In everyday business law practice, we see businesses and investors make the same mistakes over and over again that lead to increased litigation risk. Often people come to us to litigate their business dispute when the situation has already spiraled out of control. Although I am a commercial litigator and trial attorney, my firm also advises clients on ways to avoid litigation. Here, we set forth some strategies for businesses and investors to decrease the likelihood of litigation.
- DUE DILIGENCE FOR NEW CONTRACTS AND INVESTMENTS
It is remarkable how even very successful business people do not conduct adequate due diligence when entering into new business ventures. This problem applies to both new contracts that businesses enter into and new investments.
Case study: A wealthy international investor was convinced by his old friend to invest $2M into a private wholesale business for twenty five (25%) ownership in the business. He was promised that with time he would be part owner in the building that the business owned. Now, a couple years later, his investment is gone and the company has no money. He does not own the building and simply did not know that another entity owned the building. He had no clue that there is a law called the Statute of Frauds that in a times requires contracts for interests or purchase of real estate to be in writing. And now what? Does he invest another $100K into trying to litigate his potential fraud and breach of contract case against the other shareholders?
This type of scenario is all too common, even with sophisticated businesses. It is also a problem that certain attorneys face. Litigators often do not understand business transactions. And corporate attorneys do not understand litigation. Proper due diligence requires that someone who can balance both business interests and objectives and conduct proper litigation risk management and due diligence reviews the deal. The balance is not easy to achieve.
2. PROPER DOCUMENTATION AND CONTRACT MANAGEMENT
Lets face it: a lot of businesses are sloppy about contracts. Either they do not review and draft them properly or they do not maintain them adequately. This neglectful approach to contracts inevitably leads to disputes and increases litigation risk.
Case study: A conglomerate mutli-billion dollar corporation was involved in a multi-year research and development agreement at different sites around the country. Engineering was in one state. Finance in another. Legal in another and etc. The contract was poorly written and the document management system was obsolete. Now, years down the line, there was a dispute over the contract. Some of the employees were still there; others were not. The case and the history of the facts of it had to be put together again. The old back up tapes had to be tracked down and reconstructed with the help of forensic e-discovery specialists. And at what costs!?
All of this expense and inefficiency could have been avoided through a proper document management system. Larger companies have come around on this (but not all), but for smaller businesses, this problem still prevails. The bottom line is review your contracts, use a competent attorney to draft them for you or at least review them before you sign them, and keep proper records documenting the course of dealing in connection with each contract (e.g. organize emails in folders, keep records of invoicing properly, etc). This way if there is a dispute, it will not take you months to get the necessary paperwork to your lawyers.
3. IMPLEMENT INTERNAL PROCEDURES FOR DEALING WITH THE THREAT OF LITIGATION IF IT ARISES; IN OTHER WORDS, BE PREPARED AND KNOW WHAT TO DO
This concept means different things for different businesses. On the one hand if you are a multi-billion dollar company with international law firms, with their armies of lawyers, on retainer, then you likely already have procedures for dealing with litigations (albeit not always effective ones). But on the other, if you are a family office or a startup business that has only recently started conducting business in the United States, you may not have such procedures in place.
CASE STUDY: A startup company with operations in two states and two other countries faced an employment dispute. Legal was on East Coast and the dispute arose on the West Coast. The witnesses were not readily accessible. It was a young company with many young employees that were very active on social media. How does one stop the impetus of people to keep chatting with one another and preclude mistakes from occurring?
This type of situation is also common for many businesses. The company should generally implement a clear procedure for coordinating both external and internal communications and decision-making with legal (whether in house or outside counsel) in order to control decision-making and actions in a litigation scenario. Of course, this in large part falls on the lawyer’s shoulders also. It is our responsibility to control such matters and to have a good relationship with the company’s employees to instill trust in people.
This simple phrase — Si vis pacem, para bellum — holds many truths. Litigation risk management requires preparation and forethought. Due diligence and organization, and proper balancing between legal review and business interests, are essential for reducing the risk that you and/or your company shall be able to effectively limit the risk of litigation or handle it competently and efficiently if it ever arises.