a party to perform a sufficiently precise contractual obligation, and unlike English specific performance it is not available only where damages would be inadequate. The court nevertheless retains a limited discretion to refuse the remedy in appropriate circumstances, including where performance is impossible or impracticable or where the order sought is insufficiently precise to be enforced. Where the obligation is negative and the object is to stop conduct rather than compel positive performance, interdict, and in an urgent case interim interdict, may instead be appropriate.

Exclusion and limitation clauses

A well-drafted limitation clause can be worth more than the rest of the contract combined, and it is the first thing a competent opponent will point to. In Scotland, section 17 of the Unfair Contract Terms Act 1977 applies where one party deals on the other’s written standard terms of business. Such a term has no effect, so far as it excludes or restricts liability for breach, if it was not fair and reasonable to incorporate the term in the contract. Consumer contracts are dealt with separately, under section 62 of the Consumer Rights Act 2015.

Whether a clause survives that test is fact-specific. The relative bargaining strength of the parties, whether the term was negotiated or imposed, and whether insurance was available all bear on it.

The five-year clock

Under section 6 of the Prescription and Limitation (Scotland) Act 1973, an obligation of this kind is extinguished if five years pass without a relevant claim being made and without the obligation being relevantly acknowledged.

The word extinguished is doing real work. In England a limitation period bars the remedy while the underlying right survives. In Scotland the obligation itself ceases to exist, and no amount of sympathy will revive it. When the five years began to run is frequently the most contested issue in a commercial action, and it is the reason to take advice early rather than when the anniversary is approaching.

Where a commercial dispute is decided

Section 39 of the Courts Reform (Scotland) Act 2014 gives the sheriff court exclusive competence where the total value of the orders sought, excluding interest and expenses, does not exceed £100,000. Below that figure the action cannot be raised in the Court of Session at all.

Above it, the Court of Session’s commercial actions procedure is available. A commercial action is allocated to one of the commercial judges, who manages it from the preliminary hearing through to decision. The procedure is deliberately flexible and, at the preliminary stages, informal, with no court dress worn. The commercial judges press for early disclosure of relevant documents and will ordinarily order the parties to meet and narrow the dispute. The Scottish Courts and Tribunals Service describes the definition of a commercial action as broad, and it expressly includes contracts for the sale or supply of goods or services, commercial leases, building contracts, partnership agreements and professional negligence. The sheriff court has its own commercial procedure in the larger sheriffdoms.

Arbitration and mediation

Many commercial contracts contain an arbitration clause, and where they do the court will ordinarily give effect to it. Arbitration in Scotland is governed by the Arbitration (Scotland) Act 2010. It is private, and it can be quicker, but it is not automatically cheaper and there is very limited scope to appeal. Mediation carries no such finality and can be attempted at any stage, including after proceedings have begun. Neither route suits every dispute, and the existence of a clause in the contract should be checked before anything is raised in court.

What to do now

1. Gather the contract and every version of it, the purchase orders and acknowledgements, and the correspondence in which the terms were discussed.
2. Preserve the email account rather than forwarding selected messages.
3. Note who said what at meetings, while it is fresh.
4. Photograph goods or work before anything is repaired or replaced, because the defect is the evidence.
5. Take advice on the five-year period first, because every other decision can be revisited and that one cannot.