Risk Mitigation & Litigation Avoidance: Part 1 January 13, 2022

Squaring Away Business Contracts

By Tracy S. Francis, Esq.

The simplest reason for implementing best practices within a business is to avoid potential litigation and mitigate the risk of liability.

Litigation is expensive, which is motivation enough for businesses to avoid it, and although the monetary cost of litigation is an important consideration, the cost of time and employee resources required to engage in litigation should be considered as well. Additionally, without proper consideration, proceeding with litigation can have a negative impact on employees and company morale.

When it comes to the contracts and agreements that are common in your business, there are a few things to consider as you evaluate these documents to minimize your risk and avoid situations that tend to lead to litigation.

Establish Capacity. One of the most common disputes among businesses has to do with failure to fulfill contractual obligations. Before entering any agreement, it’s key for the business to determine if they can fulfill the obligations as stated in the contract and that ability and capacity should be clear.  Do you have enough staff? Supplies? Distribution channels?

Understand All Facets of the Contract. Be sure that you can handle the contract you are entering, know who you are contracting with, read the agreement, have someone who knows how to identify trap clauses read the contract (a lawyer), and make sure the business objective is worth the risk, and make sure that everyone is going into it with their eyes open so there are no surprises.

Identify Risk. Understand the real risks associated with the contract. If the worst-case scenario were to happen, what are you willing to chase?  What is the likelihood of a default due to a third-party supplier or distribution vendor?  Whatever those risks are, make sure they are within your tolerance threshold before you sign the contract.

Plan for Unexpected Outcomes. Make sure you understand the contract provisions pertaining to circumstances in which something goes wrong. Having options to cure or remedy defects in the product or delivery of the product can provide a much more palpable option to litigation, which preserves the contract and the relationship between the parties.

In all areas mentioned, it is vital that the business’ key stakeholders are well informed and on board with all aspects of the contract prior to finalization. Often, what is relevant to one area of the businesses isn’t a priority for another, but open communication will help ensure all areas know and understand the needs and objectives across your business. Additionally, the open communication – achieved when keeping the correct people in the loop – will often make it easier to determine if a proposed agreement is suitable, that the business can successfully take on the obligations, and that everyone understands and is comfortable with facing any unexpected outcomes that may come up.

The collaboration of all key players is just as important in the event the business does seek to bring litigation. Having best practices in place to help confirm that proceeding to litigation has company buy-in is key.  Some primary considerations for buy-in include confirming the business has sufficient financial resources (to cover the cost), that the people who need to be involved have the time to commit, and that the business has adequate human capital to reallocate and cover anyone who’s pulled away for the litigation.

If you’re unsure if your business has appropriate best practices in please for risk mitigation and litigation avoidance, please reach out to request a consultation or visit Tracy’s bio for her contact information to reach out to her directly.

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