In over 30 years, I have litigated just about every type of civil business dispute. As I have written elsewhere, companies should not avoid every dispute. Frivolous claims should be defended and substantial legitimate debts and claims should be pursued. Most disputes can be resolved without litigation, but sometimes litigation is the only option.
But I also serve as primary outside counsel for a number of small and medium-sized businesses. Many of these are machinery manufacturers or sellers. In the latter role, a main focus is trying to keep clients out of litigation. Although nothing is foolproof, the risk of litigation can be diminished by favorable (and clear) contracts, terms and conditions, and employee training. And it sure doesn't hurt to take care of customers and, for lack of a better way of putting it, to avoid doing stupid things.
As the economy has improved, it seems businesses are both taking greater risks and not paying attention to others. My perception is also that business people are plunging forward with less appreciation of the risks of litigation and without considering the value of a lawsuit avoided. This is not wise.
In considering the value of a lawsuit avoided, it is notable that the uninitiated invariably equate that the cost of a lawsuit with the cost of the legal fees spent to bring it or defend it. That is not correct, because legal fees are only part of the equation.
Lawsuits are disruptive, particularly for small and medium-sized businesses. Instead of spending their time on productive endeavors, management and employees will be involved in meeting with the lawyers, gathering documents, helping answer written discovery requests, sitting for depositions and perhaps attending court hearings. The result is often a loss of focus that may translate into decreased revenues.
In some instances, litigation leads to public relations problems, which may cause further distraction and loss of business. Many business owners and managers often overlook the stress of being involved in litigation, which can be substantial. Some people tolerate it well, others have sleepless nights. Litigation typically takes a long time. In most metropolitan areas, lawsuits will take well over a year to get to trial.
What should business owners do? As indicated, nothing is foolproof, but there are steps that should be taken to lessen the risk:
- Document substantial business relationships with professionally drafted contracts. Contracts define and distribute risk. Depending on the nature of the contract, important risk distributing and limiting provisions may include warranties, indemnities, limitations of liability, and forum selection or arbitration clauses.
- If it is not practical to have a contract for certain transactions, have professionally drafted terms and conditions. Terms and conditions can limit risks in somewhat the same manner as a contract.
- Make sure you have an insurance program that is matched to your business risks. This is absolutely critical in the machinery business. It is a prudent practice to review insurance coverage at least once a year, as well as when entering a new line of business. Find an insurance professional who will take the time to understand your business.
- Deal with business issues in a prompt and business-like manner. If you sell products and there is a valid warranty claim, take care of it. Although there are always difficult people out there, most people do not expect perfection in a business relationship. If there is a problem, most people will be satisfied if it is dealt with in a straight-forward and fair manner.
- If you have situation that may lead to a claim, notify your lawyer and your insurance professional immediately. Your lawyer may be able to help avoid a claim, or at least make sure your company is best positioned to defend it. Insurance companies may deny coverage for late notice, and may be successful. The rules vary from state to state. It is best not to let notice even possibly become an issue.
- As always, consult qualified professionals in your jurisdiction.