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A small business blog featuring tips to help entrepreneurs succeed in the small business world. Topics include family business, human resources, marketing, money, networking, operations, ownership, startup, taxes and technology.
Avoiding the Courtroom: Tips for Deterring Litigation
It’s a risk every business owner takes the moment he/she opens their doors – being sued. And there are a lot of reasons your business could be pulled into court – everything from unpaid bills to outrageous claims of fraud against your company.
Anything from the substantial and justified to the frivolous can come against your business at any moment, and if you want to avoid the long, tedious court process, you’d better make sure you’re ready.
Attorney Fees Clause
Every contract you have should contain a dispute resolution section. Within that section, it’s a good idea to state that, should any dispute proceed to litigation and you win the case, the client would be responsible for your attorney fees.
This would make any client who doesn’t really have a case against you think twice before filing a lawsuit. On the other end, should you need to sue a client for an unpaid balance, etc., they will probably refrain from fighting you much if they know they will have to pay attorney fees for you.
Limitation of Liability Clause
In addition, consider adding a clause in your contract that limits your liability and damages, should there be a flaw with the product you provide, etc. For example, if you provide a product or service on a regular basis that is worth $5,000.00 then put a clause in your contract that limits your liability to $5,000.
This covers any defective products you may have, avoids needless court proceedings to determine an amount for damages, and keeps you from losing the shirt of your back to pay for non-economic damages.
Another option is to put in the contract that any disputes that cannot be immediately resolved are to be conducted exclusively through Arbitration. More or less, arbitration is another form of mediation.
One party files a form requesting Arbitration and provides the fee up-front, which can be in the ballpark of $750. This sounds like a lot, but can be much less than a trial in court would cost with attorney fees and the like. And, whatever is decided during Arbitration, is held with the same regard as a judgment in court. More information can be found on the American Arbitration Association website.
It’s important to be aware that your business insurance may cover your liability if there is a dispute. If something comes up, the first thing you should do is check with your insurance company to see if such matters are covered under your policy.
If the situation is covered, the insurance company will take over negotiations on your behalf and, hopefully, settle the matter. Be aware, however, that the insurance provider will only pay out to the extend of the policy limits. You are responsible for anything above that (but they will always try and settle below the policy limits if possible).
Another smart move, before any threat of lawsuit even comes close to your business, is to purchase additional liability insurance through your provider. A typical business policy will, unfortunately, only cover minimal disputes.
There are additional provisions for matters that would be more likely to occur for your specific business – from employment practices liability coverage to advertising practices liability coverage and the like. Be sure to talk to your provider and be aware of all of your options.
Though these steps cannot guarantee that your business won’t go to court over something, they will help to avoid it as much as possible. Keep in mind that the best thing to really do is protect your business and your customer. If you do both honestly and efficiently, then the problems should be minimal.
Always consult with an attorney before changing or developing your business contracts to make sure your business is fully protected under the law. The statements in this article are not to be taken as official guidance, but, rather, as an informational supplement to the legal aspect of your business strategy.
• Entrepreneur.com: 5 Litigation Secrets
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