5 Steps Every SMB Owner Should Know About Contract Litigation

Posted by on November 3, 2010 in Business Management, Business Start Up Advice [ 0 Comments ]

contract_litigationIn today’s economy, there can be significant unforeseen expenses such as firing an employee, you have to close a store or worse.   As a result, small businesses and entrepreneurs need to effectively hedge their risk.

An often overlooked and rapidly growing area of financial risk is contract litigation.  Routinely outgunned by big corporations, small businesses take on significant risk when pursuing claims. Yet, with the right steps, they can put themselves in a strong position to manage potential disputes.

Below are steps you can take to reduce your risk of exposure, and level the playing field when going up against the “big guns”.

1)    Know your risks: While it may seem basic, many small businesses and entrepreneurs enter contracts without understanding all of the potential risks. Or worse, they assume they are exempt from certain liabilities. One area of risk that is often overlooked is employment contracts.  For example, famed chef Mario Batali was recently sued by staffers at several of his restaurants for “pooling workers’ tips,” a potential violation of labor laws.  Irrespective of the final verdict, the point remains that Batali, like so many businessmen, didn’t fully understand his legal obligations, thus leaving him exposed to a significant liability.

2)    Push your attorney: Never assume your attorney is always up-to-date on the latest risk management tools or has even fully assessed all your liabilities. And don’t settle for an analysis of the obvious pitfalls such as damages – every high risk area needs to be identified. One of the faster growing risks in contracts that does not get the attention it deserves is “loser pays” provisions. As the name suggests, this means you have to pay the other side’s legal fees if you lose a contract dispute. Complicating matters, in many cases, the legal fees far exceed the damages – sometimes becoming the “tail that wags the dog.”

3)    Look for the competitive advantage:   There are plenty of “tricks of the trade” that can help give you a leg up on your adversary. If you are bringing a suit, is there a choice of where to file the case? Which courts are congested? What is a reasonable estimation for a time to trial?

4) Hedge your Bets: Today there are insurance policies available to cover attorneys’ fees awarded pursuant to “loser pays” provisions in contracts. This contract litigation insurance can be purchased at various stages throughout the litigation process for either plaintiff or defendant. It covers all adversary attorneys’ fees per the prevailing party provision in the underlying contract in the event of an adverse ruling at trial or a summary judgment.

5)    Negotiate from strength: The more you can improve your negotiating position, the greater you can reduce your risks.  When paying an adversary’s attorneys fees is no longer an issue with proper insurance coverage, this, of course, puts a party in a better position to achieve a favorable settlement.

While you can never guarantee victory, no matter how strong your claim, you can budget against your liabilities with greater accuracy.  And in today’s economy, where cash is king, the businesses that will survive are the ones who can effectively manage cash flow by minimizing legal liabilities.

Larry Kruger is the COO of Sonoma Risk Insurance Agency, a litigation insurance company.

Image Credit: Culp & Little

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