Tips for Businesses to Avoid Litigation

Business litigation doesn't always start with a bad actor or ill intent. It often starts with preventable missteps: an unwritten ownership agreement or a misunderstood contract term; it can also result from the inevitable employment issues facing every business.

1. Start Off on the Right Foot

Forming an LLC or a corporation is a way to potentially avoid personal liability if your business is sued. Some disputes come from within the business. Properly forming your business entity and practicing ongoing good governance can reduce the chance of internal conflict among LLC members or corporate shareholders.

In addition to sound formation documents, corporate bylaws or an LLC operating agreement are part of a solid business foundation. These important documents specify ownership interests, decision-making process, exit strategies, profit sharing, and more. Well-drafted corporate bylaws or LLC operating agreements provide clarity, answering questions before they turn into internal disputes that escalate to litigation.

2. Observe Email Etiquette; Trigger Legal Privileges

Write your emails as if they will be read by the world. Ill-advised emails can provide a treasure trove of incriminating evidence against you in litigation.

Avoid email rage. Hold and reflect on your emails before sending them.

The best way to protect against discoverable emails which may be problematic is to communicate your concerns in emails to your attorney. By establishing an attorney-client relationship and using your emails to seek legal advice you trigger the attorney-client or other applicable privileges.

3. Read It Before You Sign It

As your business grows, the number of contracts you sign will likely increase. You must read each one carefully before you sign it – and you must understand every term. Keep in mind that oftentimes, contract terms are negotiable.

There are many ways for a contract dispute to arise. Some of the key things to look out for in a contract include:

• Scope of Work: Make sure expectations are aligned. The courts will only enforce what is written in the contract, so nothing should be ambiguous. Deliverables, timelines, and quality standards must be spelled out in detail, as well as a process for any potential changes.
• Payment Terms: The how and the when of payment terms must be specific. Terms like “net 30” must be tied to a specific start date. Late payments may be subject to late fees, interest, and attorney fees. It’s important to make sure you understand any payment terms that you agree to and that the terms work with the business’s cash flow.
• Termination Rights: Be sure you understand how and when you or the other party can terminate the contract, as well as what process must be followed and what penalties and fees might apply.
• Indemnification Rights and Limitations of Liability: Are you agreeing to any one-sided indemnification provisions in the contract? Understand the terms in the contract. You may be indemnifying other parties with respect to significant liability. And the legal expenses you are required to incur may also be significant. Even unmeritorious claims may be tendered to you under an indemnity provision, requiring you to incur expense indemnifying other parties. If you are providing a service, you may want to limit your liability so as not to expose your company to liability for consequential or punitive damages. If you are receiving the services, you will not want the service provider to limit their liability if the liability associated with their negligence or breach could jeopardize your business. Any indemnification rights and limitations on liability must be clearly defined in the contract – and clearly understood.
• Choice of Law, Venue, ADR Provisions: A contract may provide that another state’s laws will apply if a lawsuit is filed and even specify where a lawsuit can be filed. Agreeing to a contract that specifies a distant venue will add significant costs to an already costly lawsuit. Sometimes, a contract may specify that any disputes will be resolved through alternative dispute resolution (ADR). I advise clients to include ADR provisions that require the parties to engage in negotiation and mediation before filing suit; this requirement results in a large number of matters resolving before incurring the significant expenses associated with litigation. Also, understand the consequences of jury trial waivers, in which you may be giving up the right to have your dispute decided by a court of law.

If you don’t understand something in a contract, if the potential exposure is high, or if you want help with negotiating the terms, consider consulting with an attorney before you sign anything. When it comes to contract disputes, an ounce of prevention is worth a pound of cure.

4. Manage Your Workforce Properly

As your workforce grows, so does the potential for employment law disputes. It is essential that you are aware of your responsibilities as an employer, under both state and federal law. The Tennessee Department of Labor and Workforce Development employer page can be a good place to start.

Hiring, training, and retaining employees can grow into a significant business cost, as can employment law violations. Take charge of your business employment matters, beginning with your very first hire.

5. Make Risk Management Part of Your Business Plan

Proactively planning for risk is one of the most important things you can do for your business. Not only do risk assessments identify risks that could threaten your business, but, because the process of identifying risks also identifies the best way to do things, risk assessments can also dramatically improve the business’ performance.

When you operate a business, the question of risk is usually not “if” but “when.” Businesses that take risk, crisis, and reputation management seriously from the start are well-positioned for any uncertainty ahead. With a crisis response plan in place, you’ll already know what to do in a challenging situation. Without a crisis response plan in place, those crucial early moments will be spent figuring out how to respond.

Sometimes external (or internal) forces prevail. Expecting the unexpected with a risk management plan is one step you can take to protect your business. A risk management plan may not avoid litigation, but it can minimize its impact on your business. The cost of having a risk management plan is minimal; The cost of not having one can be devastating to the business.

Partner with an Experienced Tennessee Attorney

The best way to avoid business litigation is to partner with an experienced attorney from the start. Our general counsel services can ensure your business structure meets your needs, your filing requirements are met, your contracts support the business needs, and your workforce is properly managed. In addition to providing a risk management plan, having an attorney-client relationship in place means you know exactly who to call when you have a question, you need advice about a brewing conflict, or you’ve been served with a lawsuit. Contact Dedicated General Counsel today at 615-585-2140. Partner with an experienced Tennessee attorney for the peace of mind that comes with professional legal advice.