Anatomy of a Business Dispute: When is it Time to Call Your Lawyer
Almost all small businesses frequently encounter disputes—some small, some not so small. In the vast majority of these business disputes, the small business owner can resolve the conflict without resort to a lawyer. In this blog, we describe what measures you can take as a small business owner to minimize the risk of business disputes, tactics to take to resolve disputes when they arise, and finally, when after a dispute arises is the best time to see your small business lawyer.
These business disputes can be between the small business and its employees or independent contractors; or its clients or customers; or its vendors or distributors; or its competitors; or, as we have covered in previous Rosten Law blog posts, between or among the small business partners, owners or board members. Even startups are not immune from disputes between their founders and investors.
Closely Held Businesses: Agreements and Disagreements
Resolution of Disputes Among Business Partners in Closely Held Businesses
Written agreements provide the best prophylactic against business disputes
The first place to look when a business dispute arises is the agreement between the parties. If you consulted with a small business lawyer, then you may have come up with an agreement to detail the rights and responsibilities of all of the parties in the transaction. If you have an agreement with your client, you may have a services agreement. Or you own some intellectual property, you may have a licensing agreement in place.
Some business owners are accustomed to operating without agreements. So long as they don’t have any disagreements, they are safe. But there is hardly a business without disagreements. Small business owners who have some foresight will made agreements with those folks he or she has contact with, clients, employees, vendors, and others.
Your small business lawyer will advise you to reduce your understanding to writing. That includes employment agreements or independent contractor agreements. The understanding between members of a limited liability company may be memorialized in an operating agreement or in some jurisdictions known as a limited liability company agreement.
If you have a written agreement, then you may have some guideposts not only regarding the respective rights and obligations of each party, but also what to do if there is a dispute. If you have a well-written agreement then you can count yourself as lucky.
An ambiguous or unclear agreement may be just as bad or worse than having no agreement at all. An ambiguous agreement adds fodder to the fire in a business dispute.
Conflict resolution before a lawsuit
Usually the least expensive time to resolve a dispute is early on—but that is also the time that emotions may be running high and each party feels aggrieved. But the outset is the best time to use your negotiating skills to get to yes.
There are numerous books, articles and blogs on conflict resolution. If you haven’t read Fisher and Ury’s Getting to Yes: Negotiating Agreement Without Giving In or if you have it on your bookshelf, now is the time to dust it off and try to resolve any conflict you may be having.
And the fact is that since you are in business, you probably have negotiated your way through many disputes without litigation or a formal dispute resolution mechanism.
Time to see your small business lawyer
If you know what your rights are under the agreement, it will be easier to negotiate your way through a business dispute. That means usually the earlier the better to consult with your small business lawyer to get some guidance.
You need to be able to articulate what your goals are in resolving the dispute. There may be many factors at play that you may want to consider:
• Continuing relationship. Are you going to have a continuing relationship with the other party?
• Opportunity cost. Do you want to be spending your time in expensive litigation while you could be out making money?
• Expense of litigation. Litigation is expensive and standing on principle may not pay the bills.
• Effect of dispute on other relationships. You may want to consider what effect the dispute will have on other relationships, especially if you or the other party decides to make the dispute public through social media or otherwise.
• Make a lesson out of dispute. One small business owner would sue any of his customers if they were late with payment. The business provided exceptional service and demanded in return prompt payment from its customers. The business owner wanted other customers to know that if they didn’t pay they would be sued.
If you go to an attorney who is not business savvy, then the attorney may immediately recommend litigation. Some attorneys simply do not know how to resolve disputes; they are paid to litigate and the longer they do not resolve the dispute, the more they can collect in hourly fees. One attorney recently counseled his clients not to attend a meeting among the principles to try to resolve an ongoing dispute. He gets his attorneys’ fees the longer the action is not resolved.
Deadlock: dispute resolution mechanisms
Despite your best efforts, you have been unable to resolve your dispute. You may still be able to avoid litigation if you and the other party are able to agree on a mechanism to resolve the dispute short of litigation such as through mediation or arbitration. In another blog, we will discuss the differences between mediation and arbitration and the advantages and disadvantages of each. In the following blog, we discuss responses to litigation for a small business.