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10 Tips to Prevent Business Litigation

An ounce of prevention, as they say, is really just sound business practice.

Litigation can be ruinously expensive and may force a business into liquidation. Even a “win” can devour the time and energy you need to actually run your business. Law suits also have a nasty way of damaging the most important intangible asset, your business reputation.

There is no reason to step away from an unavoidable fight, but the advice all business attorneys give clients is to avoid finding themselves there. Following are 10 remarkably simple steps you can take to protect your business from the risks of becoming needlessly embroiled in litigation.

1. Structure your business to protect important assets. Most businesspeople understand that the peril of doing business as a sole proprietor is that personal assets can be reached by business creditors. There are few, if any, situations in which that is a reasonable risk.

An informal partnership, in which rights and responsibilities are not described in a formal partnership agreement, can be just as bad.  Partners can find themselves liable for the misdeeds of other partners even if they were unaware of their actions.

An LLC or Subchapter S corporation may be a better choice depending on the risk characteristics of the business and desired tax treatment, but it should be a considered rather than an automatic choice.

It  may be important to go even a step farther, perhaps structuring the business into several entities in order to shield important assets, such as intellectual property or real estate from the greatest sources of risk, whatever they may be.

One of the most important parts of a business plan is an exit strategy. Make sure that the form in which you choose to do business will allow you and your co-venturers to leave on terms that are clearly understood at the outset.

2. Business relationships should be covered by written contracts, which should be reviewed by an attorney. That is the place to spend your legal budget, rather than on litigation.

Without laboring the obvious, make sure that you read and understand all contracts to which you are a party. Ask for clarification of points about which you are unsure or which may require further negotiation.

Remember that employment contracts may be appropriate for key employees. Consider whether nondisclosure or non-competition agreements would be justified.

In some circumstances, it may be worth requiring that disputes that arise under certain contracts be resolved through alternative dispute resolution rather than litigation. Liquidated damages clauses may also help to prevent litigation.

Contracts are especially important in international transactions where, practically speaking, you may not be able to bring the other party into American courts. This is when escrows, indemnity clauses, liquidated damage agreements and insurance can be essential.

3. Apropos of which, make sure that your insurance coverage is appropriate to your business risks. It is not just a question of amount, but of the kind of coverage that your business carries.

General liability and commercial property insurance are probably not enough. Product liability and professional liability insurance are also must-haves. Depending on the nature of your business you may also need data breach insurance. Your lenders may have specific insurance requirements of their own, and state law will also require specific types of insurance, such as workers compensation.

4. Keep good records. Many disputes can be avoided by being able to quickly produce the relevant documents. These should include contractual agreements as well as correspondence and notes taken contemporaneously to record the substance of conversations and telephone calls. This may be a good time to review your records retention policy and to ensure that important documents exist in both electronic form and hard copy.

5, Train and manage staff. Do annual or more frequent reviews and be prepared to terminate the employment of any individual whose conduct could subject the business to a law suit. Employers may be vicariously liable for the misconduct of employees, including sexual harassment, if they are aware of the problem and do nothing to stop it.

A good policy and procedures manual that includes guidance on your business’s social media policy can go a long way toward preventing litigation, but it does also need to be reviewed with employees periodically.

Make sure that you have systems and procedures in place to help you identify dishonest conduct.

6. Be proactive in managing disputes before they escalate into litigation. Prompt and effective communication can do a lot to diffuse a situation with an unhappy customer or business partner. If the shoe is on the other foot and the dispute is about a nonpaying buyer or client, negotiating a payment schedule is often far cheaper and more effective than a lawsuit.

It is important to trademark your business name and anything else that is essential to its identity, but it is equally important to be pro-active in policing your intellectual property. Putting an end to infringing use promptly is more effective than suing over it after it has already done harm to the good will you have built. This is a situation in which you may actually have to be more than ordinarily willing to litigate.

7. Choose who you do business with. Especially for new businesses, the temptation can be to take any client or embrace any potential partner who walks through the door. Taking the time to know a little more about those you depend on, whether it is a big client, an important vendor, partner or key employee is usually worthwhile. Counterintuitive as it may seem, sometimes it is necessary to fire client or a brilliant, but obnoxious employee. Disentangling an unwise business relationship can be very troublesome.

8. Analyze past business disputes. A periodic retrospective review of disputes – who they involved on both sides and what kind of transactions gave rise to them – may help your business identify areas for improvement. For example, you may be able to identify problems with the terms of standard contracts, poor internal communication or a failure to properly handle complaints.

An annual audit of disputes, particularly over financial issues including credit card chargebacks or overdrafts can also help you spot problems like fraud or internal theft.

9. Nothing personal; it’s just business. It can be difficult for someone who has nurtured a business from the start to separate the personal from the commercial. If you find yourself arguing about principle, back down, turn around and hand the matter off to someone else who can be objective.

10. Don’t be a jerk. This is really a corollary of the previous two rules. Be honest in evaluating your own actions because no one has the luxury of being right all the time. Try to understand the dispute from the other side and made adjustments or amends as necessary. It can be cheaper in the long run just to let a customer win, even when he or she is clearly mistaken.

If you are dealing with a genuinely impossible individual, don’t be goaded into a fight. You can choose who you do business with and in some cases, the better choice may be to politely decline additional orders or jobs.

Litigation may, in some circumstances, be a necessary evil, but where your business has the opportunity to avoid recourse to the courts, it should. Remember that the primary beneficiaries of litigation are usually the lawyers.

Your business can avoid a great deal of unnecessary litigation by adopting 10 relatively simple good business practices that will also improve day-to-day management.

Anne Wallace, Esq.

Post by:

Anne Wallace is a New York lawyer who writes extensively on legal and business issues. She also teaches law and business writing at the college and professional level. Anne graduated from Fordham Law School and Wellesley College.

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