8 ACTIONS YOU CAN TAKE TO PROTECT YOUR BUSINESS FROM LITIGATION

No business owner enjoys litigation, and for good reason.  The high costs of litigation, in terms of money and time, can take quite a toll on the health of a business and its owner.  When you own a business, lawsuits are sometimes inevitable.  However, there are some preventive measures and techniques that all business owners, regardless of the type and size of the business, can employ in an effort to avoid, or at least minimize, the risks associated with business litigation.

Litigation in business can arise from various sources, such as:

•    disagreements between partners or shareholders
•    disgruntled employees
•    dissatisfied customers
•    accidents on the premises

Taking the following actions can reduce the likelihood of litigation, and in the event of litigation, minimize the cost to your business and/or increase the chances of your success.

1.    Make sure that all agreements are in writing and signed by the parties involved.  When dealing in transactions between parties, verbal agreements are worth the paper they are written on.  The days of “handshake” agreements are long-gone.  Verbal agreements should be memorialized in writing and exchanged between the parties.  Even if it is not a formal agreement, a simple letter or e-mail that sets forth the essential terms will put you in a better position should litigation ensue.

2.    Be compliant with the law and ensure that all rules and regulations are followed.  That may mean knowing what and when to file important documents relating to the status of your business entity.  If you have employees, be familiar with the labor laws so that you can comply with your obligations as an employer, and post the proper employee notices in the workplace where required.

3.    Do not to co-mingle business operations with your personal affairs.  You took the time and expense to form a corporation, or other business entity, to avoid personal liability.  You must now follow corporate formalities and keep your business separate from your personal affairs.  For instance, maintain a corporate credit card and avoid writing and issuing personal checks for business expenses (and vice versa).  Properly document any personal loans to the business.  When signing business documents, indicate your title as a corporate officer or company member, which will be helpful in connection with defending against a claim seeking to impose personal liability on you.

4.    Have a written agreement between shareholders and partners.  The need for a written agreement between shareholders and partners cannot be overstated.  Many businesses and partnerships develop out of personal relations, when trust between the parties is at its highest level.  However, such relationships become secondary whenever the business faces a financial crises.  Work closely with a corporate attorney to ensure that the agreement between the parties clearly and accurately outlines the duties and responsibilities.  The agreement should contain buy-out provisions to address when and how an owner’s interest can be purchased.  The agreement may include a clause requiring mediation for certain types of disputes since mediation is less formal and less costly than using the courts.

5.    Prepare Employment Agreements and Employee Handbooks.  A major way to avoid employee-related litigation is to have written employment agreements that clearly lay out the rights and responsibilities of the employee, including the terms of compensation.  If you hire an outside consultant on a project, whatever terms of engagement you have agreed to should be documented in writing.  You should also have an employee handbook that explains the employer-employee relationship and sets forth the company’s policies with respect to discrimination and harassment, confidentiality, employee absences, vacation time, sick leave and benefits.  Such policies should be clear and all managers and supervisors need to be familiar with them.  Even more important, these policies must be applied fairly and consistently.  Operating your business in accordance with your handbook may reduce the risk of charges and lawsuits filed by employees.

6.    Do not ignore customer complaints.  Address a customer complaint at the outset and try to resolve the issue before it leads to litigation.  Since disputes with customers are quite common, you may reduce the chances of litigation by having your legal counsel review your sales/purchase orders, invoices and billing statements to ensure that the essential terms and conditions are clearly and accurately stated, such as risk of loss, return policies, and warranties.  If you agree to extend payment terms for a customer, put it in writing, even if it is a short-term accommodation.  Add a provision to your billing statement entitling you to recover costs of collection, including legal fees and costs, in the event of a default in payment.  This may not prevent litigation but will help you to offset the associated costs.

7.    Procure proper insurance for your business needs.  Sometimes accidents occur at the workplace and on the premises, such as a slip and fall, that may result in personal injury and/or property damage.  Procuring the proper insurance policy will help protect your business in the event that it is sued.  Consider having your attorney review your policy(ies) to make sure that they provide you with the coverage sought.  In the event of an incident which may give rise to a claim, be sure to follow to the letter the notice provision in the policy to properly and timely notify your carrier of a claim or loss, which should reduce the likelihood of the insurance company denying coverage.

8.    Involve your attorney.  At some point, your business is going to need an attorney.  That is unavoidable. A good working relationship between the business and its attorney is essential and should not be overlooked.  Corporate counsel may be able to identify potential risks and assist the business in formulating a strategy to resolve issues before they lead to protracted and costly litigation.  Have your attorney periodically review and update your “standard contract” forms, sales/purchase orders, invoices and billing statements.  Work with your attorney to review your contracts, employment agreements, employee policies and handbooks, real estate leases, and insurance policies to protect against potential litigation.  If you are interested in buying or selling a business, consult with a business attorney before you speak or sign anything with a broker.  While many business owners are concerned about the expense of hiring an attorney to provide such services, taking preventing steps with your attorney will help avoid larger problems, and much more costly litigation, down the road.

If you have any questions about what your business can due to reduce its exposure to litigation, feel free to contact us to discuss your specific issues.