Is early planning a vaccine for litigation?

Litigation and dispute resolution can be an expensive and time consuming exercise, particular to owners of small to medium size businesses. An inquiry conducted by the Australian Small Business and Family Enterprise Ombudsman, which surveyed small business owners on their experiences in litigated disputes found that on the whole, more than half believed that they had ever been successful in litigation or dispute resolution. The reason many businesses feel that they ‘fail’ in litigated disputes are set out below.

Failure to plan or budget for legal expenditure

The ‘Access to justice: where do small businesses go?’ paper showed that one of the more common reasons that business owners feel that they fail in litigated disputes is that the costs of litigation are higher than expected. While legal costs can be expensive, it is also often the case that legal costs are an unplanned expenditure in the business, meaning funds are usually not available when needed most. Usually, this is when someone else owes you a debt.

Businesses can protect themselves against incurring unexpected legal bills by planning and budgeting to incur a certain amount of legal costs for dispute resolution each year. Having the amount budgeted allows the business to plan ahead for disputes, knowing the amount it can afford to spend on debts, and being able to weigh that budget against the balance of aged debtors to effectively decide which debts should be pursued.

Poorly drafted terms and conditions and other commercial agreements

Many smaller businesses will avoid incurring legal expenses in establishment by drafting their own terms and conditions or commercial agreements, ‘borrowing’ those agreements from the results of a quick Google search, or doing without altogether. In most cases, the transactions entered into by the business will proceed smoothly, which tends to reinforce the idea that legal costs spent on drafting agreements are a waste of money.

Most often, disputes arise where terms are not mutually understood by parties to the agreement, either due to parties not obtaining advice on the terms, or due to verbal agreements which are either vague or inconsistent with the drafted agreement.

Unfortunately, litigated disputes become completed when the documentation entered into between the parties are either poorly drafted, not in writing, or otherwise ambiguous. Agreements found by a Google search may not be enforceable in a particular jurisdiction, or simply not well understood between the parties. This requires significantly larger volumes of evidence to be produced for relatively small debts, which may result in less disputes being resolved quickly and cheaply, leading to a higher perceived ‘fail’ rate for businesses.

Failing to adopt a commercial approach to dispute resolution

Commercial disputes are not personal, and even the ‘worst’ negotiated settlement is likely to better any judgment delivered on a final hearing of a dispute. By the time disputes (particularly smaller claims) reach a final hearing, the parties involved have incurred a significant amount of legal fees, as well as a large amount of time of effort, with the costs all told likely exceeding the amount in dispute.

Court hearings are notoriously unpredictable, your lawyer cannot guarantee a successful outcome, and costs orders awarded on your success will likely fall well short of the actual expense of litigation.

This can be avoided by adopting a commercial approach to litigation early in the dispute, by attempting alternative dispute resolution, making settlement offers early and making genuine attempts to compromise the dispute. While this may lead to accepting less than you are owed for the service given, a well negotiated early settlement can avoid incurring unnecessary legal costs in the long run.

By planning and budgeting for dispute resolution, and by seeking out legal advice at the front end of commercial agreements, businesses can be better prepared and achieve more commercial outcomes out of disputes. Early planning is not a vaccine for litigation, however can significantly reduce your exposure to legal costs in disputes. Effectively negotiating and resolving disputes also assists a business in maintaining important relationships which might otherwise be lost following a protracted legal dispute.

For more information, please contact Associate Mitchell Micevski.

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