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Litigation Proofing™
5 Simple Steps to Protect Your Business From Costly Lawsuits
by Calin A. Lawrynowicz for the SEA (Self Employment Assistance) Program in Toronto Volume 17, August 2001
Lawsuits cost a business time and
money, and can often bankrupt a business. Businesses
must prepare and organize their legal affairs to reduce
the possibility and costs of litigation. 5 simple steps
can help you avoid and decrease litigation costs.
1. Incorporation: Protect Your Personal Assets
Corporations have limited liability
and proprietorships and partnerships do not. Corporations
are legally distinct from their shareholders, who only
risk their investment. Partners and sole proprietors
are not legally separate from their businesses and risk
everything that they own. A corporation acts like a
special insurance policy with a one-time premium that
protects your personal assets from the people that deal
with your business. Corporations can also provide tax
deferral benefits that are not available to sole proprietors
or partnerships. Incorporation prepares you for success
while protecting you from the worst eventualities.
2. Client Contracts, Waivers, and Disclaimers: Improve
Relationships
Most disputes are usually based on
an honest misunderstanding of the deal. Written contracts
commit parties to perform certain actions, but more
importantly they limit what is required by each party
and determine which party bears which risks. Outlining
each party's obligations can result in earlier payment
and less wasted resources. Detailing exclusions and
risks makes the parties more profitable by avoiding
or limiting costly disputes and litigation. Parties
to a written contract are also more likely to be satisfied
at completion of the contract and commit to repeat business,
which means more profit.
Consider a contractor hired to remodel
a room in a house where a written contract is not used.
One party may believe certain work is included in the
price, and the other party may not. Who is responsible
to move or cover the furniture? Who is responsible for
certain types of damages and to what amount? Is there
a warranty on materials or labour, how long is each
and what do they include and exclude? Is there a deadline
for completion?
Client contracts, waivers, and disclaimers
are common documents that, when drafted properly, can
protect your company. Contracts outline both benefits
and obligations, risk placement and are the essence
of the business relationship. Waivers, disclaimers and
acknowledgments are particular risk reduction tools
in situations where one party wishes to place a risk
upon the other, who would not normally bear the burden.
These documents can be used separately, but are often
used in concert. Clear agreements make for better and
happier business relations that almost always avoid
court.
3. Employment Contracts, Policies, and Procedures:
Control Possible Damages
Employees are often the most important
assets of a company and they are usually the largest
liabilities. Long-term or tenured employees represent
significant risks to the companies they work for, if
they are terminated, laid-off, or unable to work due
to disability. More than one company has gone bankrupt
on account of the stringent obligations of employers
under Ontario law.
An employment contract can control certain risks or
exposures that the company has, and employment policies
and procedures can control others. Every company needs
to understand employment standards before they hire
an employee, as it may be too late afterwards to enforce
a subsequent contract with that individual.
4. Risk Assessment and Reduction: Avoid Costs and
Catastrophe
Assessing and reducing risk is a two-part
process where you must determine and prioritize risks
particular to your company and industry, in addition
to the normal risks of business. When risks are identified
and prioritized, each risk can then be systematically
examined and targeted for possible reduction. Every
company has unique risks based on its industry and operational
style. These risks need to be prioritized based on likelihood
and dollar value exposure in order to move to the next
step.
A particular risk can be reduced in many ways. A specific
contract, waiver, disclaimer, acknowledgment or other
document can reduce or eliminate a specific risk. Insurance
may be another route. Sometimes a risk assessment may
lead to the elimination of a product or service, when
the costs to reduce the risks and/or the risks themselves
outweigh the economic benefits. Most companies' change
the way they do business after a risk assessment and
some even change what business they do. Risk assessment
and reduction are important in protecting a company
from major hazards because most perils are foreseeable.
5. Quick Response and Settlement: Lessen the Impact
of Disputes
There is justice and then there is
legal reality. Many people involved in business litigation
believe that when they tell their side of a story to
a judge they will win and get everything they deserve.
That belief is a legal fiction.
A party may be 100% successful in a claim, but the party
will never ever be made whole. The costs of lawyers,
experts, lost time, delay in recovery, stress, and the
distraction from the business are never fully recovered.
In short, going the distance in a lawsuit should usually
be avoided if a reasonable settlement can be reached.
Quick response and settlement in problem situations
prevents the spending of good money to litigate on the
mistaken belief that a successful lawsuit will cover
all costs and expenses.
No business can completely protect
itself from the possibility of a lawsuit, however, the
5 simple steps outlined above can greatly reduce the
chances and costs of litigation. Incorporating can protect
your personal assets. Client and employment agreements
reduce misunderstandings and litigation costs. Risk
assessment and reduction improve the bottom line and
can save a business from a catastrophe. Quick response
and settlement of disputes also save money. Remember,
every lawsuit prevented or reduced in cost greatly affects
your business' profitability.
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