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Published: 2008-03-26

Common Sense Tips For Avoiding Litigation



This article may appear logically inconsistent: A trial lawyer, who is employed by a law firm that also specializes in litigation, is writing an article advising potential clients on how to avoid litigation. However, the inconsistency is one of perception only. In reality, litigation is merely one tool used to attain specific goals, which may be achieved more efficiently by other means. It is certainly not uncommon that part of a litigator's job will include fully analyzing and evaluating a set of circumstances to determine whether they warrant litigation, or whether there may be more efficient alternatives, especially when working with a client's in-house counsel.

As I was preparing this article, I met with several of my colleagues to brainstorm on how to avoid litigation. In preparing this initial list, however, we found that our paradigm predisposed us to initially identify better methods for improving one's chance of prevailing in litigation, rather than specific steps to avoid litigation entirely.

Many of the methods we first identified were heavily influenced by legal and procedural considerations (e.g., use of proper document retention policies to avoid a spoilation charge), as opposed to preventative business considerations. However, after refining our focus to avoidance of conflicts that lead to litigation, we became more consistent in our observations.

Without doubt, there are usually appropriate reasons for litigation, and it is sometimes the best approach for resolving a dispute. For purposes of this article, though, we discuss some of the common reasons why disputes often result in litigation, which, had they been properly managed, could have been avoided.

In narrowing and prioritizing our list of root causes of litigation down to five items, we considered the various reasons to avoid litigation, as well as the more common reasons for litigation arising in the first place. As I believe our thought process is instructional when analyzing how to avoid litigation, this article will first focus on the benefits of avoiding litigation. Next, the article will outline some of the primary causes of litigation. Finally, I will discuss our five suggestions on how to avoid litigation.

Why Avoid Litigation?

Depending on one's perspective, any number of reasons can be listed to support an argument that litigation should be avoided. In this article, we list the five reasons that seem to repeatedly resurface in periodicals, in lectures, and during discussions with corporate clients.

1. Cost Control:

Budget constraints and cost control are perhaps the most frequently raised issues by general counsel as reasons to avoid litigation. This is certainly understandable, especially from a business manager's perspective. The Legal Department is ordinarily not considered a profit center for a business, and therefore, annual expenditures are perceived to be deducted from the bottom line without any corresponding value being added to the business enterprise. While many practitioners and business managers disagree with this point of view, it is not our goal to debate it here. Instead, we merely identify cost as a factor commonly cited as a ground for avoiding litigation.

2. Risk Avoidance:

"This is your opportunity to control your destinies by achieving an amicable resolution to this dispute thereby avoiding the uncertainties and risks associated with a jury trial. I assure you that if both sides are willing to negotiate in good faith, then we will settle this dispute, . . . both sides will have managed their risk by avoiding a potential end result which could be devastating to your client's interests."

Have you ever heard this lecture before? Almost every mediator will make a statement substantially similar to the one quoted above when presiding over opening statements at a mediation. Mediators make this statement because they understand the psychology driving many mediations. For one thing, it is not unusual for mediations to take place shortly before a scheduled trial. By this point in time, the early bravado of many parties, plaintiffs and defendants alike, has disappeared. In fact, some parties never seriously scrutinize their prospects of success until the trial date approaches. The closer that date gets, the more urgently parties begin to re-evaluate their position, upside potential and downside risk, the ongoing cost (monetary and human) of proceeding to trial, and, to be candid, the hassle factor. A good illustration of this phenomena is that few parties prepare draft jury charges, and hence do not study the very questions a jury will be asked to answer, until shortly before trial. While this behavior may be a common human characteristic (i.e., to never do today what one can put off until tomorrow), it does not facilitate efficient risk management.

3. Distraction:

Litigation often distracts managers and employees from doing their jobs, which are ordinarily geared toward the basic business objectives of the company (i.e., making money). This distraction results not only from the time commitment which is necessary to assist trial counsel, but also from emotional factors often experienced during litigation (e.g., stress, fear, anger, etc.). These distractions are sometimes time-consuming and can certainly reduce productivity. Bottom line, unless the company is in the business of filing and trying lawsuits, litigation simply distracts from a business' goals and objectives.

