Managing contractual disputes while fostering positive relationships
Published on 04 September 2025
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By Joshua Brown, General Counsel & Compliance Manager
For local governments, strong supplier relationships are vital. Councils rely on a wide network of contractors and service providers to deliver essential works, projects, and community programs. But what happens when a supplier falls short of their contractual obligations?
Too often, councils face a dilemma: strictly enforce the contract and risk damaging the relationship, or overlook the breach and risk non-compliance with legislation, audit requirements, and value-for-money obligations. The good news is that it doesn’t have to be an ‘either/or’ situation. With the right approach, procurement professionals can address non-compliance firmly while still protecting long-term supplier partnerships.
Step 1: Refer to the contract
The first step is always to return to the written agreement. A contract is more than just paperwork - it is the foundation that governs the rights and obligations of both council and the supplier. It sets out what performance looks like, how issues should be managed, and what remedies are available if things go wrong.
Most contracts already anticipate that problems may occur and include mechanisms such as rectification plans, liquidated damages, dispute resolution mechanisms or step-in rights. Before escalating a situation, procurement officers should carefully review:
- What does the contract actually say about performance requirements?
- Are there formal notice requirements or timeframes for rectification?
- Is the breach material, or can it be resolved informally?
Equally important, clear reliance on the contract shows suppliers that concerns are being dealt with objectively, not personally. This helps maintain trust in the relationship, even when the council needs to enforce compliance because the conversation is anchored in agreed terms rather than opinion.
Step 2: Communicate early and clearly
Open communication can prevent a small issue from becoming a dispute. As soon as a performance concern is identified, reach out to the supplier to discuss the problem. Councils should:
- Use neutral, professional language to describe the issue.
- Be specific about the gap between expected and actual performance.
- Invite the supplier to explain any underlying challenges (e.g. staffing shortages, supply chain issues, weather delays).
Often, suppliers are willing to rectify issues once they understand the concern and council benefits from preserving goodwill. Addressing issues as soon as they arise gives the supplier an opportunity to correct course before the problem escalates. Early communication reduces the risk of misunderstandings, avoids unnecessary conflict, and often leads to quicker, cheaper resolutions.
Step 3: Apply proportionate responses in line with the contract
Not every breach requires the ‘nuclear option’ (e.g. damage claims and/or termination). Enforcement should be proportionate to the risk, impact, and frequency of the non-compliance (amongst other considerations). Before enforcing any contractual rights and/or remedies, council may consider:
- Issuing a reminder or warning letter.
- Agreeing on a corrective action plan with milestones.
- Using contract levers such as withholding payments or applying agreed damages only where necessary.
Important: Council should consider obtaining professional advice prior to exercising any contractual rights and remedies. Failure to do so could result in council themselves being in breach of the agreement. For example:
A supplier breaches its contract with council in a way that could be rectified. Under the agreement, council is required to give the supplier notice of the breach and a reasonable opportunity to rectify a breach before termination. However, due to an oversight, council terminated the contract without providing that notice and opportunity to the supplier. The supplier then takes legal action against council, claiming the termination was unlawful (a repudiation of the contract).
In this scenario, the council arguably: (a) applied a disproportionate response to the breach; and (b) failed to ensure that the response was in line with the contract.
Step 4: Document everything
Even when issues are resolved informally, documentation is essential. Council should keep written records to ensure consistency, accountability, and clarity. This should include:
- Non-compliance incidents, to track whether issues are isolated or recurring.
- Communications with the supplier, to create a clear record of what was discussed and agreed.
- Rectification steps, including what actions were required, timeframes, and responsibilities.
- Outcomes, showing whether the agreed actions were completed and if the issue was resolved.
Maintaining these records helps keep discussions fact-based, supports better decision-making in future engagements, and ensures knowledge is retained within the organisation.
Step 5: Approach contractual / compliance issues commercially
Managing non-compliance should be viewed through a commercial lens, not just a contractual one. Strict enforcement may resolve the immediate issue, but it can also drive-up costs, delay delivery, or reduce supplier competition in the market. Ending a relationship too quickly often creates more expense than value.
A commercially minded approach means looking for solutions that restore performance and preserve the investment already made in the supplier. Supporting a supplier back into contract compliance can often deliver better outcomes than starting over with a new contractor.
At the same time, there is a commercial cost to tolerating ongoing underperformance. If a supplier fails to improve despite reasonable opportunities, transitioning away in a fair and transparent way is necessary to protect value, reduce risk, and maintain a strong and reliable supplier base.
Conclusion
Managing supplier non-compliance effectively is about striking the right balance between enforcing contractual obligations and fostering positive relationships. By combining clarity, communication, proportionate action, and careful record-keeping, councils can protect their interests while keeping suppliers engaged and motivated. Approached this way, compliance and collaboration complement each other, creating a procurement environment that is resilient, sustainable, and focused on delivering real outcomes for the community.