Management gurus will tell you that there is no such thing as a bad experience because today’s bad experience is the training ground for tomorrow’s expert. Therefore, why is it that so many people who learn from their own mistakes refuse to learn from the mistakes of others?
The impact of litigation
Any company that has been involved in a difficult piece of commercial litigation will have found it stressful and expensive in both external fees and internal management time; it exposes risks that had previously been unknown and problems not previously encountered; resolution can often require an attitude of realism and compromise.
Many of those who have been involved in such disputes swear that they will never get involved in them again!
Learning from litigation
Other organisations realise that litigation is one of the many risks in a business that have to be properly managed and take a more sanguine approach to these risks by ensuring that they take active steps to manage them along with all the others. The danger is that companies who have not been involved in litigation do not address the risks appropriately or at all (it will never happen to us!) and proceed in complacency without understanding the simple steps that might be taken to manage these risks more effectively.
The issue is of particular relevance to those companies which handle commercial contracts which have a large value in comparison with their own annual turnover or profit. The consequences of such a contract going wrong can be catastrophic.
Managing the risks
So what is it about the involvement in litigation that encourages a company to manage these risks and what steps do they take to do so? I suggest that there are 5 key areas:-
Analysis of the contract processes and a review of management practices
Commercial litigation involving a contract dispute with a supplier or customer will necessarily involve a detailed review of the terms of business but also the practices, procedures and protocols used by the company which lead to the formation of the contract and the management of its implementation. This may reveal gaps in documentation but may also reveal gaps in the training and development of staff particularly in areas involved with managing contracts and clients and/or dealing with contracts with suppliers. This can lead to a review of document and to the development of training programmes for existing and new staff.
A review of the documents that the organisation keeps which might be relevant to the contract.
Most companies would be aware that it is important to keep copies of any contracts they have signed. However the review of the documents that have been kept which might be helpful for resolving the dispute exposes more general record keeping habits. There is generally always room for improvement. To what extent does the company create the following records?
Minutes kept of important meetings agreed by all parties;
Written notes of important conversations;
Variations to the original contract.
For contracts which run over a longer period, what are the protocols for archiving and storage of historic data relevant to that contract e.g.
copy letters and documents;
emails, texts, voicemails and other communications?
Understanding how litigation can be financed, if it becomes necessary.
The costs of litigation can be very significant; they are almost invariably an unplanned expense! Sometimes, the litigation becomes potentially unaffordable. Even if the company has a strong case, this will be of little benefit if the company cannot afford to enforce or protect its rights. Since the costs of pursuing (or defending) litigation can be significant, many companies will seek to manage this aspect of the litigation risk by purchasing legal expenses insurance cover. When purchased as part of an overall package of insurance, this can be quite competitively priced. Whilst legal expenses insurance is available on an “after the event” basis (i.e. once litigation has commenced) the premium by that time is likely to be a significant proportion of the cover that is sought.
A review of the commercial decisions that were taken during the management of the contract.
The litigation is likely to require a review of the commercial decisions made whilst the contract was being performed. The existence of litigation will often expose situations in which commercial decisions have been made which have had a significant impact on the prospects of successfully defending the organisation’s best interests. Different companies may face different kinds of situations depending on the nature of their business.
It is not uncommon for companies to consider entering into commercial relationships without any written contract (what are the risks involved?) or on the basis of the other party’s standard terms and conditions (what do these mean?) or on the basis that certain amendments are proposed to their own terms and conditions (what is the effect of these?).
During the management of a contract, the parties may discuss a possible variation to its terms (does this need to be in writing in order to be enforceable?) How should the variation be expressed in light of the terms of the underlying contract? Often the original contract is expressed in very formal terms and yet the subsequent variation is drafted in such an informal manner that its interpretation is unclear and confusing.
It is important for contracts managers to get into the habit of asking themselves whether they understand the legal risks of what they are doing and, more importantly, the legal and, potentially, financial consequences of getting that decision wrong. Without that input, the decision is, at best, uninformed and at worst, potentially disastrous.
Review of any decision to terminate and/or the prospects of success.
A good number of litigation claims reveal that the company left it too long before taking legal advice on a potential dispute. As a result, it may inadvertently have waived its right to pursue a claim; it may have taken action which has had unintended legal consequences without understanding the risks. For example, whilst it may seem obvious that a party may be entitled to terminate the contract in certain circumstances and to claim compensation for breach of contract, if the party which seeks to terminate the contract is not entitled to do so at that point, it can find that it is the one that faces the claim for compensation.
Summary
These are relatively simple lessons. So why is it that so many businesses are reluctant to learn lessons from the problems that others have suffered? What steps could you take to manage your litigation risks?