5 Litigation Secrets

These tips may keep your business out of court--or possibly help you win if you get there.

By Chris Kelleher Originally published Jul 12, 2005

Opinions expressed by Entrepreneur contributors are their own.

Q: Why do lawyers love to go to court?

A: Because lawyers always get their money, even if their clients lose theirs.

All joking aside, I'm sure that few business owners would dispute the fact that being in court is a very costly "civics lesson"-not only in terms of the legal fees involved, but also the potential judgment or settlement that the business may have to pay. On top of that, another huge cost that many business owners are unaware of is that the litigation process robs you of valuable time, attention and mental energy that you could otherwise use for running your business.

With that in mind, here are five litigation secrets that can help your business stay out of court-or at least increase your chances of coming out on top if you have to go there.

1. Insert a "If I win, you must pay my attorney's fees" clause in all your business's forms, contracts and agreements.It's a big shock to many entrepreneurs when they discover that the law will usually not allow them to recover their own attorney's fees from the other side even if they win! However, if you have a "loser pays" clause in your business's forms, contracts and agreements, then the law in many states will allow you to recover your own attorney's fees from the other side if you win. What's more, the threat of having to pay your attorney's fees may be enough to forestall frivolous lawsuits and get the other side to settle for a reasonable amount before the dispute ends up in court.

2. Insert a "binding arbitration" clause in your major or important contracts and agreements.In many states, both sides can avoid the courthouse altogether if they have already agreed to submit a dispute to binding arbitration rather than go to court. Many times, arbitrations of disputes are faster and less expensive than going to trial in court. And arbitrations are private matters that, unlike lawsuits, are not open to public or press scrutiny.

3. If you are threatened with a lawsuit, check with your insurance agent to see if the dispute or lawsuit may be covered by your business insurance policy.Many business owners are unclear as to what exactly is and is not covered by their business liability insurance policy. Rather than just assuming that a dispute or lawsuit is not covered, it's a great idea to check with your business insurance agent. If the dispute or lawsuit is covered by insurance, then typically the insurance company is required to pay for the legal fees in defending the lawsuit as well as any judgment or settlement that is within the policy limits.

4. Purchase additional liability insurance in advance to cover likely business risks.While business liability insurance may cover a lot of territory, it doesn't cover everything. The last thing you want to find out after you've been sued is that you could have purchased additional insurance to cover that specific type of dispute. For example, if your business has a high turnover of employees and is likely to be the target of a suit for employment discrimination, you should investigate purchasing what is often known as "employment practices liability insurance" to cover that specific type of issue. Similarly, if your business engages in a high volume of advertising, then you should investigate purchasing "advertising practices liability insurance" to cover claims in that area.

5. Insert a "limitation of liability and damages" clause in your important contracts and agreements.If you are dealing with another business, the law in many states makes it possible to have a clause in your contract that actually limits the amount of liability and damages that you may have to incur if something goes wrong. Let's say, for example, your business signs a $10,000 contract to install a computer system. In that contract, there is a clause that limits your liability to acts of gross negligence and further limits the amount of damages your business could be sued for to $10,000. While the other side may not necessarily agree to these types of limitations, it is certainly worth it to ask for them in your contract negotiations.

Now that you know the five litigation secrets, you should also know that implementing these is not a do-it-yourself project. You should discuss these with your attorney and/or insurance agent to ensure that you can take advantage of these secrets in your state.

But don't delay. These litigation secrets can save you time, aggravation and money-but only if you have put them in place prior to going to court, not after.

Note: The information in this column is provided by the author, not Entrepreneur.com. All answers are general in nature, not legal advice and not warranted or guaranteed. Readers are cautioned not to rely on this information. Because laws change over time and in different jurisdictions, it is imperative that you consult an attorney in your area regarding legal matters and an accountant regarding tax matters.

Chris Kelleher, Entrepreneur.com's former "Legal" columnist, is an award-winning small-business advisor and attorney. He's also a sought-after speaker and the founder and resident legal guru of The Law Firm For Businesses, a boutique law firm that helps business owners creatively solve their business and legal problems.

Chris Kelleher

Chris Kelleher is an award-winning small-business advisor and attorney. He's also a sought-after speaker and the founder and resident legal guru of The Law Firm For Businesses, a boutique law firm that helps business owners creatively solve their business and legal problems.

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