How to protect your business from lawsuits
Video Description
Most transactions that companies enter into are either business-to-business or with customers. Well-drafted contracts can maximize the chance to resolve these business disputes efficiently and effectively.
In this video Board Certified expert business lawyer David Steinfeld discusses how and when disputes with suppliers, vendors, and customers can arise and what your business can do to avoid getting sued by those parties.
In this video Board Certified expert business lawyer David Steinfeld discusses how and when disputes with suppliers, vendors, and customers can arise and what your business can do to avoid getting sued by those parties.
Video Transcript
Hello, I'm Dave Steinfeld a Florida Bar Board Certified business litigation attorney. That means I'm recognized as an expert in business litigation law. The video you're about to watch is from a talk I gave entitled “A primer on Florida business litigation”. This particular video examines liabilities within a company and from outside of a company. This video is not intended to provide legal advice to you but merely to give you background information on this topic. After you've watched the video please take a look at other videos and articles on my website www.davidsteinfeld.com. Thanks for watching.
Liabilities that come from outside a business
Let me talk now about some of the third-party or external liabilities that businesses can face. We've discussed the internal strife that can happen in business, this is outside of the business. Most businesses are set up in such a way that they deal with some third party that's not a member or owner of the business. They'll deal with vendors, they'll deal with suppliers, they’ll deal with customers, what have you. Those third parties all have the ability to bring claims against the business but equally so the business has the ability to bring claims against them. If you think about this most commonly if a purchaser of some product doesn't pay for the product you could sue them from not paying for the product. If a supplier failed to deliver and that causes harm the corporation would have the ability to go after that supplier. Conversely if the supplier provided supplies to the business and the business didn't pay, that third party would have the ability to bring a claim against the business. This all falls within the rubric of contracts.
In order to bring a claim under Florida law for a breach of contract there are three things that you have to establish. You have to prove the existence of a contract. You have to prove that the contract was breached and you have to prove damages that result proximately and directly from that breach that aren't speculative. It sounds very simple but it may not be in practicality because you may have a contract that is ambiguously worded where one party thinks it says one thing and the other party thinks it says something different. That has to be cleared up initially because a court would have to determine do these parties even have a contract, do they have a meeting of the minds as we say. Another issue would be the breach. If a party that purchases something from your business doesn't pay common sense dictates that that might be a breach, however, there may be extenuating circumstances or other factors. There may be acts of god that would delay shipments for example.
There may be something that the business itself does in changing the nature of the items that are shipped to the purchaser for example that frustrates the purpose of the contract. If the purchaser said I ordered something in a certain color and the company decided on its own that they didn't have enough paint or coloring to make that color so they just change the color and then ship the same product in the wrong color it may have a huge impact on that third party’s business and the business would say well we shipped the product, it's not exactly what you ordered but we still shipped it to you. That party is going to say you frustrated the purpose of the contract, you breached the contract. And if they don't pay and the business says you've breached because you didn't pay you can see that the third party would have a defense to that, that they would bring up saying you didn't ship the right things and the law has different ways of curing those situations and remedying those situations and we do that inside of a lawsuit.
In order to bring a claim under Florida law for a breach of contract there are three things that you have to establish. You have to prove the existence of a contract. You have to prove that the contract was breached and you have to prove damages that result proximately and directly from that breach that aren't speculative. It sounds very simple but it may not be in practicality because you may have a contract that is ambiguously worded where one party thinks it says one thing and the other party thinks it says something different. That has to be cleared up initially because a court would have to determine do these parties even have a contract, do they have a meeting of the minds as we say. Another issue would be the breach. If a party that purchases something from your business doesn't pay common sense dictates that that might be a breach, however, there may be extenuating circumstances or other factors. There may be acts of god that would delay shipments for example.
There may be something that the business itself does in changing the nature of the items that are shipped to the purchaser for example that frustrates the purpose of the contract. If the purchaser said I ordered something in a certain color and the company decided on its own that they didn't have enough paint or coloring to make that color so they just change the color and then ship the same product in the wrong color it may have a huge impact on that third party’s business and the business would say well we shipped the product, it's not exactly what you ordered but we still shipped it to you. That party is going to say you frustrated the purpose of the contract, you breached the contract. And if they don't pay and the business says you've breached because you didn't pay you can see that the third party would have a defense to that, that they would bring up saying you didn't ship the right things and the law has different ways of curing those situations and remedying those situations and we do that inside of a lawsuit.
