Practical advice on what you can do to help protect your business when it has been threatened with litigation or has a potential claim against it.
Unfortunately, litigation (or the threat of litigation) is a fact of life for many business owners. Even though you may have protected your personal assets by forming a corporation or LLC, litigation may put your enterprise and income at risk. When you are threatened with litigation, accept the fact that it may cost you money to solve the problem, even if you are right. If another person wronged you or breached your contract, don’t be afraid to consult an attorney. A contingency based fee agreement (common with plaintiff’s attorneys) may allow you to enforce your rights and reduce your risk of loss if you do not prevail in your lawsuit.
When you are threatened with litigation, the worst thing you can do is ignore the problem, especially if you have been served with court papers or a notice or demand pursuant to a contract. Failure to timely respond may cause you to lose valuable rights, or worse, allow the other side to obtain a default judgment against you and go straight to collection.
Nothing will prevent you from being sued, however, the following points may help you reduce your risk.
Protect yourself in advance.
Be proactive and anticipate problems that may arise. Retain a transactional attorney to assist you in drafting or reviewing contracts. Discuss potential conflicts and how they can be resolved or minimized in an agreement. Having a well-crafted agreement to help minimize your risks can make you a hard target for litigation. Often times potential plaintiffs shop their case to multiple lawyers only to be rejected because the agreement is airtight and the other side scrupulously complied with its terms. Read and understand your agreement (with the assistance of legal counsel if necessary) and make sure you follow its terms. Finally, discuss your business with a qualified business insurance broker and ensure that you have the appropriate type and amount of insurance coverage for your type of business.
Read your contract.
This can’t be said enough: “read your contract!” Even if you have a lawyer, you should also read and understand your contract before signing it; don’t be ignorant. If you have a contractual relationship with the person suing you (i.e., privity of contract), read your contract and understand your rights and obligations under the contract. Too often parties start disputes without understanding their contract rights and obligations. In addition, a third party (such as a landlord, tenant, service provider, or insurance company) may be liable under your contract or another and be required to defend and indemnify you from a claim, lawsuit, or damages.
Consult an attorney.
A 30 minute phone call with an attorney to advise you of your rights and obligations and help you develop a strategy in response to the claim or dispute may save you a great deal of money in the long run. Your first priority should be how to resolve the matter without resorting to litigation, if it has not proceeded to that stage yet. Most attorneys offer free initial consultations. Don’t be afraid to ask questions and get a cost estimate, but bear in mind that litigation costs fluctuate and are very difficult to estimate. Is the attorney qualified in the field of law you would be litigating? Have they had similar cases? Are you comfortable with the attorney’s approach? Does he or she consider solutions without resorting to litigation, such as mediation or arbitration? How is the attorney’s fee structured: contingency or hourly fee based? In a typical contingency agreement, the client does not pay the attorney up front; the attorney is only paid if there is a recovery. His or her fee is based upon a percentage of the final award, however, ensure you understand how expenses (such as copying, depositions, expert witnesses, court costs, etc…) will be handled. If the fee is hourly, the client pays the attorney his or her hourly rate plus expenses as the litigation progresses, however, the entire award is kept by the client. Ensure that any fee agreement you enter is in writing!
Finally, once you’ve engaged counsel, help them help you with your claim, by preparing a timeline memo objectively showing day by day how the claim arose and support it with documentation (agreements, letters, e-mails, invoices, etc…). Presenting your case to your advisors in a clear, objective fashion will help them mount a better defense on your behalf and save you attorneys’ fees in helping your counsel quickly understand the case.
Insurance… you may be covered.
Review your insurance policy and contact your broker. The event or occurrence may be covered under your policy or under insurance that another person or company was required to provide for your benefit. Many contracts require one of the parties to either provide insurance or list the other party as an additional insured on their policy. If a contract requires someone to provide insurance for your benefit, make sure they are also required to provide you a correct insurance certificate (correct policy type, parties, property, time period) evidencing they have in fact provided the insurance for you during the time period required. Better yet, get a copy of the policy showing you as an additional insured; an insurance certificate is only a representation from the person providing it while the policy is the actual contract. Make sure you get an update when the policy period expires. If you feel you may be covered (even remotely), promptly notify the insurance company in the manner required under the provisions of your policy (typically the “notice” paragraph) and confirm whether they have accepted (in writing) and will defend you against the claim. Often times the insurance company will hire an attorney to defend you, so you should accomplish this before getting too involved in paying for counsel.
Work it Out.
Most litigation (some say as high as 95%) ends in voluntary settlement before a final judgment is made by the court. Rarely do you see an absolute victory; in most cases the parties meet somewhere in the middle to resolve their differences after becoming fatigued by the dispute.
With counsel’s guidance, you may wish to try to work it out prior to filing or responding to a lawsuit. Eating a little crow or meeting your adversary halfway may save you money in the long run and prevent an all out war. But beware, don’t be so focused on resolution that you don’t prosecute the case; failure to answer a complaint within the required time may cause you to take a default judgment and “anything you say can and will be used against you in a court of law,” so proceed cautiously and with counsel’s guidance. Assume that anything you say or any letter you write will later be presented to a court in a worst-case scenario if you can’t work out the problem. If you are able to work it out, your attorney can help you draft a settlement agreement to ensure the matter is properly resolved. Finally, remember that if you are the plaintiff, your chance of recovering monetary damages awarded to you is only as good as your adversary’s assets or insurance coverage. Most judgment debtors don’t voluntarily pay the judgment… you have to find and forcibly take their assets (through the use of a marshal or sheriff) after a judgment has been awarded. This is an issue to consider before you enter a contract with someone; if they breach, how will you recover your damages?
Don’t let litigation run your life or business.
Litigation can be all encompassing, both professionally and personally. Sometimes the worst effect litigation can have is disruption of business operations and forcing business owners and principals to spend too much time on litigation when they should be managing their business. Having a good legal plan in advance and understanding how to rationally manage disputes will save you money and may save your business.