4. Damage to Business Relationships:

Of course, many disputes, though certainly not all, will either directly or indirectly involve business relationships (e.g., disputes over the divestiture or acquisition of assets, indemnity, services rendered, warranties, vendors, fees, and other similar contracts, and many others). If not well-managed, these disputes often result in strong personal animosities directly impacting existing and future business. While making enemies is certainly not good business practice or, for that matter, good litigation strategy, it often happens, sometimes despite the best intentions and efforts of counsel and their client.

5. Public Relations:

We use the term "Public Relations" broadly. Litigation can sometimes have an adverse effect on a company's reputation and standing within its own industry, among potential investors or partners, consumers, industry oversight groups and the company's own employees.

Why Does Litigation Happen?

With all of these compelling reasons to avoid litigation, why does litigation happen so frequently, often involving parties who would prefer to avoid litigation? Of course, there are countless reasons why litigation commences. Some of the manageable reasons are discussed below.

1. Stubbornness/Pride:

This common human characteristic is most aptly illustrated by Dr. Seuss in his short story "The Zax." You may recall that in this story Dr. Seuss describes the North-Going and South-Going Zax who, during their journey, got into each other's way. The Zax refused to budge even though the compromise was easily identified and obtained, and even though their failure to compromise proved to be damaging to both.

While a Zax could become a possible client over the short term, he might not get far in the business world. Instead, a successful business and legal practice is oftentimes built on the foundation of compromise.

Having said that, however, we continually see circumstances in which litigation arises because, at least in part, one or more parties are simply too stubborn to compromise or even to negotiate.

2. Lack of Knowledge/Understanding:

When first confronted by a potentially threatening circumstance, a party will frequently fail to adequately analyze his own case. In other words, people will often decide to embroil their company in litigation based on a cursory review of the facts and they fail to adequately analyze critical considerations (e.g., the expected venue, the law that may influence dispositive motions or the charge of the court, the availability and merit of evidence [document and witness], cost and other fundamental criteria that can have a direct impact on the valuation).

3. Passion/Emotions:

Every trial lawyer has experienced situations where a party is primarily motivated by passion and not reason. Admittedly, the passion is sometimes understandable, at least when one views the matter from the perspective of the one personally affected. However, passion usually clouds a person's objectivity and inhibits his or her ability to rationally consider all the pros and cons before proceeding with litigation. Unfortunately, decisions regarding litigation are too often made by persons most personally affected, and hence, emotionally attached to the outcome.

4. Failure to Communicate:

Anyone who has seen Paul Newman in the movie "Cool Hand Luke" will remember the famous line that the warden would frequently say: "What we have here is a failure to communicate." Such a failure to communicate frequently produces misunderstandings between the parties which, in turn, can generate a misconception of reality. Parties may then be encouraged to either initiate litigation or to allow litigation to be filed against them when it might have been prevented by simply talking to the other side.

A good example of an occasional misconception resulting from poor communication is the belief that the other party is preparing to sue your company, and based on this belief, you seek to initiate a preemptive lawsuit. Another example is the belief that another party will quickly cave in once they are brought to court.

5. Greed:

Webster's Dictionary defines greed as follows:

"Wanting or taking all that one can get, with no thought of others' needs; desiring more than one needs or deserves; avaricious covetous."

Perhaps "greed" sounds too harsh, as none of us like to consider ourselves greedy. However, the "desire for more than one needs or deserves" often motivates a party to file suit, or, on the other hand, refuse a potentially reasonable settlement offer, thereby tempting another party to bring suit. As trial counsel, it is not uncommon to see parties resolve a dispute, after months or years of litigation, on terms similar to what could have been accomplished before litigation had commenced. Equally common is the party who makes an unreasonable offer, which forces the other party into protracted litigation even if that party had previously had a willingness to entertain good faith settlement discussions.

