Nath Solicitors breaks down deadlock in commercial contracts, its causes, deadlock clauses and its consequences
A deadlock situation typically arises in commercial contracts, such as shareholder or joint venture agreements, when parties with equivalent decision-making powers are unable to agree on essential matters. For example, a company’s constitution may stipulate that decisions require a majority vote, a 75% supermajority, or a unanimous agreement.
If the company is owned by two shareholders who each hold 50% of the shares, or by multiple shareholders with equal voting rights, and they cannot agree on a particular decision, the company is said to be in deadlock. In these cases, the business’s progress on essential issues may be impeded.
Common causes of deadlock include disagreements over:
- Strategic direction
- Budgets or financial decisions; or
- Appointment or removal of key persons
Deadlock Clauses: A Preventative Tool
To manage this risk, contracts often include a deadlock clause as a method of resolving such disputes. These may involve:
- Mediation or arbitration
- Tie-breaker mechanisms; or
- Buy-sell mechanisms
The contract may also outline a process that should be followed if a deadlock occurs. This might involve using a specific dispute resolution approach or implementing a prearranged process where one shareholder purchases the other’s shares to resolve the impasse to allow the business to move forward.
Absence of Deadlock Clauses: The Consequences
The absence of a deadlock clause in agreements, particularly in joint ventures, partnerships, or shareholder arrangements, may present substantial risks when decision-makers fail to agree on key issues.
Without a clear mechanism to resolve these stalemates, the business may face prolonged inaction, operational paralysis, or, in a worst-case scenario, even collapse. This can result in financial losses and costly legal disputes.
A deadlock clause offers a framework to resolve impasses, such as through mediation, buy-out options, or third-party arbitration, thereby enabling the continuation of business activities.
Best Practices
To avoid these risks, it is best practice for business owners to:
- Include tailored deadlock clauses in their contracts
- Seek legal advice during drafting; and
- Review and update terms as the business evolves
How Nath Solicitors can assist in a Deadlock situation
Nath Solicitors are experts in reviewing and drafting commercial contracts, including deadlock clauses and provisions. If you need advice or assistance, please contact us on 0203 983 8278 or get in touch with the firm online.