by: Arend J. Abel, Attorney
I’ve been handling business litigation for more than 25 years, now, and the most frustrating cases I’ve handled are the cases that never should have been. Litigation is costly and disruptive to a business. Litigation is sometimes necessary, and when there is litigation we fight aggressively for our clients. However, sometimes the best outcome is avoiding the need to litigate in the first place. Here are my observations of steps businesses might take to avoid the disruption, cost and risk that litigation represents.
1. Understand which stakeholders are potential sources of litigation for your business. Litigation rarely comes from strangers. Most likely, the opposing litigant will be someone you know. Disgruntled employees are a major source of litigation. So are suppliers, customers, business partners and competitors.
2. Select those with whom you do business carefully. Evaluate the reputation that the other party has in your industry, the other party’s prior actions in the industry, and the other party’s approach during your negotiations. You may want to think twice about doing business with a party whose business relationships frequently end in litigation, or even if their relationships end in non-litigation rancor. Frequent changes or replacements in the other party’s business relationships can also be a red flag, if they are not typical of the industry. You may also want to be wary of a party who seems to feel a need to press for every advantage, and to “win” a negotiation, rather than looking for a collaborative arrangement that works for both parties.
3. Hire carefully and infrequently. This is really a specialized application of point 2 above. In addition to making sure that the prospective employee has the skills and qualifications to perform the job you are filling, also assess the prospective employee’s compatability with you workplace, general attitude, and work history. A history of job hopping can be a red flag. In addition, a prospective employee who spends a lot of time criticizing a former employer may feel the same way about you in six months to a year.
If you have hired carefully, you should be able to keep turnover low. Litigation frequently follows employee terminations, and the more such terminations you have, the greater the likelihood that one of them will result in litigation.
4. Understand The Other Party’s Business Issues. If each party understands where the other is “coming from,” the relationship can be structured in a way that satisfies both parties’ interests, and is less likely to lead to disputes in the future. Similarly, if some form of dispute begins to arise, the parties can more readily find a solution that works for both of them if they have a deep understanding of each other’s interests.
5. Cultivate Long-Term Relationships. It is far easier for someone to pull the litigation trigger on an impersonal company than on a person they’ve grown to know and like. Spend time with those you do business with on matters other than the business at hand, visit their places of business, if possible, and genuinely get to know them. Conversely open up about yourself, so that they can get to know you. Reach out – don’t wait for others to do so.
6. Have clear written agreements. Many lawsuits result from the fact that contracts between the parties are not clear. It may be that two businesses can operate under unclear contracts for years without incident. However, gaps and ambiguities in the parties’ contracts rear their ugly heads when business conditions become more difficult. For example, the cost structure of one party or the other might change, making the contract unprofitable to that party. One party or the other may fall on hard times, making it difficult for the party to live up to its contractual obligations, or making it advantageous to attempt to shift costs under the contract to the other party. One party’s company might be purchased by another company that doesn’t have the background or relationship with you, may not understand the business arrangement, and may be looking for cost savings.
Even absent such changed circumstances, divergent views on what a contract means can lead to deal-killing, litigation producing misunderstandings.
While it may seem more “trusting” to do business “on a handshake,” the terms of the handshake deal should be spelled out in writing, to avoid misunderstandings later. Likewise, in supply contracts, the parties should do more than simply exchange purchase order forms. Invariably, the parties’ forms will have conflicting provisions, which is an invitation to litigation over whose form controls.
A clear, well thought out contract anticipates these sorts of difficulties and makes it more difficult for one party or the other to undermine the agreement.
7. Be fair, flexible and firm. You may have heard it said that “just because it’s legal, that doesn’t make it right.” Similarly, just because you have a contractual right to something doesn’t mean you have to insist on it. If the other party is experiencing changes that make the business arrangement more difficult for it, at least consider whether the arrangement could be modified and still satisfy your business interests. Remember, you want a long-term relationship. Still, you need to be firm about what you need from the arrangement, and not give in on things that will cause problems in your business. It may be that circumstances have changed so much that the arrangement can no longer work for both parties. If that’s the case, find a way to end it that does the minimum damage to both parties.
8. Don’t let things fester. At the first sign of trouble, address the problem directly. For example, if you’re having quality problems, whether with a supplier or an employee, talk to them to try to get to the root of the problem, and to work with them to solve it if possible. If the difficulty is with a customer, don’t let accounts receivable mount. The more a customer owes you, the more likely he will find fault with your products or services. Again, if the problems cannot be resolved to everyone’s mutual satisfaction, whether performance or payment issues, it may be necessary to sever the relationship.
9. Document, Document, Document. Even while you work with the other party to solve problems, whether the other party is an employee, supplier or customer, you should document those problems. Contemporaneously documenting issues avoids the later charge that problems were simply made up as after-the-fact justifications. Less obviously, you should also retain any expressions of satisfaction with your company that you receive from the other party, making it more difficult for the other party to create its own after-the-fact justifications.
10. Involve Counsel Early. Your first call to your lawyer should not be when the other party has sued you, or even when you believe the other party is on the verge of suing you or taking some action that will force you to sue the other party. Instead, that call should be when you first see a problem arising in the business arrangement. Not only will the attorney be able to help you to avoid saying or doing something that could come back to haunt you if litigation ultimately occurs, the attorney might see a potential solution to the problem that you have overlooked and that can avoid litigation.
These are a few guidelines to follow that can help you avoid costly litigation. It’s always a good idea to be proactive in protecting your business from litigation, however, if you find yourself in a situation where you are being sued–all is not lost.