Five Common Sense Ways to Avoid Litigation

1. The Golden Rule:

We often want to envision our business or litigation adversary as having a monopoly on greed, ignorance of the law, neglect or evasiveness. Conversely, we want to envision ourselves as being fair, reasonable and correct on the law. Such a black-and-white view of the world is seldom accurate. Instead, as some clients come to accept during the litigation process, the other party may have a point. Perhaps the other party sincerely believes in his case, perceives a risk to his company which he cannot ignore, or experiences serious injury which he legitimately attributes in whole or in part to your client's conduct. When stepping into the shoes of the other party, one can sometimes achieve a more enlightened understanding of what motivates the other party. Some of those motivations may be well-founded, while others can often be refuted through reasonable discussions and disclosures. Before you get to that point, however, you need to at least consider what is objectively right, not only from your perspective, but also from the likely perspective of your potential adversary.

Many parties sincerely seek to determine the other side's position and needs in order to try to pursue a "win-win" agreement, or even when that is not feasible, at least to come to an arrangement that is justified by an objective analysis. Much too often, however, an individual or a party has a motive to simply win, not just by achieving some objective business resolution, but by beating the other side. I do not presume to know all of the reasons why this is sometimes done, though I do suggest that our society and business culture sometimes applauds the victory of the hard fought battle more than the amicable resolution which was much more easily concluded.

2. Improve Communications:

How can one justify initiating litigation against another party without first fully discussing other options? In certain circumstances, there may be justification for not communicating. For example, the other party won't agree to talk; the other party is being unreasonable; the other party is talking, but in reality, merely stonewalling; there are serious and legitimate issues of trust; there are legitimate legal or procedural issues requiring immediate action. Each of these reasons can and often does exist for refraining from or deferring communication with the other party. However, a party's failure to communicate is often much more difficult to understand or to justify.

Clearly, communication at the inception of a business relationship is desirable. Few would disagree with the need to carefully draft and read letters of intent, contracts, addendums, purchase orders with terms and conditions, or even letters and emails. Hopefully, if the parties are well-educated and prepared in the transaction being discussed, and are operating with basic good faith, then an enhanced flow of communication will timely identify areas for possible miscommunication, allowing those areas to be eliminated before they evolve into something much more serious.

Even after a problem has arisen as a result of a miscommunication, aggressive discussions can often resolve those problems before other factors come into play and potentially interfere with a resolution (e.g., harmful reliance, animosities, distrust). Certainly, if the other party opens the lines of communication, respond to those initiatives. Much too often, a trial lawyer will learn during the course of a deposition that a damaging perception was created, and a serious decision was made, when someone became suspicious or angry because the other party did not timely return a phone call.

3. Analyze your company's historic performance to determine what activities typically result in getting you into litigation:

Practices that result in a higher risk of litigation are sometimes deeply rooted within a business' operational structure. For example, a business' structure and culture may discourage or hinder effective communication between the business units and the law department. In addition, a business may lack procedures that assign responsibility for recognizing and assessing areas of potential risk.

The need to understand the company's business is one of the most critical considerations cited by top management in support of in-house legal departments. One benefit is that in-house counsel understand the company's historic deficiencies or weaknesses that have previously resulted in litigation. Examples of potential deficiencies may include, weaknesses in the contractual compliance and auditing groups, poor communication between the legal group and the various business units, poor handling of employee complaints or termination, inadequate screening of business transactions to properly identify and hopefully avoid future risk. The question you should regularly ask is, "Where have we been making mistakes and how do we address the cause to prevent a reoccurrence in the future?"

It has been our experience that some clients have successfully identified not only the general areas that more commonly generate litigation, but also conduct their own root cause analysis into each "event." A company should not study only those situations in which the company has been sued or has itself filed suit. It should also carefully scrutinize situations where a problem was resolved and suit was successfully avoided. Simply put, study your failures and successes, cure the causes behind the failures and reinforce factors supporting success.

4. Rapidly respond to potentially threatening developments in their earliest stages (i.e., don't sit on it):

Much too often, individuals in a business unit, in-house counsel and even outside counsel will receive notice of a potentially threatening situation, and then not act on it simply because it is not perceived as urgent. After all, if it is not on a scheduling order, it must not be urgent, right?

