Mitigating Litigation Risk for Small Businesses

David W. McCormack

In the business world, there is always the risk of litigation–even for small businesses. Unfortunately, as a business continues its operations, the possibility of litigation turns from an “if” to a “when.” Litigation can be expensive, time-consuming, and stressful. Here are some basic considerations that can help mitigate the risk of litigation for a small business.

1. Put it in writing in definite terms.

As stated in Field of Dreams, “If you build it, they will come. . .” It is “they,” right? Or is it “he will come?” People are not always great at remembering the fine details. That is why it is strongly advised to put business agreements in writing with specific, definite terms. Without an unambiguous written document that clearly articulates the parties’ obligations, parties are likely to have differing recollections of what was agreed upon. Were those parts deliverable in 30 days or 90 days? Litigation tends to arise from ambiguities. Even when doing business with a friend, a neighbor, or a repeat vendor, having an unambiguous written contract can mitigate the risk of litigation by clearly stating each party’s obligations and available remedies in the event of a disagreement. Furthermore, if litigation does arise, a clear, written document can prevent the case from devolving into a “he-said she-said” argument over the terms of the contract. The discipline of subjecting an agreement to writing also forces the parties to define their intentions more thoroughly than typically what occurs in a conversation. The process of drafting and executing a contract leads to a clearer understanding of each party’s expectations.

2. Keep work communications professional.

If a business does become involved in a lawsuit, it is best that the business’s owner and employees have conducted themselves professionally, especially in business-related written communications. One of the early stages of a lawsuit is discovery, during which the parties exchange potentially relevant documents, including emails and other communications. The scope of discovery is wide, and a lawsuit may necessitate handing over business emails and text messages—including intra-office communications—to the opposing side. The opposing attorneys will look through the communications and try to use them to make the business look unprofessional and diminish their credibility. The joke that was emailed between employees that was funny in the moment may not appear so funny when taken out of context and presented to the sender at a deposition, or worse, told to a jury. That is why it is highly advisable to keep work communications professional and separate from non-work communications.

3. Don’t keep everything forever.

While putting things in writing is valuable, it is also important to know when to get rid of those documents. Keeping electronic documents is easier today than ever, but that is all the more reason to have a clear and robust document retention and destruction policy, which involves the regular destruction of old documents during the normal course of business.[1] In a lawsuit, as part of the discovery process, the opposing party may make substantial document requests, reaching years into the past. It can be needlessly time-consuming and expensive to review and determine the relevance of those documents. A document retention and destruction policy can help mitigate the cost of the search for and review of old documents.[2]

4. Obtain insurance and understand your coverage.

When people think of insurance in a business setting, they likely think of insuring physical assets, such as real property and equipment. However, insurance policies can cover a variety of things, such as business interruptions or legal liability. One important aspect of insurance when thinking about mitigating legal risk is the duty to defend. Even if a business is sued through no fault of its own and ultimately wins the lawsuit, it may still need to pay legal counsel a substantial amount to defend itself. However, if the insurance policy contains a duty to defend clause, that means that, in certain circumstances, the insurance company will provide—and pay for—legal counsel to defend the business. Insurance coverage is dependent on a variety of factors, including providing timely notice to the insurance company of the potential claim or liability.[3] Having and understanding a business’s insurance may protect that business from out-of-pocket legal expenses in the event that business finds itself in court, even through no fault of its own.

5. Develop and maintain consistent employee policies and practices.

As a business grows, it will likely hire more employees. With those employees comes an increased need for policies and guidance. Are employees allowed to work from home? How are they expected to dress? Who has access to what parts of the building? Are employees required to sign a non-competition agreement, a confidentiality agreement, or a non-solicitation agreement? Many employment-related disputes arise from a perception of unfair treatment on the part of an employee. Avoiding this perception requires consistency. Consistency is bolstered by having and following well-defined employment policies. Significant employment decisions, such as disciplining or terminating an employee, should be made only after careful consideration of the facts and consultation with an employment attorney.[4]

Every business is unique and can face legal challenges and risks. Understanding the legal landscape surrounding a business and considering the topics mentioned here can help mitigate some of the risks of litigation for a small businesses.