Tag Archives: business litigation

Ten Tips for Avoiding Litigation: Tip #4: Every Significant Business Transaction Should be Documented

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There is a nostalgic notion among traditional businesspersons that the best deals are sealed by a hand-shake (or an elbow in this COVID-19 world in which we live), and you don’t need fancy lawyers and contracts to be successful in the business world. That approach to reaching agreements seems to work well in John Wayne and Clint Eastwood movies, but it can lead to problems in the real world. Robert Frost famously said: “Good fences make good neighbors.” In the business world, good contracts make good deals.

So why should you insist on – and pay the expense of creating – written contracts to memorialize your significant agreements? Consider the myriad of psychological research studies, which show that memories fade with age and the passage of time and that, even under the best of circumstances, we tend to remember what we want to remember. The corollary to that rule is that different people will tend to remember different things, depending upon their varying interests. Next consider that, according to the natural order of the world, otherwise known as “Murphy’s Law,” if something can go wrong, chances are it will go wrong. Finally, consider what will happen when you and the other party to the deal have differing recollections about the terms of the deal but nothing in writing to confirm either party’s position.

For example, suppose you understood that your customer was going to pay shipping costs for the goods it purchased from your company. Your customer, to the contrary, is certain that shipping costs were included in the price it paid for the goods. Similarly, what if our customer thinks it is entitled to receive a 2% price discount if it pays your invoice within 20 business days of receipt. You recall discussion of a discount but swear the terms you agreed to required payment of the invoice within 10 days and a resultant 1% discount.

How will you resolve such disputes without a definitive written agreement that includes provisions for shipping, payment and price terms? To paraphrase Yogi Berra: If you don’t know where you are going, how will you know when you get there? More to the point, if you don’t have a contract, how will you know what the deal is?

Faced with such a disagreement about the terms of the deal, you will either negotiate a new deal to resolve the disputed issues, stop doing business with the other party, or end up in court. If you end up in court, without a written contract, it will be your word against your adversary’s. Unfortunately, that kind of litigation, which depends upon either a jury or judge deciding whose testimony is more credible – a so-called “credibility contest” — is one of the most expensive and unpredictable kinds of contract disputes to resolve. Moreover, even if you are fortunate to prevail in the litigation, you will most likely be responsible for your own attorney’s fees and costs, which could be enormous. Under the so-called “American Rule,” which is followed, with rare exception, by every state and federal court in this country, each side bears its own costs of litigation, regardless who wins. One exception to the American Rule occurs when the contract that is the subject of the litigation contains a “loser pays” provision. But, of course, without a written contract containing such a provision, you will be out of luck and will probably have to bear your own litigation costs.

One additional reason to insist upon a written contract to memorialize significant transactions is the good will it will buy you with your most valuable customers. The truth is that wasteful and unnecessary litigation is just as expensive, time consuming, and distracting for your customer as it is for you. Your adversary will be forced to eat its own attorney’s fees and litigation costs, just as you are, if the dispute ends up in litigation. Therefore, both parties will benefit from a well-drafted contract that resolves disagreements without the need to resort to litigation.

Finally, not every deal requires a full blown contract with all the bells and whistles, but even in those circumstances, there should be some written confirmation of the agreement. In many cases, a simple purchase order with pre-printed standard terms and conditions, sent by one party and accepted by the other, will suffice. Some simple deals will only require a confirming email or two back and forth to provide a record of the principal terms of the deal. With the convenience of electronic communications these days, there is no good excuse for not documenting every deal in writing!

Click here for Tip #1: Always Have a Strong Written Agreement to Govern Your Business
Click here for Tip #2: Avoid Doing Business with Members of your Family
Click here for Tip #3: Check Your Insurance Coverage Frequently to be Sure it Protects Your Business from Exposure and Risk

Phil Kirchner of Flaster Greenberg
Philip Kirchner is a member of Flaster Greenberg’s Litigation Department headquartered in Cherry Hill, NJ. He concentrates his practice on resolving business disputes, including complex litigation of all types of business issues in both the federal and state courts of New Jersey and Pennsylvania. He can be reached at 856.661.2268 or phil.kirchner@flastergreenberg.com.

 

Tip for Avoiding Costly Business Litigation: Always Have a Strong Written Agreement to Govern Your Business

Tips for avoiding litigation

As a career commercial litigation attorney, I have been asked by several people why I would write a column advising business people on how to avoid needing my services. That’s a good question for which I do not have a good answer, other than to say I believe, in our ever-more complex commercial world, there will be plenty of commercial litigation to keep me busy. At the same time, I hope my clients will benefit from using an ounce of prevention to avoid paying a pound for a cure involving litigation.

Litigation is expensive, time-consuming, a distraction from running a successful business, and unpredictable. It is NEVER a good thing for a business to be involved in litigation; it generally means you owe someone money or someone owes you money. Either way, you are not happy, but you will be even less happy if you end up in litigation, regardless whether you are the plaintiff or defendant.

I plan to post one litigation avoidance tip per week for the next several weeks. I hope you find these tips helpful, and if you have questions or want to discuss any of them with me, I am happy to oblige. So, here is my first tip for avoiding litigation:

Tip #1: Always Have a Strong Written Agreement to Govern Your Business.

No matter what type of business you have, be it a pizza parlor or a high tech company, and regardless how your business is organized, as a corporation, partnership, LLC, or whatever, you should start your business with a well-drafted operating agreement. This is the document that governs all the important decisions and activities in the life of your business, such as ownership structure, voting rights, management responsibilities, resolution of disputes between owners, death or disability of an owner, adding new members, transfers of ownership interests, and, ultimately, dissolution of the business. For example, the death of one of the owners of the company need not automatically lead to the death of the business. A well-drafted agreement will spell out exactly how the deceased owner’s interest in the company will be distributed and valued and how the company will be managed going forward. Without such an agreement, however, an owner’s death could lead to a power struggle among the remaining owners, expensive litigation, and, eventually, dissolution of the company.

Business operating agreements are generally ignored until there is a significant event in the life of the business. When such an event occurs, however, you will be happy you have one. For example, many businesses with multiple owners reach a stage in their development where the owners develop different visions for the future of the business and how the business should be managed. They might disagree about whether to expand the company into a new line of business, take on additional debt, hire a new employee, or any number of other critical business decisions. Without a strong agreement that specifies how such disputes are to be resolved, the company could find itself in a stalemate position, requiring resort to a court to break the deadlock. The cost of a court battle alone (payment of attorney’s fees and costs of suit, plus the expenses associated with the possible appointment of a receiver to run the business while the owners and the court sort things out) is reason enough to avoid litigation. The other detriments inherent in business litigation, such as the business opportunities the company is unable to pursue, and the time spent by the business’s owners and key employees on the litigation that should be devoted to the business, reinforce the conclusion that litigation is not a desirable outcome. Finally, the litigation might very well produce a result that neither of the owners wants.

In short, every business should avoid litigation if possible, and one of the best ways to do that is to have a well-drafted, comprehensive operating agreement. Be sure to entrust this most important task in the life of your business to an experienced and able business attorney who has drafted many agreements of this kind.

Stay tuned for more tips in the coming weeks!

Phil Kirchner of Flaster Greenberg
Philip Kirchner is a member of Flaster Greenberg’s Litigation Department headquartered in Cherry Hill, NJ. He concentrates his practice on resolving business disputes, including complex litigation of all types of business issues in both the federal and state courts of New Jersey and Pennsylvania. He can be reached at 856.661.2268 or phil.kirchner@flastergreenberg.com.

 

 

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