- To Avoid Getting Hit By The Litigation Bus: Stop, Look, and Listen
- July 11, 2013 | Author: Jonathan O. Hafen
- Law Firm: Parr Brown Gee & Loveless P.C. - Salt Lake City Office
Most business leaders understand that litigation can be expensive, time-consuming, and emotionally draining. Fearing that outcome, clients sometimes ask me how they can avoid a lawsuit. Unfortunately, a business can be sued by almost anyone at any time, whether they have a valid claim or not. However, the best advice to avoid litigation in the first place, and to give your business the best chance to prevail if you are sued, is the same advice mothers have been giving their kids for decades - stop, look, and listen.
Most business litigation relates to a contract freely signed by both parties. Under Utah law, you are presumed to have read and understood everything in any contract you sign. My experience has been that business leaders often focus on what they perceive to be the most important parts of a contract - what is being bought or sold and for how much - and ignore other provisions that could end up being far more important if things go wrong. Before you sign that contract - stop, look (carefully at the proposed agreement), and listen (to your lawyer).
For a fraction of what a company will typically pay for a month’s worth of litigation, your legal counsel can review that contract before you sign it and steer you clear of toxic provisions that could have potentially devastating consequences down the road.
By way of example, let me give you a couple of provisions I focus on when my clients ask me to look at their contracts before signing them. The first is arbitration and the second is indemnification.
A couple of weeks ago, I was talking to a business leader about arbitration provisions. He told me that most business schools still teach that every business contract should have an arbitration provision in it. I have a contrary view.
I counsel my clients to avoid arbitration provisions in almost all circumstances. Based on my experience and what I have heard from other lawyers around town, arbitration tends to take as much time as a lawsuit filed in court and can be significantly more expensive. There are obvious reasons for this. Arbitrations almost always require parties to pay a hefty filing fee and other administrative fees to the company managing the arbitration. These fees are almost always multiples (and in some cases exponentially so) of the single court filing fee.
In addition, one or both of the parties is always required to pay the arbitrator to be their private judge. Many contracts require a panel of three arbitrators, thereby tripling those costs. Arbitrators qualified to handle commercial litigation are usually very expensive, generally charging around $300 per hour in Utah and sometimes much more.
But perhaps the worst part of arbitration is that there is nearly no right to appeal. Under Utah law, there is almost no way to get a court to overturn a decision made by the arbitrator, even if the arbitrator ignores controlling law and obvious facts. In other words, if your arbitrator reaches a devastating decision that is clearly wrong, there is probably nothing you can do about it.
If the other side insists on arbitration, and you choose to accept that demand, there are ways to control the arbitration process. For instance, consider requiring use of the “streamlined rules” offered by the major arbitration administrators such as the American Arbitration Association and JAMS, Inc. These streamlined rules limit depositions and written discovery and set deadlines to complete the different phases of the arbitration process, thereby reducing the time and expense of the arbitration.
To improve predictability, you can also include in the contract that the arbitrator must issue a “reasoned award.” That means the arbitrator must provide the basis for the ruling. Without such a requirement, all you may get is a damages amount and little else.
It also is helpful to specify what state’s laws will apply to the dispute, and whether the arbitrator will be required to apply the Utah Rules of Evidence or the Utah Rules of Civil Procedure.
One complaint about arbitrations has long been that arbitrators have a tendency to compromise on an outcome, rather than making a hard decision that favors one party over the other. While not all arbitrators compromise in this manner, some parties address this concern with a “baseball arbitration” provision. In “baseball arbitration,” each party puts on its evidence and then gives the arbitrator a number. The arbitrator is required to choose one number or the other.
Again, your legal counsel can best advise you on the advantages and disadvantages to your business of an arbitration provision. Getting that advice before you sign the contract makes a lot more sense than getting it after you have received an arbitration demand in the mail.
Another provision that must be scrutinized during negotiations is any indemnification provision. Many contracts contain these provisions, and they are often overlooked as a “standard” provision having little impact. That is a trap for the unwary, and can prove fatal to a business. I have seen companies struggle mightily when on the wrong end of one of these provisions.
An “indemnity” is a contractual promise by which one party agrees to save another party from the legal consequences of certain conduct. If your business promises to “defend” the other company and “hold it harmless” (which is what the indemnification provision usually looks like in a contract), watch out. You have just issued an insurance policy.
If a claim is made on that insurance policy, you could be paying lawyers to defend that company from a broad array of claims, even if the lawsuits are frivolous. And if that company loses, you may have to pay the judgment on its behalf.
My best advice on indemnification provisions is always to get one from the other side and never give one. Sometimes that works. More often, however, parties insist on indemnification provisions applying to both sides. It is critical for your business to stop and look at the proposed transaction very carefully before agreeing to indemnify.
By way of example, if you are buying potentially dangerous products from a company that is new to you, it would be critical to get indemnification “insurance” from the seller. If you are the seller, you likely do not want any indemnification provision in the agreement.
Just as with arbitration provisions, indemnification provisions can be improved (from your company’s standpoint) if the other side insists on having one. Issues such as choice of law may be tremendously important. For instance, if you are providing the indemnity, you likely would prefer to have New York law apply than California law. In New York, indemnification provisions are generally construed far more narrowly than in California.
Under Utah Law the duty to defend and the duty to indemnify are construed broadly (similar to California’s approach). However, most states, including Utah, have what are known as “Anti-Indemnity” statutes which restrict parties under certain circumstances from agreeing to indemnify another party for that party’s own negligence. Typically, these statutes are limited to the construction industry, but each state’s laws in this area are different. Once again, this underscores the importance of carefully choosing what law applies to your contract and understanding how that state’s law applies in the context of each provision of the contract, such as indemnification.
If you are the party providing indemnification, there also are specific ways you can control your exposure, such as a cap on the total amount to be paid under the indemnity, or even deductibles that must be paid before the indemnity obligation kick in.
If you are the party receiving indemnification, you should ensure that the contractual language covers claims for breach of contract as well as negligence. Further, it is critical that you make clear that the indemnification provision includes the duty to defend. In some states, such as New York, such “duty to defend” language must specify that all reasonable attorneys fees and costs will be paid as they come due by the indemnifying party.
Again, the best practice with respect to indemnification provisions is to seek the advice of counsel before agreeing to one.
Entering into a contract is a bit like trying to cross a busy street: Stop before you sign, look carefully at each part of the agreement and make sure you understand your obligations, and seek and listen to the advice of your lawyer. A slight delay to take these key steps is much better than being hit by the litigation bus.