Many of my litigation clients are owners of small to mid-size businesses that find themselves thrust into court for the first time. These folks are often shocked to see how time consuming and expensive the litigation process can be. So after years of counseling them through the court system, I have observed that there a few small and easy steps businesses can take to better protect themselves. The best way to win in litigation is to never have to be in litigation. Adopting these strategies won’t guarantee that you won’t be sued, but it will ward off some potential litigation and it will also limit and curtail claims that come your way:
1. Insert a “If I win, you must pay my attorney’s fees” clause in all your business’ agreements. It’s a big shock to many clients when they discover that the law will usually not allow them to recover their own attorney’s fees from the other side even if they win. However, if you have a “loser pays” clause in your business’s forms, contracts and agreements, then the law in many states will allow you to recover your own attorney’s fees from the other side if you win. What’s more, the threat of having to pay your attorney’s fees may be enough to forestall frivolous lawsuits and get the other side to settle for a reasonable amount before the dispute ends up in court. But a word of caution – the clause will likely have to say that either side gets legal fees. This will also help keep you from making rash decisions about filing suits and claims that may not be worthwhile.
2. Insert a “binding arbitration” clause in your major or important contracts. In many states, both sides can avoid the courthouse altogether if they have already agreed to submit a dispute to binding arbitration rather than go to court. Many times, arbitration of disputes is faster and less expensive than going to trial in court. Arbitration is also a private matter that, unlike a lawsuit, is not open to public or press scrutiny. The down side to arbitration is that your case rests in the hands of one person and there is no appeal. So if you decide to have an arbitration clause make sure that it calls for the arbitration to be done by a reputable organization like the American Arbitration Association that has qualified arbitrators in a number of fields. You may also want to consider a mandatory mediation clause instead. Mediation is not binding and what is said during the mediation cannot be used in a later court proceeding. So even if you don’t want to have binding arbitration in your contract, then at least have a mandatory mediation clause requiring all sides to sit down with a mediator to try and settle the matter before litigation.
3. If you are threatened with a lawsuit, check with your insurance agent to see if the dispute or lawsuit may be covered by your business insurance policy. Many owners are unclear as to what exactly is and is not covered by their business liability insurance policy. Rather than just assuming that a dispute or lawsuit is not covered, it’s a great idea to check with your business insurance agent. Act quickly, as soon as you become aware of the claim as it may take time for your insurance to determine if you are covered. If the dispute or lawsuit is covered by insurance, then typically the insurance company is required to pay for the legal fees in defending the lawsuit as well as any judgment or settlement that is within the policy limits.
4. Purchase additional liability insurance in advance to cover likely business risks. While business insurance may cover a lot of areas, it doesn’t cover everything. The last thing you want to find out after you’ve been sued is that you could have purchased additional insurance for a few dollars to cover that specific type of dispute. For example, if your business has a high turnover of employees and is likely to be the target of a suit for employment discrimination or wage/hour claims, you should investigate purchasing “employment practices liability insurance” to cover that specific type of issue. Similarly, if your business engages in a high volume of advertising, then you should investigate purchasing “advertising practices liability insurance” to cover claims in that area. All web-based entrepreneurs should have this type of coverage as a website is generally just another form of advertising. You may want to have an insurance broker perform an audit to determine what coverage you need. If your company is larger and better-financed, there are risk management companies that perform this task for you and will shop for the best and most affordable coverage for your business.
5. Insert a “limitation of liability and damages” clause in your important contracts and agreements. If you are dealing with another business, the law in many states makes it possible to have a clause in your contract that actually limits the amount of liability and damages that you may have to incur if something goes wrong. Let’s say, for example, your business signs a $10,000 contract to install a computer system. In that contract, insert a clause that limits your liability to the cost of the system and not incidental damages, like the business being shut down for a week because of computer failure. Give your company the right to try and fix the problem before the client can go to a third party whose repair bills you have no control over.
6. Make sure you and your business partners have a clear operating agreement. Without a doubt, the main cause of litigation for newer companies is disagreement among the partners in the company. Often this is particularly stressful because you usually go into business with someone you trust, like a friend or family member. Then when trouble begins, it can be hard for one side to take a strong position against he other even though that is what is called for. So at the very beginning of the endeavor, while there is still a lot of love in the room and people are ready to give concessions and try to reach middle ground, take the time to draft an operating agreement that outlines everyone’s responsibilities and expectations. The agreement will also have a clause that dictates what happens if one partner wants out or if another partner cannot contribute the same time or capital as the other. While ideally it would be best if each partner had their own attorney review the agreement, to save on costs you could use a “collaborative attorney.” Collaborative attorneys are catching on in matrimonial matters and the idea has merit in this situation as well. The collaborative attorney represents the entity that is being formed and tries to reach a fair agreement to both sides. Each side will still have an opportunity to have their own lawyer look at it if they so choose, but the larger time of drafting the initial document will be split by the partners. The collaborative lawyer will also not be allowed to represent any of the individual partners in any future litigation over the company or the agreement. But whichever method you choose, at the start of the business have an operating agreement in place, it will save you lots of grief later on.
Hopefully, following these simple guidelines will help keep your company out of court or at least limit your exposure to litigation. Planning properly at the start of your business is the key and some money spent early on to do things right can reap great rewards later on.