Key advice on preventing or preparing for a business dispute

John Deis: Contract provisions that impact a party's pocketbook or shift risk are most likely to result in litigation. Examples of such provisions include payment terms, termination rights, scope of work, representations and warranties, indemnity or risk-of-loss provisions. Disputes develop most often out of unforeseen costs and circumstances, whether they are related to a contract or to external forces.

Courtney Ervin: To put it simply, if a party finds itself being asked to pay more than anticipated or is unable to pay—even if the costs were anticipated—litigation is more likely.

What should you look for if a dispute arises?

CE: Review the contract cover to cover to understand the provisions that are the subject of the dispute, other potentially implicated provisions, and to understand any provisions that govern when, where and how disputes are to be resolved. This includes notice provisions, choice of law or venue, mediation or alternative dispute resolution provisions or anything else that either party needs to do to preserve its rights in the dispute. Also, determine whether any other contracts are implicated and, if so, read those cover to cover to determine whether the contracts work in harmony or if any contradictions or inconsistencies will need to be addressed.

JD: Also begin to evaluate the amount of potential damages that are likely to be recovered or paid by the client. This includes contract provisions that may restrict the type of damages that are recoverable, such as limitations on consequential damages. Determine whether attorney fees may be recoverable and look for provisions that may shift responsibility from one party to another. These risk-allocation provisions include risk of loss or indemnity agreements. Also consider whether there is the potential for insurance coverage. Finally, evaluate whether damages are recoverable due to solvency of the parties or the ability/willingness of the client and the opponent to fund the litigation.

CE: At this point, it is also imperative to determine when the time for bringing a claim expires under the statute of limitations and consider what, if any, actions need to be taken in that regard. This includes entering into a tolling agreement or timely filing a lawsuit or demanding arbitration.

CE: Work with the business team to get a clear understanding of the client's perspective, including how the other side will frame the dispute, and the client's expectations and hopes for an ultimate outcome. At the beginning of the dispute, it is also important to obtain copies of all communications pertinent to the case and make sure there is a clear understanding of how things transpired.

JD: Armed with the above information, begin considering what the dispute resolution and litigation strategies are and make sure that business communications are aligned with those strategies. Identify problem areas early and fully apprise the business units of these problems in order to set expectations on the range of potential outcomes.

Is it beneficial to have both a business unit and in-house counsel working together from the outset of a dispute?

JD: Both groups bring to the table different information and perspectives that are critical to an effective litigation strategy.

The business unit best understands not only the facts of the case and the parties' course of performance but also the personalities and motivations driving the other party. The business unit often bears the financial risk and upside of the outcome of the dispute and understands the overall relationship between both sides. Early in a dispute, it is often best to have the business unit (with guidance from in-house counsel) be the voice of the company in communicating with the opposing party in an effort to reach a resolution.

CE: In-house counsel best understands how the contract terms and law will apply to the facts. This enables in-house counsel to assist in the following ways:

• Advising their client on how the contract provisions, law and facts may strengthen or weaken the positions of both parties.
• Reviewing and guiding communications between the parties and even internally so that the client is placed in the best possible posture in the event of litigation.
• Working with outside counsel to assess how a judge, jury or arbitrator may view the case and advising the client on the most favorable courses of action, all while setting realistic expectations on potential outcomes.
• Maintaining attorney-client and work product privileges and protecting internal debate and settlement communications.

In-house counsel can also help ensure that any notice or dispute resolution provisions in the contract are strictly adhered to in order to avoid adversely impacting the client's case for procedural reasons unrelated to the underlying merits of the dispute.

What are the best practices for communicating inside and outside of the organization during a dispute?

JD: Unfortunately, many lawsuits revolve around a handful of quickly drafted or unprofessional emails or other less formal communication that can be misconstrued or paint the author and organization in an unfavorable light. It is important to be thoughtful and deliberate in internal and external communications about the dispute and the opposing party. Key communication best practices include:

• Consider whether communications are best made in person or over the telephone.
• Do not send casual messages and do not vent or be sarcastic in any written communication. This applies not only to emails and hard copy correspondence, but also text messages, instant messages, social media, etc.
• Assume all internal and external written communications will be reviewed by a judge, jury or arbitrator. This means that tone and precision in language are very important.
• Involve in-house counsel in drafting correspondence about the dispute.

CE: Lawsuits are often tried years after a dispute arises. Because of this passage of time, written communications often determine or define the facts. It cannot be overstated how important it is to be intentional and careful in these communications.

Can you discuss indemnity and insurance items to consider early?

CE: First and foremost, it is important to keep all contracts and insurance policies organized in a single place or at least keep a record of where they are kept. This includes contracts and insurance policies held by predecessors and entities from which you acquired assets and liabilities, along with policies where you are named as an additional insured. It is not uncommon to learn of additional policies or agreements after a dispute has begun.

When it comes to insurance, determine which policies may provide coverage. Be sure to carefully follow notice provisions and identify any deductibles, self-insured retentions and policy limits. Also be sure to understand if defense is included. If so, know whether it applies toward policy limits and determine who controls the defense.

JD: Further, determine what indemnity or other risk-shifting agreements exist and what rights are provided or owed and if any notice requirements apply. Again, it is important to know whether these rights include the right to a defense, and, if so, which party has the right to control the defense. Also, look for risk-allocation provisions that determine who bears the risk when various types of losses occur. When and how indemnity rights are invoked can determine who may ultimately pay costs of defense or an ultimate judgment.

Other important indemnity questions to ask early include:

• Is there likely to be a dispute over indemnity rights?
• Is the indemnity provision enforceable?
• Is the indemnity obligation covered by insurance and, if so, has that insurance carrier been placed on notice of the claim?
• What is the best way to preserve these rights?

Are there any processes or procedures that can be put in place to help prevent future disputes?

CE: Involve a litigator in reviewing draft material contracts, including master service contracts that may cover numerous or high-risk transactions or long periods of time, as well as nonroutine contracts such as those relating to novel or substantial business operations. Their experience litigating similar contracts enables them to spot issues that may be overlooked or underappreciated by the parties closer to the negotiations. This includes identifying ambiguous terms and inconsistent language that makes litigation more likely, costly and risky. Litigators should also be involved in reviewing damages, indemnity, arbitration, choice of law, forum/venue selection, severability, merger/integration, and notice provisions, as these provisions often impact how a dispute will be resolved.

JD: Have a procedure in place to review contracts to ensure compliance and evaluate the need for amendments. This is particularly important in two circumstances: long-term contracts and contracts acquired from a different entity. In long-term contracts, the parties' course of performance tends to gradually and sometimes significantly change. When these changes are not memorialized in an amendment, it typically puts one party in a far more advantageous position than the other if a dispute arises.

CE: Also, it is important to review contracts after an acquisition in order to identify how they will apply moving forward, and whether the previous parties' course of performance complied with the contract. Often business units rotely continue their predecessor's course of performance, including billing and payment, without regard to whether the predecessor's conduct mirrored the contract requirements.