What to do when litigation threatens your business

Understanding how to keep your company free of legal entanglements, as well as what your options are when litigation is unavoidable, can be critical to your bottom line. Here is what to do when litigation threatens your business.

Smart business owners understand and meet their legal responsibilities when setting up and running their companies. Regardless of how your company is set up, be sure you are current with all required licenses, bonds, insurance, annual state filings, state and federal taxes, OSHA reporting and other mandatory documents. These can all be anticipated and managed to avoid potential legal issues.

Unfortunately, other challenges faced by small contractors and subcontractors are less predictable.

Know your contracts

Whether you are a general contractor or a subcontractor, you need to read and understand every contract with respect to the services you will provide under the agreement. Contracts have become increasingly complicated, and typically contain language that may make your company ultimately responsible for things over which you have little or no control.

Even a brief explanation of some of the contract clauses you should be concerned with would be very lengthy but a good thing to keep in mind is that all contracts are written to favor the “buyer.” If you have concerns about any contract language you don’t fully understand, it may be wise to have an attorney read the contract. An attorney can explain what risks or responsibilities you will incur in signing the contract and you can use that information to assess other contracts.

A few contract “hot spots” to watch for:

• Liquidated damages. Often called LDs, liquidated damages are financial penalties paid by the contractor based on the number of days the work is delivered past the contract completion date. For example, a contract might stipulate that $500 per day be paid to the owner by the general contractor. That fee will certainly be forced upon any offending subcontractors.
• Indemnification: Indemnification requires the contractor to “indemnify” or “hold harmless” the owner, design professionals, and sometimes other related parties against all consequences of accidents resulting in personal injury or property damage on the jobsite due to the contractors negligent acts or omissions. Indemnification categories can include “limited”, “intermediate” and “broad” and each has a different impact on the contractor.
• Consequential damages: Consequential damages make the contractor liable for related damages due to an accident/incident caused by negligence. These related damages often include the lost income of the owner, due to construction delays or accidents that kept them from operating normally.

A common oversight that can lead to legal problems is poorly documented payments to subcontractors and suppliers. When you pay a sub or supplier, be sure you receive properly formatted and notarized lien waivers. These waivers give you legal recourse if the money intended to flow to a given sub or supplier goes unpaid by the subcontractor you paid.

Alternatives to litigation: what you can do when litigation threatens your business

Heading to court to resolve business conflicts can be costly and time consuming. Before you hire an attorney when litigation threatens your business, pursue other courses of action. Sometimes, Alternatives to Dispute Resolution (ADR) are mandated by the contract to avoid more costly litigation.

When litigation threatens your business, arbitration is an out-of court legal solution in which both parties agree to present their side of the case to a neutral party or arbitrator, and accept the findings of the arbitrator in the matter. This is called “binding arbitration” because the losing party is legally required to accept the consequences of the arbitrator’s final decision.

Non-binding arbitration is less common, since neither party is legally bound to honor the decision reached. This is often perceived as a waste of time and money, since it is often a preamble to a formal litigation of the dispute.

Other course of action when litigation threatens your business is mediation. Mediation uses a neutral third party to try to bring the disputing parties together and facilitate constructive negotiation and settlement. However, mediators don’t render a final decision. While neither party is legally bound to any outcome of mediation, they often reach a compromise agreement and avoid costly litigation in the courts.

When to hire an attorney

Get legal advice from an attorney if you don’t understand the documents you received from the other side or the court. You’ll also need an attorney if your case is complicated, you are charged with a crime or you cannot afford to lose the case. If you want to appeal a case or sue someone, you need an attorney.

You may not need a lawyer and may be able to represent yourself if you understand your case well enough to explain it to a judge. If you are going to go to court without an attorney, you should be able to speak, read and write English well and you should be comfortable speaking in public. You’ll probably have to negotiate with the other side or their attorneys.

To go to court without an attorney, you’ll need to have accurate records. You will also need to be able to devote your time and abilities to preparing and filing papers with the courts, do legal research, attend court hearings and to read and understand the state laws, court rules and similar cases.

Typical fees charged by attorneys

The most common billing method is to establish a set dollar amount per hour not only for the lead attorney, but also for other people the attorney may use on your case. These might include less experienced attorneys, legal aides, and clerical support that work on your case.

Before starting any work on your case, your attorney should hold a meeting to hear the details of your case and to give you an approximate estimate for his services. If you reach an agreement and decide to engage the attorney, an initial payment or retainer is common. As work on your case proceeds, your attorney should provide you detailed billing that describes who worked on your case and the cost per hour you were charged.

When a case involves personal injury or worker’s compensation, a “contingent” fee may be more likely. Under a contingent fee arrangement, you agree to pay your attorney a percentage of the money awarded by the court should you win the case. If you don’t win the case, you will not owe your attorney for the work performed, but you will still be responsible for court related costs.

You can reduce your legal expenses if you are make copies of needed documents, pick up and deliver documents, or provide other time-saving tasks that you would otherwise be billed for.

More importantly, answer your attorneys questions honestly and completely even if your answers reflect poorly on you. This will save you money in the long run, since such details will ultimately be revealed and could potentially weaken your position later on.

—By Bruce Webb