Unfortunately, opportunities to avoid litigation are often missed simply because inadequate resources and attention are dedicated to a dispute in its embryonic stage. One effective method to ensure proper identification and analysis of a potential or existing risk is to implement an expedited review procedure. Such a procedure can help ensure that resources are timely employed to enhance your prospects of avoiding litigation.

An expedited review procedure should be tailored not only to conform to the business structure, but also to the types of disputes or risks anticipated by the company. The example illustrated below could be employed in any one of a number of modified forms.

  1. Create a reporting procedure encouraging employees to report potential risks;

  2. Identify the stage of the risk and develop a plan for risk evaluation;

  3. Allocate the necessary resources and delegate authority as needed;

  4. Ensure follow-up;

Continue with basic steps to evaluate risk (or prospects if suit is being contemplated)

  1. Identify, interview and evaluate potential witnesses;

  2. Identify and retrieve important and potentially relevant documents and electronic information;

  3. Identify anticipated disputed and undisputed fact issues and key legal questions;

  4. Prepare a draft jury charge (or other detailed legal review) to assist in your preliminary win/lose evaluation;

  5. Take into account appellate considerations. Admittedly, consideration of appellate prospects are quite speculative. However, when deciding whether litigation is an appropriate option, one should also consider the risks of an appeal (i.e., cost, continued delay in resolution and potential of reversal);

  6. Venue/jurisdictional analysis. In the event suit has not yet been filed, determine where a suit may be filed. Of course, a determination of the jurisdiction and/or venue coupled with known or anticipated opposing counsel can affect both liability and damages evaluations;

  7. Prepare a preliminary liability evaluation;

  8. Prepare a preliminary damages evaluation;

  9. Prepare an analysis of available alternative dispute resolution options; and

  10. Prepare demonstrative budgets.

5. Incorporate risk shifting and litigation alternative provisions into your business practices:

Many business disputes will be either directly or indirectly related to contractual instruments. Hence, one powerful way to avoid litigation is to include litigation avoidance provisions within your contractual instruments. Examples of such provisions are provided below.

Litigation Avoidance Provisions

  1. Include a cure provision that requires the opposing party to provide notice of a perceived breach and a reasonable opportunity for you to cure the claimed breach prior to the opposing party having an opportunity to file suit;

  2. Mandatory mediation provisions;

  3. Arbitration provisions, sometimes preceded by mandatory mediation;

  4. Agree in advance to be bound by expert opinions rendered by mutually agreeable experts;

  5. Fact finding and/or neutral evaluation. This process is similar to the binding expert opinion discussed above, though it can be used to provide guidance in areas where an expert is not required. It can be designed to have a binding or non-binding effect;

  6. facilitation) procedure within your contractual/business relationships to provide impartial feedback during the early stages of a dispute, thereby facilitating early resolution before escalation;

  7. Mini-trials; and

  8. Require partnering, whereby parties agree to cooperate as a team to improve communications and avoid disputes.

Risk Shifting Avoidance Provisions

While a risk shifting/avoidance provision will not always prevent litigation, it can certainly be utilized to protect your company and enable it to absorb some of the risk and expense (financial and other) generally associated with litigation. It can also, when properly used, serve as a deterrent to litigation. Some examples of risk shifting/avoidance approaches are provided below.

  1. Indemnity and hold harmless provisions, which shift certain identified risks to another party. Pass-through language can also be utilized in certain circumstances to ensure that the indemnity provision benefits a party which is not even a direct party to the contract;

  2. Exculpatory agreements, whereby one party agrees to absolve a second party from any blame even when an alleged injury is caused by the negligence of the absolved party;

  3. Additional insurance provisions, whereby a party is required to name a second party as an additional insured on its own coverage;

  4. Release language;

  5. Disclaimer language (e.g., disclaimer of warranty); and

  6. Waiver language (e.g., waiver of consequential damages and waivers of subrogation).

Conclusion

The avoidance of litigation is usually preferred whenever reasonable alternatives can be employed to achieve the company's objectives at a lesser cost. While alternatives are not always available, they should be explored and precautions should be employed both prior to a potential dispute developing, as well as after a dispute has been identified. We hope this article provides some useful discussion for not only identifying some of the avoidable causes for litigation, but also some proactive steps you might take to avoid litigation.


