The last thing any business wants is to end up in litigation. Lawsuits are lengthy, stressful, and distracting. And while an established business may be able to weather the storm of a costly and protracted court battle, for a business that is fairly new, a lawsuit can threaten their continued existence. In either case, businesses should do everything possible to avoid litigation.
Any business attorney will tell you that the best way to avoid litigation is to make sure you never wind up in there in the first place. Although there is no way this can be guaranteed, there are several proactive steps you can take to minimize the chances of becoming embroiled in an expensive court battle:
Create the Right Entity Structure
From the outset, it is important to structure your business correctly to protect your important assets. For example, sole proprietorships or informal partnerships may be the simplest entity structures you can use to get into business. However, once you have a real business and not just a sideline hobby, you should seriously consider an LLC, Subchapter S Corporation or even a C Corporation (if you are planning to seek investors or go public). You may also want to consider setting up multiple entities to protect various assets, such as intellectual property (IP) and real estate.
Cover your Business Relationships with Written Agreements
One of the most common mistakes new business owners make is failing to create written agreements to govern their business relationships. In your personal life, you may be used to making oral or handshake agreements with people you trust, based on nothing more than the belief that the other person will honor their end of the agreement. Unfortunately, business in the 21st Century does not work this way. While an oral business agreement may be enforceable in theory, in practice, it is very hard to prove that an agreement exists unless it is put in writing.
Have all Your Written Agreements Drafted or Reviewed by a Business Lawyer
You should create written agreements for everything related to your business; such as the relationship between business partners, employees, vendors you do business with, and in many cases, clients. These agreements should be clear and understandable, and ideally, they should be drafted by a business attorney. Boilerplate contracts like those that you find on the internet are often confusing, and they usually fail to adequately address the specific terms and conditions that should be covered in your agreement. Make a small investment now to have a lawyer prepare you agreements – this could save you untold dollars down the road. And if you are being asked to sign an agreement that has already been prepared, at the very least, have the agreement reviewed by your lawyer first.
Consider Alternative Dispute Resolution (ADR) Clauses in Your Contracts
Since it is not in anyone’s best interest for a dispute to end up in litigation, it most often makes sense to add a clause to your contracts spelling out an alternative method for resolving a dispute. The two most popular forms of alternative dispute resolution (ADR) are binding arbitration and mediation. The main difference between these two is that with binding arbitration, the arbitrator decides how the dispute is resolved. Mediation, on the other hand, is a voluntary process in which all participants must agree on a resolution for it to be binding. Speak with your lawyer about the pros and cons of various forms of ADR, so you can decide which one is best for your business.
Obtain the Right Types of Insurance
We live in an increasingly litigious society, and many businesses do not have the proper insurance to cover the various liabilities they are exposed to. General business liability and commercial property insurance are basic policies most business owners need, but they may not be enough. You may need product liability insurance if you are selling a product to consumers or businesses, or you may need professional liability insurance if you provide a professional service. If you take payments from customers or clients in a way in which you keep their personal information in some type of database, you should probably also have data breach insurance. Cyber criminals are everywhere, and even the federal government and some of the best-known companies have been hacked in recent years. It only makes sense for you to protect yourself from the same type of risk (if necessary).
Keep Thorough Records
Many disputes can be headed off with good record keeping. For example, when a disagreement arises, you should be able to refer to the written contract that governs this situation. You should also be able to refer to other pieces of information, such as e-mail correspondence, records of telephone conversations, and other types of communication. By keeping meticulous records (preferably in both electronic and paper form), you can often defuse a major conflict before it erupts.
Involved in Business Litigation? Speak with an Experienced San Diego Business Attorney
Even if you follow all the best practices, litigation is sometimes unavoidable. Whether you are being sued by another party or you have no choice but to pursue litigation yourself, you will need strong legal counsel by your side advocating forcefully to protect your interests. When you are faced with litigation, the best result is to resolve the case outside of court and without the need to go to trial.That said, you will need to be prepared to go to trial if the other side is not willing to be reasonable.
At Garmo and Garmo, LLP we work closely with businesses of all types and sizes in San Diego and throughout Southern California. Our extensive experience in this area of the law allows us to thoroughly examine all angles and work toward developing the most practical, effective, and cost-efficient legal solution. Call our office today at 619-441-2500 or send us a message through our online contact form to schedule a free consultation with one of our attorneys.