08 Dec What Every Business Owner Needs to Know About Dealing With Disputes and Other Litigation
For my entire career as an attorney, I have been involved in business-related litigation. During this time, I have advised or represented countless businesses and their owners concerning claims and disputes involving customers, suppliers, employees, third parties and even co-owners. In that time, one truth has remained a constant – litigation is an expensive way to deal with disputes. In many cases, however, the choice of whether to litigate may not be one that you get to make. And in some cases, litigation may be the only means left to protect your business interests.
Regardless of whether the business is a small “Mom and Pop” or a Fortune 500 company, there are certain considerations that are common to most litigation. Below is a non-exhaustive list of these considerations and some strategies to address them.
Invest In A Transactional Lawyer Early
While the risk and expense of litigation cannot be completely eliminated, the risk and expense is extraordinarily magnified if businesses do not have the right (or any) agreements in place before disputes arise. Business owners should consider their entity selection and their contractual relationships with other business owners before the business is built. It is much easier to divide the pie before it is baked. Admittedly, in the infancy of a business, it is hard to justify expending attorneys’ fees to protect the business before knowing that it will succeed. Of course, no one plans to fail so it makes sense as part of your investment to include a transactional lawyer to help establish the agreements to govern the owners’ relationships. This lawyer can also ease the inevitable, “prenuptial” like decisions that business owners must address
After the initial agreements are in place, the transactional lawyer should prepare or at least review the important agreements to operate the business. Which ones are those? Consider the primary revenue stream or largest expenses of the business. Is the key to your revenue stream built on intellectual property such as new technology, services to be provided by employees, a franchise arrangement, manufacturing processes, relationships with particular suppliers, a particular piece of real estate, or new markets? All of these involve different contracts that need to be in place prior to or very early on in the business. Remember – litigation costs increase exponentially and inversely to the amount of time spent on identifying where formal agreements are necessary and putting those agreements in place.
Businesses often overlook, especially early on in their life cycle, the types of insurance needed to protect it. Insurance not only covers a loss or damage to the business’s assets or resulting from business operations, it can become the funding source to defend third party claims. Admittedly, not every business needs every kind of insurance. There are numerous types of insurance to consider such as commercial general liability, property insurance, builder’s risk, directors and officers, errors and omissions, business interruption, environmental, fidelity, employee practices, and many others. But again, consider the primary revenue source and the likely risks to it. A good and trusted insurance broker can help you identify those risks but certainly there is a reasonable concern that brokers will sell something you do not need. Having a lawyer involved in the process will help you. Lawyers deal with risk all the time and experienced lawyers can draw on that experience to identify the most likely and most devastating risks to your business. And make sure to have a lawyer review the policies. Insurance companies do not make money paying claims. A broker can help you identify the insurance companies that have traditionally stood behind their insureds. A lawyer can review a policy looking for exclusions that could leave your business unprotected.
Policies and Procedures
Most often when businesses consider policies and procedures they focus primarily on relationships with employees. Certainly, this is an area that should not be neglected. Employment policies can provide employers with defenses to employee disputes. But don’t end the inquiry there. Some of the most expensive cases I have dealt with could have been avoided or at least mitigated by a policy being in place beforehand.
Other policies and procedures may also be appropriate for your business including policies for safety, financial accounts and transactions, limitations on authority of employees, communicating and dealing suppliers and customers, and other key components to a business. In determining what policies to develop and implement, consider the risk to the business of a mistake or, even worse, a bad actor. This is particularly important in the area of customer relationships. In my experience, the clients that seem to avoid costly litigation are those with a customer service policy that generally puts the customer first and seeks resolution of customer disputes early. The benefits of this policy may be hard to quantify. How much did the business spend in dealing with customer problems that might not have resulted in litigation or where the business was not legally obligated to address versus the expense of litigating the disputes? Furthermore, and perhaps more importantly, how much repeat business or new business did a client obtain because of good customer policies. From a litigator perspective, clients that have customer-oriented policies tend to be successful and are less likely to be calling me for help.
Related to policies, one of the things that I see that drives up costs of litigation is not documenting events and not maintaining documents. In the business world, it is common and often expected that communications are informal with business deals being negotiated and closed with emails and texts. There is obviously a cost-benefit analysis to consider when determining what documents are necessary for a transaction. But even where there is no contract, a little more foresight into ensuring that the communications accurately reflect and state the deal will significantly reduce litigation costs. The more time that it takes to effectuate the communication is directly proportional to the cost of litigating the matter if something goes wrong. A phone call or video conference (unrecorded) leaves no record of the conversation. A text is preferrable to an unrecorded call, but even a brief email is preferable to a text. And a detailed email, even without an agreement, may provide enough information to make your case. Remember, if something goes wrong, a litigator is going to have to work through these communications to figure out what happened (and more importantly what can be proven). As much as we all hate long email strings, they tend to provide the best, chronological record of a deal. In fact, one of the more costly issues is when an employee chooses a completely separate email string to communicate concerning a deal that is already being discussed in a different string). Taking the time to communicate the same ideas on the same string can reduce litigation costs.
I would avoid texts if at all possible. It is very difficult to piece together a deal from texts. Finally, regardless of how you communicate, you should make sure to preserve and organize those communications in real time to make it easier to identify the communications at a later date and ensure all communications can be considered.
Hire A Litigator Early
Let’s be frank – no one wants to talk to a litigator. If you are, it usually means either (a) you have been wronged and are considering suing which means spending money to have to get to a place where you think you should already be or (b) are being sued and are facing the possibility of having to spend considerable amounts of time and money with attorneys. Not to mention, the disruption of your business. While these are true, hiring a litigator early may allow you to avoid a lawsuit or if you cannot avoid it, at least position your business for a more successful outcome. Litigators have the unique perspective of routinely dealing with what could go wrong. I am often called in to matters even in the deal making stage, to ponder what might go wrong and how the deal can be structured to avoid unnecessary risks. Further, clients that hire litigators early in a dispute may find ways to resolve the matter more efficiently than if they go it alone.
Collaboration between a client and its lawyer is essential. It goes beyond simply trust but requires both the client and the lawyer to listen to each other and be willing to look for ways to mutually support the endeavor whether it be a transaction, a lawsuit or some other matter. Clients benefit from a lawyer that takes the time to learn not just about the case, but about the client, their propensity for risk, their values, and their decision-making process. Clients also benefit from a lawyer that provides options in dealing with litigation strategies. A client that listens to those options without questioning the lawyer’s commitment to the client and its cause, will find ways to reduce litigation costs while maintaining a reasonable probability of success.
Litigation is rarely a client’s business strategy. Inevitably, however a business will become embroiled in some type of litigation in its lifetime. And the more successful a business is the more likely litigation will be necessary. Understanding how to stack the deck in your business’s favor from the outset by embracing these many considerations rather than avoiding them will allow a greater chance of success in the dispute while reducing its effect in terms of time, disruption, and expense to the business.
ABOUT THE AUTHOR: Kenneth M. Krock is a Shareholder at Rapp & Krock, PC, the head of the firm’s Litigation Group, and has represented parties in business-related disputes for over 25 years.
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