How can a business calculate its damages
As financial executives your positions in the finance arm of a company as either a CFO or as the individual responsible for maintaining and managing all the financial operations of the business you will most likely be called upon to determine and quantify the damages that flow from a breach of contract. Breach of contract damages as I mentioned earlier must be directly and proximately caused by the breach. They can't be speculative damages or things down the road. To go back to the example of a supplier that ships goods if you were to enter into a contract from your business and purchase some raw material or product from a third party under that contract where you're going to have that component assembled into a finished product and you're going to sell that finished product. If the third party doesn't ship the right material or doesn't properly construct that component, if you have a contract with another business to sell 5,000 or 10,000 of these items and you can't meet that contract because of what the supplier has failed to do your damages may be the loss of profits from the contract with the person or the business that you have contracted with. However if you say well if we had only completed this first level contract our business would be known throughout the world, we would become very very famous and a lot of people would buy our products so we have also lost that secondary business, that business oftentimes is too remote and too far down the road and is too speculative to be recovered. So when you examine the contract damages that you may have in a suit when you sit down with your litigation counsel and look at those numbers you want to be realistic and conservative in your assessments and not try to overreach into areas that can't be recovered.
Once again in this particular area when we're talking about breach of contracts, documentation becomes very very critical and very important. As I mentioned a little while ago whether you have a contract with another party must be proven by substantial and competent evidence. Whether that contract has been breached must likewise be proved by substantial and competent evidence and the damages. It behooves any business to sit down prior to entering into a contract with their attorney and understand exactly what they're signing, what they are agreeing to, how to put the proper wording in so that there aren't problems later with these agreements and there aren't ambiguities that will come up that would jeopardize the enforceability of the agreement.
Once again in this particular area when we're talking about breach of contracts, documentation becomes very very critical and very important. As I mentioned a little while ago whether you have a contract with another party must be proven by substantial and competent evidence. Whether that contract has been breached must likewise be proved by substantial and competent evidence and the damages. It behooves any business to sit down prior to entering into a contract with their attorney and understand exactly what they're signing, what they are agreeing to, how to put the proper wording in so that there aren't problems later with these agreements and there aren't ambiguities that will come up that would jeopardize the enforceability of the agreement.
What is the venue of a dispute
Another factor to consider particularly in planning your contracts is venue considerations. What do I mean by venue the location that any dispute is going to be decided in. There are international venues, there are different states that you could go to, you have to ask yourselves if you're in a corporation and you're entering into a contract for example as I mentioned earlier with the supplier that's going to supply components and you're going to assemble that component into something and sell it, would you feel comfortable as the business signing a contract that would provide for the venue being a foreign country where that particular supplier is shipping materials from. You have to understand the situation that you're entering into. It may be favorable to go to that forum but you have to research that in advance to determine whether or not the laws of that form are sufficiently build up enough to protect you whether you understand them before just agreeing to it. Likewise in different states our states have very common business laws but the venue considerations that come into play may also bear on the costs and expenses of litigating any kind of dispute.
I’ll give you an example of this, a client of mine had a dispute with a commercial phone and internet carrier. The carrier had a mediation and arbitration provision in that contract that provided that all disputes will be resolved in a state in the upper midwest This dispute wasn't a very large dollar dispute. It was it was something that could be resolved by these two entities but because the business had not examined that venue provision and having thought about going to a state in the midwest beforehand they then had to find themselves in a situation where they weren't satisfied with the service that they were getting they didn't believe that it matched the contract that they had entered into but in order to resolve that they were going to have to send their people and their records all the way to this other state at a very very significant expense that they may or may not recover if they won but they’d have to pay it upfront. And the cost of going to the other venue to litigate far far outweighed the amount that was in controversy. If you think about these issues in advance before entering into agreements and you map these issues out you'll have a much better understanding of what comes later and how to resolve those. You may very well agree in the negotiation process that all disputes would be dealt with in another state or even in another country but you have to factor that in and understand that and know what you're getting into before you sign that agreement.
