By John L. Watkins
Readers of this blog know that proactive early steps with a lawyer (such as by documenting contractual and business relationships properly before a dispute develops) help avoid lawsuits and save money in the long run. Further, wearing a white hat by being honest and forthright in your business dealings will substantially lessen the chances of legal trouble.
A couple of recent experiences have reminded me, however, that the bad guys are still out there. Who are the bad guys? Bad guys come in a lot of varieties, but they tend to be characterized by a number of qualities, foremost of which is greed. Bad guys believe there is nothing wrong with taking advantage of another person. Bad guys believe that success in life and business is characterized by what you can get, not what you have earned or what is fair. Bad guys almost always believe that the end justifies the means, and the end is always what benefits them.
There is another interesting point I have observed over the years about bad guys: It is amazing how fundamentally unreasonable (or worse) clients tend to find fundamentally unreasonable (or worse) lawyers. Although this observation may bring a wry smile, the unfortunate reality is that these pairings tend to result in disagreements turning into blood feuds and lawsuits being brought that should never have been filed. It is also almost always a much more difficult proposition to resolve disputes and lawsuits when such a pairing is involved, at least until the expense of litigation has made proceeding prohibitively expensive for them.
There is no magic secret for avoiding bad guys. Further, close business associates who were once trusted colleagues can change as time passes. Simply stated, good guys can turn into bad guys. What is the root cause of this? Typically, it all boils down to money or power, or, put more accurately, a desire for more money, power or both. This statement may strike you has horribly cynical, but, having handled litigation for over 25 years, I am convinced it is true, or is at least true in many instances. Perhaps this is part of human nature, bringing to mind the old lawyer joke that "this town isn't big enough for one lawyer, but it is plenty big enough for two."
Although there is no magic secret for avoiding bad guys, there are a few things you can do to avoid a nasty encounter, or to increase your chances of a positive outcome if you have one:
1. As always, properly document your internal company relationships (through shareholders' agreements and operating agreements) early on, and at time when personal relationships are positive. If rights and obligations are clearly defined in a binding agreement, there is much less chance of a future dispute. There is also a much greater chance of a prompt and predictable resolution if a dispute develops.
2. If you have not documented your internal company relationships, but relationships are still friendly, see a lawyer and document them now.
3. If you have not documented your internal company relationships and a dispute appears to be on the horizon, see a lawyer now. If you are a shareholder of a corporation or member of an LLC, you should hire your own lawyer as opposed to the lawyer who has been acting for the company. If relationships are not properly documented, it is probably not the end of the world, but you need to know where you stand and develop a strategy for resolution.
4. Are your company's key external relationships properly documented? Are your supplier contracts documented? Are your customer contracts documented? Do you have properly documented terms and conditions? Are your warranty obligations defined and are any "implied" warranties disclaimed?
5. Are your employment relationships properly documented? If your company has key confidential information or trade secrets, do you limit access and take other steps to protect it? Do you regularly stress to employees with access what information is truly proprietary? Note that simply taking the position that "everything" is confidential may not be effective and may create problems later.
6. This is much more subjective, but is important: Are your relationships with key business partners (suppliers and customers) satisfactory? Are these relationships such that the suppliers and customers want to continue rather than simply work out the balance of the term of the contract? Extremely one-sided relationships -- regardless of whether one is on the giving or receiving end -- often lead to disputes.
7. Similarly, are your employees happy? Do your employees want to work for you, or are they simply waiting for the economy to improve so they can move on? If the employees are unhappy, who is to blame? Step back and look at things from the employees' point of view: If in their position, would you be happy with the relationship? If the answer is "no," take steps to fix the problems. If the answer is "yes," and you still have employees who are disgruntled, complain, and act out, you may want to consider severing the relationship. One disgruntled staff person can cause a lot of trouble and distraction throughout an organization. You probably should consult with an employment attorney before taking action.
8. If a customer, supplier or employee begins making demands that are of a nature they could lead to a legal dispute, see a lawyer as soon as possible. Do not misunderstand me, I am not suggesting you need to see a lawyer if an employee asks for a raise. However, if a demand is made outside the scope of normal and ordinary business, you probably need legal advice. Good business lawyers tend to be great coaches, and can help develop a strategy for making sure that a disagreement does not morph into a dispute or a lawsuit. Often, this is accomplished by the lawyer remaining in the background.
9. If you receive a demand letter, particularly from a lawyer, see your lawyer immediately. By this point, you are already a little behind the curve. The other side already has briefed their lawyer and thought through a strategy. You will need to act quickly to get up to speed. This is particularly not a time to try to go things alone. If you try to deal with the other side's lawyer without the benefit of counsel, you will be at a great disadvantage.
10. Sometimes, mediation is a great way to resolve disputes early and without great expense. Mediation is a process that involves bringing in a neutral third party to help the parties try to reach a settlement. A mediator does not have the authority to resolve the dispute, but acts (sometimes strongly) to try to help the parties reach a voluntary settlement.
The problem, however, is that many bad guys and their lawyers will not want to go to an early mediation. They may claim to need discovery (the legal process for obtaining information) or may argue that you do not "understand how serious they are about the claim." Statements like this may be driven by the client, but the unfortunate reality is that they are often driven by the lawyer's desire to make a larger fee before the case is settled. At some point, however, it is likely that the case will go to mediation, either because reason prevails or because a court directs the parties to go to mediation. For more information on mediation, go to my mediation website.
Unfortunately, you can follow all of these tips and still find yourself in a lawsuit with a bad guy. If this is the case, there is little choice but to fight it out in court. Although I cannot say that the bad guys never win, if you have been honest and forthright in your dealings with the other party, you will have a far greater chance of prevailing in the long run.
If you do not have a business attorney and are in Georgia, give me or my colleagues a call. If you need more information about how to find, evaluate, interview, and work with a business attorney, you may want to consider my book, An Insider's Guide on Hiring a Business Attorney.