Tips to Protect Yourself from Business Lawsuits

Unless you are a litigation lawyer, chances are that you didn’t get into business to end up as part of a lawsuit. This article will review some of the common mistakes that can lead to business lawsuits and some simple tips to avoid them. In case you still find yourself at the end of a lawsuit, I have also included some additional helpful hints for getting the best results from your litigation counsel.

Common Mistake #1 - Poor Research

Often companies do not adequately research the other companies with which they choose to do business. Not enough emphasis is placed on the financial and performance history of potential customers or suppliers (eg. credit reports). Especially if it is an  important new contract, it is a good idea to learn the names of the principal officers of the business and even conduct inquiries about them. This process is much easier today with the Internet. Unfortunately, there can be shady operators who change business names and disband and reincorporate on a regular basis or those who simply consistently fail to deliver promised results. Even the best contract cannot overcome a dishonest or incompetent customer or supplier.

Common Mistaken #2 – Poor Paperwork

Poor paperwork can result in the failure to create a legally binding and enforceable contract. When assessing a new business lawsuit, your lawyer’s first task is to determine if you even had a contract and, assuming that you did, to determine who the contract was with and its complete terms. This is not always as simple as you might think. Sometimes the communication of offers and counteroffers may omit or fail to properly clarify one or more of the essential terms of the deal. One of the most common errors arises out of the liberal use of the short form “TBD” for “to be determined”. Since a valid contract can be formed only by a “meeting of the minds” between the parties to the contract, the use of “TBD” can have serious or unforeseen consequences. In the worst case scenario, it may even render your contract unenforceable. Ironically, poor paperwork seems to be more common in the age of email which is informal and where it is so easy to just type, click and send.

Common Mistake #3 – Side Deals

A subcategory of “poor paperwork” is the “side deal”. When reviewing a potential litigation matter, very often we will find what the deal says and what the deal is may be entirely different. There is nothing inherently wrong with “side deals” which are part  of business, but side deals which are not adequately documented or thought out can make it difficult to enforce your contract. The use of a “standard form” contract that does not adequately reflect the particular terms of a transaction is another example. Very often these “standard forms” were created in other legal jurisdictions and contain terms or references to laws that have no application to Ontario or Canadian law.

Common Mistake #4 – Bad Estimates

Large numbers of business lawsuits started with a bad estimate be it related to cost, time or promised results. A contract that is not capable of being performed gives you a great lawsuit and no product or result. It is important for both sides to recognize and correct a bad estimate before it becomes a problem leading to a failure to perform. Common sense also tells us that things have a tendency to get worse unless you take decisive action. Business owners are encouraged to contact their legal counsel early in the development of a dispute and, most importantly, not to ignore any legal process. With this in mind, a good lawyer will always encourage you to be prepared to enter into a reasonable settlement early in the process. Identifying a potential problem early is a great way to avoid a lawsuit. Business owners should be encouraged to educate their employees about past legal problems in the business rather than sweeping them under the rug. Better employee training on the unique legal problems in your particular business can help them to avoid the same mistake again.

Getting the Best Results from your Legal Counsel

And finally, if despite following these guidelines, you still find yourself in a business lawsuit, how can you get the best results out of your legal counsel? Probably the most important thing that you can do is to encourage your employees to tell the whole story, good and bad, up front. Remember that your lawyer is on your side. However, while your lawyer cannot guarantee a particular result, he or she must be able to provide you with a realistic assessment of your case without having their judgment or advice clouded by incomplete or inaccurate information. It is only with a realistic and objective assessment of your case that your lawyer will be able to guide you to a commercially reasonable settlement or outcome.