In the typical scenario, in-house counsel is notified of business disputes when a lawsuit has already been served or when negotiations have broken down and the parties are deeply entrenched in their positions. At these points, it is very difficult or impossible to avoid litigation. While we enjoy lawsuits and the courtroom, we know your business can be better served in most instances by avoiding expensive and protracted business disputes. This article provides suggestions for working with business colleagues within your company to minimize risk and proactively avoid litigation.
PREVENTION IS BETTER THAN CURE
One of the most effective ways to avoid litigation is to train your business colleagues in basic contract legal principles. It is surprising how many commercial disputes could have been avoided had the individuals negotiating the contract and monitoring performance under the contract understood basic contracting law such as offer and acceptance, breach, notice, cure and waiver. Routinely when interviewing employees who are already in the midst of a dispute, we find them truly shocked to learn that simple email exchanges between the contracting parties created a contract, amended it, or perhaps even waived a breach. They are equally befuddled to learn that email “notice” of a potential breach of contract may not be sufficient to constitute true notice, as many contracts require notice of breach to be in writing and delivered to specified individuals. We now routinely recommend Contracts 101 training once a year for clients who engage in the contracting process on a day-to-day basis.
Business colleagues should be provided guidance on documenting contractual activities. The tremendous speed of business activity, coupled with a pervasive concern about putting things in writing caused by discovery in product liability litigation, often leads to critical actions being undocumented. Despite concerns about discovery, there are activities in the commercial setting which should be regularly documented. Business colleagues should be trained to document concerns about another party’s failure to perform under a contract, and contracts should almost never be terminated without some written memorialization to the other side. Although critical communications should involve the assistance of in-house counsel, it is not possible for legal to be involved in regular but potentially significant contract activities. The better trained the business team is to handle regular documentation, the greater the opportunity will be to avoid litigation or, if litigation occurs, prevail.
Our nonlegal business colleagues are often very good at their positions, and their roles may include oversight of contractual relationships. When disputes arise over business issues, such as timing of payment, the provision or quality of services, or actual breach of contract, such roles inevitably lead to efforts on the part of the businessperson to address the situation without the involvement of in-house counsel. These efforts are often accompanied by emotion and decision-making that are not rooted in the terms of the contract or applicable law. In other words, decisions are often made after disputes arise that are not based on the parameters that will apply in the event of litigation. This may be good for outside counsel’s employment, but it is a headache for you and a distraction from your company’s business.
While in-house counsel are too busy to be involved in every contentious business decision, business colleagues should be advised to consult with in-house counsel whenever they believe a breach of contract has occurred and before the situation is irreparable. As part of this “reach-out to legal,” business colleagues should be asked to provide the contract and all communications related to the dispute. Business relationships in the pharmaceutical and medical device industry are controlled by a wide variety of contracts, including master agreements and fine-print purchase orders, and we often see business members taking positions in a dispute without regard to the terms of the contract. This is a good training point, as it is an opportunity to remind business colleagues about the importance of contracts and a “marker” for business colleagues to use as a reminder to contact legal. Having been reminded that the terms of the contract will control in the event of a dispute, they should be instructed to contact legal anytime they find themselves reviewing a contract in an effort to address a dispute.
Even if the business colleague contacts the legal department early in the process, there will already be written communications between the parties about the dispute. These are almost always emails, and they will inevitably be one side’s exhibits in litigation. Although it seems obvious that such communications must be evaluated along with the contract terms in deciding how to address the dispute, our experience is that in-house counsel are not informed of these communications until after litigation. Reviewing these materials before becoming entrenched in a position provides a tremendous opportunity to resolve a dispute early and well before litigation or the involvement of outside counsel.
EVALUATE THE RELATIONSHIP FOR CREATIVE SOLUTIONS
No one wants business colleagues to act as lawyers, and litigators should not attempt to usurp a businessperson’s industry experience and judgment. But there is an interesting role reversal that can occur as business disputes develop. Businesspersons with wonderful judgment often lose that judgment as negotiations become acrimonious and veer toward litigation. These colleagues sometimes adopt the persona of their favorite television lawyer and find they relish the opportunity to “impart some justice.” Although it doesn’t have to reach that point for the “role reversal” to occur, business disputes are opportunities for in-house lawyers to think like a businessperson (hopefully counteracting any television lawyering). Is there an ongoing business relationship? If so, how can the strength of that relationship or the needs of the company be factored into early dispute resolution? Can the company obtain or provide in-kind credits or offsets to resolve the dispute? Are there going-forward discounts that could be applied to resolve the situation? Ongoing business relationships provide opportunities for creative lawyering that positively impact the business. Embrace them and put on your business hat – just don’t go too far in emulating your favorite television businessperson.
Choice of law and forum selection clauses can provide powerful support for early dispute resolution. Certainty about the applicable law allows you to evaluate the likely outcome in the event of litigation. If the choice of law provision applies the law of the company’s home state, then in-house counsel are likely familiar with the law. This will allow informed decision making without the need for legal research at every turn and will inevitably save costs and time. Similarly, a forum selection clause lets you know what to expect in the event of litigation. Knowing the bench and typical jury can give you confidence in a position even if it leads to litigation. It can also provide confidence for providing senior management the parameters of a high-stakes dispute. If not included already, contracting templates should be modified to include choice of law and forum selection clauses.
IN SUMMARY, THE FOLLOWING ACTION ITEMS MAY BE USEFUL IN B2B LITIGATION AVOIDANCE:
- Provide training regarding basic contract law.
- Advise business colleagues to involve in-house legal early and proactively.
- Identify and review the contract(s) and key correspondence about the dispute before positions are entrenched.
- Treat ongoing business relationships as opportunities for creative solutions.
- Review your company’s contracting templates for choice of law and forum selection provisions and understand their importance to early dispute resolution.