To Avoid Getting Hit By The Litigation Bus: Stop, Look, and Listen

Jonathan O. Hafen, Shareholder at Parr Brown Gee & Loveless

Most business leaders understand that litigation can be expensive, time-consuming, and emotionally draining. Fearing that outcome, clients sometimes ask me how they can avoid a lawsuit. Unfortunately, a business can be sued by almost anyone at any time, whether they have a valid claim or not. However, the best advice to avoid litigation in the first place, and to give your business the best chance to prevail if you are sued, is the same advice mothers have been giving their kids for decades – stop, look, and listen.

Most business litigation relates to a contract freely signed by both parties. Under Utah law, you are presumed to have read and understood everything in any contract you sign. My experience has been that business leaders often focus on what they perceive to be the most important parts of a contract – what is being bought or sold and for how much – and ignore other provisions that could end up being far more important if things go wrong. Before you sign that contract – stop, look (carefully at the proposed agreement), and listen (to your lawyer).

For a fraction of what a company will typically pay for a month’s worth of litigation, your legal counsel can review that contract before you sign it and steer you clear of toxic provisions that could have potentially devastating consequences down the road.

By way of example, let me give you a couple of provisions I focus on when my clients ask me to look at their contracts before signing them. The first is arbitration and the second is indemnification.

A couple of weeks ago, I was talking to a business leader about arbitration provisions. He told me that most business schools still teach that every business contract should have an arbitration provision in it. I have a contrary view.

I counsel my clients to avoid arbitration provisions in almost all circumstances. Based on my experience and what I have heard from other lawyers around town, arbitration tends to take as much time as a lawsuit filed in court and can be significantly more expensive. There are obvious reasons for this. Arbitrations almost always require parties to pay a hefty filing fee and other administrative fees to the company managing the arbitration. These fees are almost always multiples (and in some cases exponentially so) of the single court filing fee.

In addition, one or both of the parties is always required to pay the arbitrator to be their private judge. Many contracts require a panel of three arbitrators, thereby tripling those costs. Arbitrators qualified to handle commercial litigation are usually very expensive, generally charging around $300 per hour in Utah and sometimes much more.

But perhaps the worst part of arbitration is that there is nearly no right to appeal. Under Utah law, there is almost no way to get a court to overturn a decision made by the arbitrator, even if the arbitrator ignores controlling law and obvious facts. In other words, if your arbitrator reaches a devastating decision that is clearly wrong, there is probably nothing you can do about it.

If the other side insists on arbitration, and you choose to accept that demand, there are ways to control the arbitration process. For instance, consider requiring use of the “streamlined rules”.