The Business Value of Engaging a Litigator Before You Are In Court

The point when what began as a negotiation, or even a conversation, ripens into a full-blown lawsuit is rarely clear. Yet it is certainly clear that the courtroom is not where any of the parties to a once-promising business relationship wanted to land. Without careful management from the outset, myriad day-to-day business disagreements could expose companies and their owners to significant attorneys’ fees and, quite possibly, a damages award.

While perhaps counterintuitive, the involvement of a litigator at the early stages of a business rift can facilitate brokering a resolution that avoids a protracted court battle. Having fought the post-fallout consequences of many failed business relationships, litigators are uniquely situated to spotting kinks in a transaction that if ironed out pre-dispute could save the parties a lawsuit. Outlined below are some of the factors that warrant leaning into litigation counsel as a means of proactively staying out of the courtroom.

The Contract is King: Know What It Says

It is quite common for transactional parties to do business with each other in a manner not quite in accordance with the precise rights and obligations laid out in their written agreement. Veering from the letter of the contract is entirely normal, and there is generally no reason to rethink course. Until something goes wrong.

When a disagreement arises, parties are quick to harden in their beliefs as to the relief they are entitled to as a matter of law. These beliefs are typically shaped by how they have previously transacted business with their counterparty. Consequently, laments over how business has always been conducted, or over how business should be conducted as a practical matter within a certain industry, are frequent. Unfortunately, courts only care about the contractual terms. Absent a gap in the contract, the industry standard for conducting business is of little relevance. After all, if every dispute were adjudicated by the purported practices of an industry, there would be no common law.

Working with a litigator at these pre-dispute stages is one way of ensuring businesses have a reasonable expectation of their actual entitlements under the law. A litigator’s ability to identify actions that breach an express contractual obligation, or, alternatively, breach a party’s obligation to carry out the contract in good faith, makes him or her particularly capable of eliciting from a client’s story the parts that are actionable under the law. Even if a client has a host of complaints with their counterparty, only a handful might satisfy the necessary elements of a cause of action. Undoubtedly, the remaining nonactionable woes could in fact be far more important to the client from a business standpoint than the actionable ones. This misalignment is exactly why the client should be apprised early on regarding how each of its grievances are likely to be viewed by a court.

As problem solvers, attorneys are always looking for ways to help companies navigate dicey situations. Part of this entails correctly framing their rights and obligations, the agreement governing the pertinent transaction being the guidepost. A pre-litigation tour of that agreement’s terms, and their attendant consequences, both mitigates litigation risk by cautioning clients to live up to their own contractual obligations and educates clients on recognizing when their contractual rights are being violated. Having this awareness allows clients the opportunity to strategize on the aspects of their business they want to focus on, determine areas to which they want to devote resources, and, most importantly, pick the battles they deem worth fighting.

Judicial Interpretation and Enforcement of Key Contractual Terms

A material contractual term that is drafted in your favor may seem like a win—if you can enforce it. For instance, a clause affording one party a high figure in liquidated damages will be invalidated as a penalty if the amount due in liquidated damages bears no reasonable relation to the probable amount of actual damages.[1] A non-compete or non-solicit clause that is broad reaching in scope, geography, or time is of little to no use in protecting your business if a court finds it is not narrowly tailored to serve a legitimate interest.[2] Even a foreign choice of law provision may be unenforceable if it is offensive to the fundamental public policy of the state where the court sits.[3]

Before wielding what you believe is your strongest weapon, be sure you can deliver on the threat. A litigator’s grasp of the state law applicable to contractual provisions such as the ones cited above spares you from losing credibility with a counterparty by advocating for a position that would not hold water in court. Conversely, with the advice of a litigator, you too have ammunition against a counterparty who claims a contractual entitlement based on an unenforceable provision.

Signal Your Potential Adversary

In addition to shining a light on the legal landscape and managing expectations, bringing on a litigator can function as a signaling device, showcasing to your counterparty that you are serious about enforcing your rights and remedies. This goes beyond telling the other side that you are rearing for a fight. To the contrary, you want your counterparty to know that you are fully aware of all acts, or omissions, that are and are not permissible under the terms of your contractual agreement. A counterparty that knows this is less likely to act in bad faith or try to take advantage of a situation.

Watch Your Words

If litigation becomes inevitable, you need to ensure your prior communications, and in

particular your written ones, cannot be used against you. As an example, an email to a counterparty that reflects your carrying on business as usual, despite knowledge of the counterparty’s breach, might be evidence of waiver or ratification. Similarly, an email exchange departing from the contract’s requirements might be considered an amendment or modification. A litigator’s skill in crafting language that preserves your rights, and your contract terms, keeps you from making representations that will haunt you in court.

Takeaway: Think Like a Judge 

Transactional parties, and their attorneys, can be inclined to go it alone when it comes to running their negotiations. This is understandable. They are the ones who structure the deal and the ones closest to the operations of the business. In this regard, the client and its transactional attorney function as partners in creating, running, or selling a business. Litigators, by contrast, lack this same familiarity with the business side. Not having witnessed the blossoming of a deal from inception, they usually come in at the end when something has gone awry and the eggs cannot be unscrambled.

The thing is, a judge or jury approaches every business dispute from an even more removed perspective than a litigator. They likely have little to no knowledge of the inner workings of a business or industry, and will only be going by the contract’s terms.

Being prepared for this reality makes a litigator a valuable complement to a team charged with steering a business through a budding dispute. The addition of a litigator is a window into how a court will interpret the parties’ contract, make legal and factual determinations as to conduct constituting breach, and, assuming the contract is silent or its language ambiguous, rely upon the parties’ course of dealings in adjudicating the dispute. Comprehension of this full picture, in turn, presents an opportunity for businesses to make decisions in furtherance of their ultimate business goals, including the decision to pursue litigation.

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This DarrowEverett Insight should not be construed as legal advice or a legal opinion. This Insight is not intended to create, and receipt of it does not constitute, a lawyer-client relationship. The contents are intended for general informational purposes only, and you are urged to consult your attorney concerning any particular situation and any specific legal question you may have. Please reach out to us if you need help addressing any of the issues discussed in this Insight, or any other issues or concerns you may have relating to your business. We are ready to help guide you through these challenging times.

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[1]Cent. Irr. Supply v. Putnam Country Club Assocs., LLC, 57 A.D.3d 934, 935 (2d Dept. 2008) (liquidated damages clause that “did not constitute a reasonable measure of the probable actual loss” amounted to an unenforceable penalty).

[2]Aqualife Inc. v. Leibzon, 50 Misc. 3d 1206(A), at *6 (Sup. Ct. Kings Cty. 2016) (restrictive covenant prohibiting individual from performing or soliciting any customers of former employer, without geographical limitation, invalidated as overbroad).

[3]Brown & Brown, Inc. v. Johnson, 25 N.Y.3d 364, 368-70 (2015) (invalidating Florida choice of law in employment agreement with restrictive covenant as Florida’s nearly exclusive focus on employer’s interest was contrary to New York’s public policy of balancing employer and employee interests).