5 Lawsuit Mistakes You Can Avoid

This article is a reprint of Wise Bread's contribution to OPEN Forum from American Express -- where small business owners can get advice from experts and share tips with each other.

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If you do business, it’s likely at some point you’re either going to sue or be sued. The bigger the potential payout, the greater the chance you’ll get mired in costly, time-sucking litigation.

Most business lawsuits are filed over monetary disputes, such as for services provided or goods sold. Add to that the number of frivolous lawsuits manufactured to extort settlement, and it pays to know when to defend against claims, when to countersue, and when to cut your losses without jeopardizing your business.

While troubleshooting liability risks is not a cure-all, there are ways to make you a less attractive target for legal disputes. These include:

• Incorporate or form a limited liability company to shield personal assets. Also consider transferring personal assets to family members not involved in the business.
• Become well-versed in laws dealing with securities, accessibility, and intellectual property.
• Document partnership agreements, corporate bylaws, and vendor contracts. Contracts may disclaim legal liability and specify that the parties agree to arbitration, mediation, or another form of dispute resolution. Just be sure to have an attorney review the language. Many states have a statute of frauds, which nullifies contracts that are not in writing.
• Adhere to written employment policies, such as conducting proper background checks on new employees, confirming reprimands in writing, and adequately documenting terminations.
• Update insurance to include commercial liability and malpractice coverage. Some recommended limits are at least $1 million per occurrence and $3 million total liability.
• Respond quickly to resolve customer complaints and, when necessary, eliminate “high-risk” clients.

All of that will go a long way toward reducing your risk. Unfortunately, it won't eliminate it. Here are things you should not do in case of lawsuit.

Don’t Procrastinate

We know it’s a distraction, but to avoid a judgment in default against you, you must respond within 14 days to a High Court or county court claim. The most successful lawsuits are when a mountain of evidence is on one side and the law is clear. Be diligent in maintaining all records, including electronic mail, associated with the case.

Consult with a qualified business litigator (ideally, before getting served). Do not confuse this lawyer with the one who drafted your will or registered your business, says David Newdorf, a San Francisco-based business litigator and owner of Newdorf Legal. Many attorneys will not take a business suit on a contingency basis, so you and your lawyer should discuss in detail a budget of fees and expenses. That billable rate of $300 per hour can get compounded over years with trial delays, so don’t be afraid to negotiate. A written engagement letter sets forth the scope of the lawyer’s work and the associated fees. Remember that certain legal fees, but not all, are tax-deductible.

Don’t Fly Solo on Complex Cases

With simple matters, when all that is needed is a tersely worded letter threatening litigation, it makes sense to go it alone. But when people breach contracts, infringe on copyrights, or are negligent, do-it-yourself litigation is not advisable.

Don’t Rush to Trial

More than 90 percent of business lawsuits are resolved through mediation or negotiation, notes Newdorf in his article, The Top Ten Business Litigation Mistakes. Carefully weigh the advantages and disadvantages of both options. Since many small business disputes involve sums of less than $50,000, negotiating directly with your opponent may make financial sense, even if you have a stronger case, according to Newdorf. Meanwhile, trial preparation alone could take 18 to 24 months, siphoning business productivity. Further, a lawsuit could expose your company to unwanted publicity, along with drawing attention to proprietary information and other business records from taxing authorities and regulatory agencies. While the monetary limits are considerably lower, small claims court offers quick resolution without the pesky lawyers’ fees.

If you’re planning to sue, first investigate the opposing party’s financial health and realize that half of all suits filed involve a counterclaim, says Newdorf. Don’t handicap your lawyer by failing to disclose all pertinent facts in the case, even the “bad facts.”

Don’t Get Emotional

Pursuing a case on principle interferes with sound business judgment. Lawsuits are not for the faint-hearted. Don’t take it personal. It's just business.

Don’t Have Unrealistic Expectations

Once you’re in a lawsuit for the long haul, it’s difficult to bow out. “The business world has a lifespan of days, weeks, and months,” says Newdorf. “Typically, litigation has a lifespan of years. It’s not going to be a fast and easy way to solve your problem.”