There are differences within the United States between state and federal court and this is another factor that you must consider in your negotiations for contracts and in the drafting of the contracts. State court right now in Florida does not have electronic filing capacities [Note: after the taping of this video Florida State Courts added the ability to electronically file pleadings and virtually all documents are now electronically filed]. Federal court doe. Our state courts are catching up very quickly and within twelve or so months most state courts will have the ability to electronic file all documents. Federal court has that ability and has had that ability for several years which bears on the expenses of the lawsuit.
I’ll give you an example of this, a client of mine had a dispute with a commercial phone and internet carrier. The carrier had a mediation and arbitration provision in that contract that provided that all disputes will be resolved in a state in the upper midwest This dispute wasn't a very large dollar dispute. It was it was something that could be resolved by these two entities but because the business had not examined that venue provision and having thought about going to a state in the midwest beforehand they then had to find themselves in a situation where they weren't satisfied with the service that they were getting they didn't believe that it matched the contract that they had entered into but in order to resolve that they were going to have to send their people and their records all the way to this other state at a very very significant expense that they may or may not recover if they won but they’d have to pay it upfront. And the cost of going to the other venue to litigate far far outweighed the amount that was in controversy. If you think about these issues in advance before entering into agreements and you map these issues out you'll have a much better understanding of what comes later and how to resolve those. You may very well agree in the negotiation process that all disputes would be dealt with in another state or even in another country but you have to factor that in and understand that and know what you're getting into before you sign that agreement.
There are differences within the United States between state and federal court and this is another factor that you must consider in your negotiations for contracts and in the drafting of the contracts. State court right now in Florida does not have electronic filing capacities [Note: after the taping of this video Florida State Courts added the ability to electronically file pleadings and virtually all documents are now electronically filed]. Federal court doe. Our state courts are catching up very quickly and within twelve or so months most state courts will have the ability to electronic file all documents. Federal court has that ability and has had that ability for several years which bears on the expenses of the lawsuit.
How electronic discovery impacts business disputes
Another factor is what we call eDiscovery which is a developing area the law electronic discovery. The federal rules and body of federal case law have for a number of years provided for not only eDiscovery but methods by which eDiscovery can be had. Our Florida State Courts are catching up to that but do not have those same rules [Important: after the taping of this video Florida amended its Rules of Procedure to specifically allow for discovery or electronically stored information]. If you're in a business that is heavily heavily invested in social media and uses a lot of Internet if you all of your employees are using smartphones and emailing an even contracts are sent back and forth by email all that electronic data becomes discoverable to the other party in a lawsuit.
The other party is going to want to say we want to see all of your electronic files. There may be expenses involved in that. If you think these things through in advance and decide where you want to be to the extent that you can control that with any litigation when you sit down before you're ever involved in a lawsuit with your counsel you can understand how this data needs to be stored and managed to make it a lot easier and less expensive later when another party says we want certain electronic data you'll be able to respond as the business and say no problem we have that stored we have that on backup tapes or whatnot here's the expense of doing that versus having to stop your business in its tracks and compile all of this vast electronic data and figure out how to get your arms around it. So prior planning is the key.
The other party is going to want to say we want to see all of your electronic files. There may be expenses involved in that. If you think these things through in advance and decide where you want to be to the extent that you can control that with any litigation when you sit down before you're ever involved in a lawsuit with your counsel you can understand how this data needs to be stored and managed to make it a lot easier and less expensive later when another party says we want certain electronic data you'll be able to respond as the business and say no problem we have that stored we have that on backup tapes or whatnot here's the expense of doing that versus having to stop your business in its tracks and compile all of this vast electronic data and figure out how to get your arms around it. So prior planning is the key.
Quasi contracts and equity
Aside from disputes over contracts businesses also see what are called quasi contracts. Quasi contracts are where you have a situation where there's no written contract or the written contract is not complete enough but the law creates a contract based on the conduct of the parties and the parties understandings. A situation where you might see this may be where two parties exchange emails that agree to something in an email and they haven't actually signed a contract but based on their conduct and their agreements and their part performance of that, a court could decide that a what we call a contract-in-law has been formed or a quasi contract and that is an enforceable agreement.