ENDNOTES

[1] For example, some of the methods discussed during our early brainstorming included the following:

  1. Improve discipline in documents, communications and agreements, including better coordination between the business units and legal groups.
  2. Similar to the above, careful attention and scrutiny should be given to decisions on when to put a communication in writing. If it is important enough to put in writing, then it is important enough to carefully draft and read before it is conveyed. As a general rule, if your communication is subject to being misinterpreted or misunderstood, it will be.
  3. Read materials thoroughly, and if necessary, consult with your in-house legal group, before you sign them.
  4. Encourage a stronger working relationship between your in-house legal group and your various business units, and encourage each group to understand the other group's business. Incorporate the legal group into the business team to enhance better cooperation and communication.
  5. Audit existing company policies, both written and otherwise, to better ensure that they are needed, well-conceived, being communicated and being consistently followed.
  6. 6. Aggressively move to preserve evidence via a hold orders, document retention policies or otherwise. Always expect the unexpected.
The above is only a sampling of our initial list, which included dozens of considerations. We found it very difficult to prioritize these considerations in order to determine the top five candidates. Not surprisingly, each lawyer's prioritization was directly impacted by his/her own trial experience, which supports the old notion that a person primarily learns from his or her own (or a client's) pain.

[2] ”11. What is the next, most important, emerging law department management issue CLO's will face?
Top 3 Responses in Order of Frequency – With Representative Comments:
  1. Budget Constraints/Cost Control

    Being held to state-of-art standards on a shoestring budget.
    Ever-increasing scrutiny of Legal Department generated costs.

  2. Staffing Issues

    Maintain a reduced in-house head count . . . without negatively impacting an effective preventative law program.

  3. Compliance

    Continued resource and relationship implications of Sarbanes-Oxley.“
A ssociation of Corporate Counsel, The Opinions of Chief Legal Officers on Issues of Importance, The 2003 Chief Legal Officer's Survey, at p. 10 (Altman Weil, Inc. 2003) (Survey Question No. 11).

[3] According to the American Corporate Counsel Association, chief executives place great emphasis on general counsel's ability to assess and minimize risk.
”3. What you believe are the three most important things that a General Counsel does with, or for, the Board of Directors?

The top three responses in order of frequency:
  1. Candidly weighing and assessing the risk of various courses of action.
  2. Ensuring appropriate corporate governance.
  3. Ensuring a sound corporate compliance program is in place.
4. In which three ways does your law department best add value to the company?

The top three responses in order of frequency:
  1. Minimizing risk.
  2. Good alignment with business units (clients).
  3. Managing outside counsel related costs.“
American Corporate Counsel Association, The Opinions of Cheif Legal Officers on Issues of Importance, Third Annual Chief Legal Officers Survey, at p. 5 (Altman Weil, Inc. 2002) (Survey Questions Nos. 3 & 4).

[4] Dr. Seuss, The Sneetches and Other Stories p. 26 (Random House 1989) (1961).

[5]Webster's New World Dictionary, 613 (2d ed. 1976).

[6] "It is a general mistake to think the men we like are good for everything, and those we do not, good for nothing." The Quotable Lawyer 39 (David Sharger & Elizabth Frost ed., New England Publishing Associates, Inc. 1986) (citing George Savile, 1st Marquess of Halifax, England, Politician, 1633-1695 The Complete Works of George Savile, 2st Marquess of Halifax, 1912).

[7] According to the American Corporate Counsel Association, 93% of senior executives responding to a 2001 survey believed that an in-house law department was justified due to its ability to better understand the company. Seventy-three percent of the respondents believe that understanding of the company's business is critical, and 62% believe that in-house counsel's focus on prevention is critical (compared to only 19% for outside counsel). See Special Report: The View From the Top, ACC DOCKET (May 2001).

[8] According to some sources, the prospects for reversal are quite high. For example, according to a recent survey, one in three civil appeals result in a reversal, with historic percentages being as high as 51%, when a defendant appeals a tort or DTPA case. See Lynne Liberator & Kent Rutter, Evaluating Appeals by the Numbers, 66 TEX. BAR J. 768 (2003).