Avoiding and Minimising Litigation Risk

Most companies will unfortunately find themselves being involved in commercial disputes at some point. These can be difficult, expensive and time-consuming for all involved, especially for company directors and senior management teams.

The lawyers at Freeths LLP have extensive experience in managing disputes when they do occur and are on hand to help clients achieve cost-effective commercial solutions in relation to these. Two key pieces of advice that we regularly give to our clients are to review regularly and act quickly. However, in our view the best way to manage commercial disputes is to avoid them altogether.

There are a number of ways that businesses can seek to minimise the risks of being embroiled in litigation. We have set out below a list of important considerations which may prove helpful and save your business money in the long term

• What transactions are your business regularly involved in?
• Whether these are acquisitions, disposals, key supply contracts, finance or construction projects, these will all require contracts with third parties and it is important to ensure that all business contracts are recorded effectively and in writing.
• Have you made sure that all key issues are provided for in the contract and that it deals with risks, describes product specifications, sets out timings, payment terms, delivery terms, costs, remedies and termination events?
• Don’t forget to include governing law and jurisdiction clauses in your contracts so that if disputes do occur you will at least have some control over where they are dealt with. This is especially important if you deal with suppliers or customers in different countries.
• Bear in mind including exclusion clauses, arbitration clauses or alternative dispute resolution clauses which could also help avoid a dispute or help parties retain control without involving the courts.
• Review standard terms of business regularly and look at your internal contractual processes to make sure that your terms are going to effectively incorporated into the contract rather than the other party’s.
• Keep written records and store documentation safely so that you can access these easily if you need to provide proof.
• Give business managers a standard form of contract to use so that you are happy that all key terms will be considered as part of the negotiations. Encourage them to attend training sessions on contract law issues. Consider outsourcing contract negotiation by using commercial lawyers to support you through the negotiation process or alternatively to negotiate key contracts for you depending on their value, nature and importance to your business.
• Are you dealing with consumers? You may want to consider reducing consumer enquiries and disputes by simplifying standard terms and conditions. It may also be possible to reduce the risk of class or collective actions by agreeing to arbitration in standard terms and conditions and including a class action waiver.
• If you are dealing with a new party, have you carried out searches and due diligence to find out more about them and to flush out any potential risks?
• If your business is involved in manufacturing or retail, do you have processes and plans in place in respect of quality management and product recall? Are products labelled and do they have clear instructions which include warnings where necessary?
• Contractual terms and insurance are also key considerations for these types of businesses in order to minimise exposure in respect of product safety claims.
• When did you last consider your day to day business processes and policies? For example, health and safety and employment policies all need regular review and updating to ensure compliance and minimise the risk of any claims, sanctions or penalties.
• Give insurance some serious consideration. Check that your insurance policies and contracts complement each other and don’t leave any gaps or overlaps. Ensure that your insurance policies are not invalidated by provisions in your contracts. Look at the claim disclosure requirements as these can be onerous and require significant time and resource.
• Consider legal expenses cover carefully. Look at what is covered and the degree of exclusions and limitations that will apply. Check how involved your insurer will want to be if disputes do occur. If they involve personnel or dictate that particular law firms will be instructed then you might want to bear this in mind. Extra layers of personnel can cause increased administrative burden and if you want to retain control of managing disputes then this might be an important factor for you when choosing cover.
• If litigation cannot be avoided and your case has a more than 50% chance of being successful then “after the event insurance” may be an option for you. Broadly this will cover you for legal costs and for adverse costs awarded against you in the event that you are unsuccessful. However, after the event insurance premiums can be costly and since 1 April 2013 these are not generally recoverable from opponents.
• If your case is high value and has good prospects of success then litigation funding may be an attractive solution. Legal funders tend to pay all upfront costs and disbursements which are then reimbursed by the insured party if the case is successful. Be aware that the legal funders will also take a share of any financial award made. This risk management tool can be very effective in our view because it gives clients greater certainty on costs as well as increased access to justice.