There are also equitable principles that carry over to our laws in the United States from old English common law. Equity is simply put fairness. If you've done something for someone and they've accepted the benefit and it's best for them or it's reasonable for them to pay it would be unfair if they didn't pay. That's a very short form version of what we call unjust enrichment. If your business on the understanding that you were going to be paid for some service that would be provided, provided the service there may not be a written contract but you provided the service the other party got the benefit of it if it's not fair for the party to keep the benefit without paying you have a cause of action to go to court to say here is the reasonable value of that service they should be made to pay.
There are also equitable principles that carry over to our laws in the United States from old English common law. Equity is simply put fairness. If you've done something for someone and they've accepted the benefit and it's best for them or it's reasonable for them to pay it would be unfair if they didn't pay. That's a very short form version of what we call unjust enrichment. If your business on the understanding that you were going to be paid for some service that would be provided, provided the service there may not be a written contract but you provided the service the other party got the benefit of it if it's not fair for the party to keep the benefit without paying you have a cause of action to go to court to say here is the reasonable value of that service they should be made to pay.
Alternatives to lawsuits for resolving business disputes
In business disputes you don't always have to go to court to resolve the dispute. There are other options available to you that are called alternative dispute resolution or ADR. You often hear about this when you hear of mediations and arbitrations but there are other alternative dispute resolution options that you should be aware of such as summary trials where you could decide just certain parts of a lawsuit to help the parties move along or we even have a statute in Florida that allows the parties to get together and pay for and hire a private judge. So you can have a trial in a sense have a lawsuit outside of the normal court system. These are all considerations for you to be aware of because a business may have a valid dispute with another business but it might not want that dispute residing in the public records. It might not want the dispute to become public knowledge. Both sides may benefit from these private type of resolution forums.
Mediation can also be done as can arbitration pre-suit. There's nothing that says that you have to file a lawsuit and then go to mediation or arbitration. Many businesses incorporate pre-suit mediation clauses into their contracts to avoid the cost and expense of litigation and require the parties to first attempt to mediate.
Arbitration likewise you see in a lot of contracts but arbitration is an alternative forum to a lawsuit. If you agree to arbitrate a dispute, if you bring a lawsuit more than likely the other side will respond and say in the contract you agreed to arbitrate therefore the case must be stayed and we must go to that forum in arbitration.
Mediation can also be done as can arbitration pre-suit. There's nothing that says that you have to file a lawsuit and then go to mediation or arbitration. Many businesses incorporate pre-suit mediation clauses into their contracts to avoid the cost and expense of litigation and require the parties to first attempt to mediate.
Arbitration likewise you see in a lot of contracts but arbitration is an alternative forum to a lawsuit. If you agree to arbitrate a dispute, if you bring a lawsuit more than likely the other side will respond and say in the contract you agreed to arbitrate therefore the case must be stayed and we must go to that forum in arbitration.
What are business torts
Aside from breaches of contracts and the permutations that we see in business litigation within the contract world there is such a thing called business torts. What is a tort. A tort is essentially anything other than a contract. You often see torts in the personal injury world where someone through negligence causes injury to another party. In a business sense business torts are those actions by another party that cause injury to the business but are not founded in a contract. For example a theft of trade secrets or what we call tortious interference with a business opportunity. You may see that situation where an employee would leave a business and take a customer list and form a competing business and call the customers of the first business and try to induce them to come to the new business. That type of an action generally would not be covered by any type of a contract unless that employee perhaps had a non-compete agreement however that action of reaching out to the customers and trying to in an improper manner move the customers from the old company to the new company can be considered tortious interference with an advantageous business relationship.
Defamation and online slander
The other area that we often see business litigation that sometimes goes hand in hand with that is defamation. One party may slander and defame another party in order to gain an advantage in the business world. If, in the example that I just gave you, the employee left and didn't have a non-compete agreement and turned around and spoke ill of the former employer or the business and told untruthful statements to people that they weren't competent or capable to do business or to do whatever business that they were doing that party can be held liable under Florida law for defamatory statements and defaming the business.
Conversion of business assets
A final business tort that we see is conversion which is similar to theft but it's in the civil sense. And it would be in that sense where say the employee took some product, took some other assets of the business or potentially even the customer list if it's not a trade secret under the Uniform Trade Secrets Act. The act of taking the assets of the business and then converting it into in that sense the former employees own use of benefit may expose that individual to liability for conversion these are what we call chooses of action or causes of action or claims under Florida law just to make you aware of some of the ones that are out there.