Contracts are drawn up and signed
so that all parties are protected
and expectations on both sides are spelled out. However, sometimes all
those involved may not be happy with
the outcome of a project and decide to
take the matter to court. Are there subtle
red flags that may warn of litigation on
the horizon?
“Usually, there are red flags, but they
are more than just subtle,” says Ed
Goldenhersh, a litigation attorney, officer
and general counsel for Greensfelder,
Hemker & Gale, P.C. “There are some
subtleties that you may not pick up, but
red flags should be identified.”
Smart Business talked to Goldenhersh
about what to look for and how to be
prepared in case you are summoned to
court.
What are the red flags a company should
look for that may warn of litigation?
The types of red flags depend on the
businesses and the particular situations
involved. If you’re in the manufacturing,
sales distribution or newspaper business, you may have a covenant not to
compete. If the holder of that covenant,
the employer, finds out that the employee may be looking for another job or that
the employee already has interviewed
somewhere else, and he requests a meeting with you, that could be a red flag. Or
if you, the employee, receives a letter
stating that you need to keep in mind
that you have a covenant that prohibits
you from working for a competitor or
that you’re privy to trade secrets, be
careful. These are warning signs.
Take another example. Maybe you’re in
a trademark situation where you are
using a trade name that is remarkably
similar to another’s trade name, although
you do not think so. If you continue to
use it and get a cease-and-desist letter,
that’s a warning sign you may be headed
to court.
Some signs may be a little more subtle.
Maybe someone suggests that there is an error in the contract’s language or asks
to have a contract clause renegotiated. If
they suggest that the contract is onerous
or that they need relief from one or more
of the obligations under the contract,
this could lead to problems down the
road. You have to determine if you are
going to hold the other party to the exact
language of the contract or provide a little bit of relief so you do not find yourself heading down the litigation trail.
Finally, if someone asks for backup
regarding your billing or invoices or job
progression, just them asking for it
could be a warning sign that they are
auditing the account and may find some
irregularities or questions.
Who should be notified when litigation is
imminent?
First, your business partners, management and legal counsel. They need to
know what is happening and the circumstances surrounding possible litigation.
Second is your insurance carrier. You
need to determine if you have a covered loss, whether they will furnish you with
legal counsel and whether they will
instruct you on what you should or
should not say.
It is important to bring in your lawyer
sooner than later to interview witnesses,
collect documents, preserve electronic
evidence, such as e-mails, and transcribe
voice mails. Once you know that litigation is imminent, you are obligated not
to destroy documents and electronic
data, even if your company has a records
retention and destruction policy in
place.
Can you bring in litigation and have it backfire?
Absolutely. Litigation can be seen by
the other side as the start of a battle
from which there is no turning back;
almost like a scorched earth policy, so to
speak. Litigation is expensive and time-consuming. If the company loses a lawsuit that you advocated to be filed, the
company has incurred a significant
expense in having pursued the failed
lawsuit in the first place. Furthermore,
you could bring a lawsuit and not anticipate that the party you are suing will file
a countersuit against you, which can
also result in a loss to your company on
the counterclaim.
Unwanted publicity is also a problem.
Let’s assume you’re a brokerage firm and
you want to sue somebody because you
believe there are some commissions that
are due and the other party does not
agree. That party claims that you misled
them on some investments and files a
counterclaim. The next thing you know,
other people you put in the same investment also are suing you because they
heard or read about the original lawsuit,
the investor’s counterclaim, and they
decide to seek redress.
ED GOLDENHERSH is a litigation attorney, officer and general counsel for Greensfelder, Hemker & Gale, P.C. Reach him at (314) 516-2667 or (314) 241-9090.