Can Litigation be used as a Business Investment to Resolve Disputes?
Sometimes you should fight for what is right. Most people view litigation as a tool of last resort, however, litigation can be viewed as a business investment, which can have a number of positives outcomes that you may not have previously considered. This article will consider how to think about costing litigation and highlight some basic considerations, before discussing some recent examples of how litigation can be used as a business investment.
As a lawyer, I understand that when most business people think about litigation, a shadow of the sentiment expressed by Charles Dickens in his novel Bleak House (1852-53) will often come to mind. Dickens used the fictional case of Jarndyce v Jarndyce to lampoon the absurdity of the civil court system:
Jarndyce and Jarndyce drones on… no two Chancery lawyers can talk about it for five minutes without coming to a total disagreement as to all the premises. Innumerable children have been born into the cause; innumerable young people have married into it; innumerable old people have died out of it.
But the civil legal system has come a long way from the times of Bleak House, and litigation and involvement in Australia’s civil court system should not be seen as an avenue of last resort. Businesses should view litigation as an investment and treat it as any other investment. It is an intangible asset, with potential future cash flow, investment amounts, risks and rewards. A well thought-out and costed litigation strategy can take the unknown out of the Court process and allow you to use the legal system to redress wrongdoing and enforce your proprietary rights.
Types of Litigation Disputes
In addition to recovery of money, litigation can be used for a myriad of issues, including:
- addressing misrepresentations (i.e. false promises) that have caused your business loss;
- resolving shareholder and director disputes;
- enforcing ‘soft rights’ such as restraints of trade for former staff, intellectual property protection; or
- compelling someone to perform their promises to you.
Once you have an idea of what you are seeking to achieve, you can then determine how much you are willing to invest and balance that against any risk.
When considering investing in litigation, most disputes involve a recovery of money owed. Therefore, the starting point is that the money or asset has been lost (because the other party is refusing to pay). As such, when costing litigation, the amount sought to be recovered, should be treated as the ‘reward’ to be balanced against the ‘risk’. Parties need to be mindful to not let the amount already ‘lost’ blind them as to the commercial realities of the situation. There is often little point in throwing good money after bad. While ‘principals’ may also affect the decision to engage in the litigation process, it is important that they are recognised as such from the outset, and that a commercial decision is made in light of the individual considerations of the company. You do not want to overcommit yourself and the company in pursuit of a claim which is unprofitable or commercially unsound. It has been my experience, that it is often worth investigating whether or not to take legal options, as such options can be particularly effective in the right circumstances.
Common risk and reward considerations
In balancing the risk and reward of litigation, (and while there are numerous specific matters which will depend on a case by case basis), there are a number of basic considerations. The harsh reality is that there are no guaranteed outcomes and litigants will rarely be in a better position then had the other party simply paid what was owed. Other important considerations include:
- the ability of the person or company to pay;
- the amount of money you are seeking to recover;
- time frames (which can be difficult to control in a protracted dispute);
- the capital expenditure required prior to the successful outcome or recovery of monies;
- the internal resources that will need to be committed to the litigation (and away from core business activities;
- reputational costs;
- emotional stress; and,
- a clear understanding of strategy and outcome that you seek to achieve.
As touched on above, litigation can be broken down into stages, which will need to be flexible enough to deal with the inherent uncertainties in litigation, but clear enough to allow businesses to know how much, and what they are investing in. Generally, the early stages of litigation will involve relatively inexpensive steps, which can be progressively escalated (at an increasing cost) in line with the agreed litigation strategy. It is important for businesses to review their litigation strategy in line with their appetite for risk as the matter progresses, and to make adjustments as the matter develops, including re-visiting the amounts they are willing to invest.
To give you a flavour of how the above considerations operate in the real world, some examples are discussed below.
Small debt claim
A client approached us seeking to recover approximately $8,000 owed to him and for which the other party was refusing to pay, without basis. Our client was concerned about legal costs and over-committing the company given the (relatively) small size of the debt. Our client also revealed that they were considering writing off the amount rather than fighting for its recovery (and they had taken similar action before).
In consultation with us, the client decided they would file a statement of claim and then, depending on the action of the other party, would decide whether to escalate the matter to the next stage, or cut their losses. In the end, the full amount plus interest and a portion of the legal costs were recovered within 3 months. Whilst the client would have been better off had the other party simply paid the money, they were in a significantly improved position then if they had written the debt off.
Additionally, and in considering pursuing small debts, the economies of scale and the ability to spread the risk over a number of similar matters may make investing in such action more feasible then it might otherwise appear. If you are experiencing a reoccurring dispute, it may be worth reviewing your processes to reduce the chances of disputes arising in the future.
Another example of a recent success with Coleman Greig was the recovery of almost $300,000.00 that had been stolen by an accounts manager, over the course of several years.
When the client first came in for a consultation, they were only aware of $5,000.00 having been taken and they sought advice as how to best deal with the employee. With our encouragement, the client did a further internal audit and discovered that over $220,000.00 had in fact been taken. Through working closely with our clients, we were able to recover close to $300,000.00 within six months of the audit being completed. Whilst there was a high outlay cost, the overall reward and relative risk made litigation an attractive option for the client.
Two partners in a printing business no longer wished to work together, and our client proposed the other partner buy out his shareholding. The other partner was being unrealistic and aggressive in their approach to the sale of the company. After engaging Coleman Greig, an agreement was reached quickly and without the need for formal Court proceedings. Our client’s shares were purchased for market value, and the deal included a release from any past or future obligations of our client in connection to the company.
Litigation is a tool and should be viewed as a business investment, rather than something to be avoided, or as an opportunity to ‘settle a score’. As an experienced businessperson, you are able to negotiate an appropriate outcome in most cases when a dispute arises. However, should a standoff arise, or if you are unsure you should be compromising on your rights, do not be afraid to fight for what is right and make an informed commercial decision.
Often the beginning of Court proceedings (or even pre-court steps) help to clarify the issues in the minds of all parties and can lead to a quick result. The process is also flexible and can be adopted to suit most clients’ wishes so long as a good understanding of the process and a strategy is agreed to beforehand, to avoid any further repeats of Jarndyce v Jarndyce. Even long, expensive and complex litigation should be engaged in, if it makes commercial sense to do so. No matter how simple or complex your situation is our experienced commercial litigators have the skills and expertise to work with you to resolve your disputes in a practical and timely manner.
For more information or assistance, please don’t hesitate to get in touch with Coleman Greig’s Litigation and Dispute Resolution team: