Thursday, April 21, 2016

HOW TO PROTECT AND DEFEND YOUR BUSINESS AND YOURSELF AGAINST FRIVOLOUS LAWSUITS

The longer you're in business, the greater the chances you'll be sued by someone who is disgruntled. This might be a disgruntled former employee, a disgruntled client, a disgruntled competitor, or even a disgruntled partner.

If you've survived in business for more than a few months, you've hopefully moved past dwelling on the possibles, and only deal with the realities. So while all those people could sue you, fortunately few ever will. It can be very hard to predict from what quarter the litigation will come, but there are a few important proactive mitigation steps you can take to protect your business and yourself from such suits.

1. Incorporate and Buy Sufficient Insurance

Incorporation and insurance aren't either or propositions, but they are most effective when used in combination. For really small businesses, the cost and hassle of incorporation (like preparing financial statements and filing corporate tax returns) may not be worth the benefit. Insurance has its limitations as well, but for professionals who can't shield themselves from legal liability through a corporate veil adequate insurance is an absolute necessity.

Be aware that incorporation is not an absolute shield to personal liability, especially when you have a "closely held" corporation with only a couple of owners and directors as is the case for many small businesses. You still might get sued personally, and court decisions are inconsistent on whether individuals should be let off the hook for actions or debts of corporations. The Income Tax Act can be especially onerous in pursuing directors and owners for tax corporate debts. But having a corporation operate as an intermediary between you and your customers and suppliers is usually a good thing once your business gets to a sufficient size.

There's a tendency amongst both businesses and professionals to be underinsured, as people don't count on the high cost of legal defence eroding damages policy limits. Get a $1 million policy, spend $500,000 on defence costs, and you don't have a lot of insurance left. So buy excess coverage where available and affordable.

2. Carefully Document Your Business Relationships with Defencible Wording

Many business people think themselves smart by committing all relationships to writing through employment contracts, purchase contracts, and partnership agreements. But if you draft abusive and vague agreements, they may be worse than not having anything at all in writing because those unfair agreements can turn a court against the party who drew up the lopsided written document.

Employment contracts that effectively prohibit former employees from working anywhere in the same field for years locally or nationally, purchase contracts that absolve the vendor of all liability for products or services sold, and partnership agreements that lock partners into a marriage with no escape until death can all be worse than no written agreement at all as courts may unpredictably strike down various agreement clauses as unconscionable, while leaving other clauses in place that create a two legged table that tips over but can't be predicted where it will fall.

Instead, get a lawyer's help drafting something that will later stand up in court. Taking a "we'll leave it to the courts to sort it out" attitude, be it lawyer or business owner who is drafting the document, will only cost the business in the end with litigation legal fees that will be many times greater than the fees charged to draft the original contract. I'm not saying an agreement can't tilt slightly in your favour and still be upheld by a court. But there is an indistinct line of unreasonableness that can't be crossed, and which you must carefully consider.

3. Defuse Business Conflicts Prior to their Escalation to Litigation

While keeping employees, clients, suppliers and partners happy - within reason - might seem self-evident in avoiding litigation, many businesses violate this rule, and later pay the price in litigation costs. Taking the employee/client/supplier/partner is always right approach will not solve all your problems; I defend businesses against what can only be called frivolous and vexatious lawsuits that should have never been initiated, even after my clients have attempted reasonable accommodation. But at least some suits will melt away before they are filed if sufficient communication and moderate appeasement is offered to the other party. This will usually save you money in the long run, especially if you couple those measures with ensuring that complaining party signs an informed release of liability in your favour. However, simply giving in to the other party without getting anything in your return might not be in the best interests of your business.


4. File a Timely Defence, Consider Early Settlement, move to Strike Parties, move for Security for Costs, or move for Summary Judgment when you Do Get Sued

If and when you do get sued, in Ontario you usually only have a short twenty days to draft, serve on the opposing party, and file with the court your defence! That time limit can be extended through various means, but you really need to contact a lawyer immediately upon receiving a claim so that you can understand your rights and the right of your business.


Even if you're only getting sued in Small Claims Court for $25,000 or less, I generally don't recommend people represent themselves because of the complexities involved. If you win, you're able to claim legal costs of up to 15% of the value of the claim (under Ontario rules), so you can recoup some legal fees.

It's clearly pointless to spend more on legal defence fees than the value of the claim, but it's still worth consulting a lawyer to determine likely fees and whether it could be advisable to self-represent. If being sued in Superior Court outside of the Small Claims realm the Rules in Ontario require all corporations to be represented by a lawyer except with explicit permission of the Court.

You need not feel that you're trapped into some multi-year court process if you move proactively when you do get sued to consider one of the following four options.

a. Consider Early Settlement - if settlement costs will be way cheaper than legal fees, consider it a cost of doing business to buy your business out of the court case, even if you think you're in the right, so long as you get a solid release of liability, and aren't facing similar claims from others where there would be value in setting a court precedent.

b. Move to Strike Parties - if you or your business have been named as peripheral parties in a multi-party lawsuit, or you've been named personally as a party that should only have been brought against your corporation, discuss with your lawyer whether a motion to strike you or your business as parties from the suit might work. Motions are cheaper to bring than being subjected to a trial, and if a motion can effectively kill off a case for your business, or at least protect you personally from a judgment, then it might be worth bringing.

c. Move for Security for Costs - if you or your business are being sued by an organization or individual with no assets in Ontario (or whatever province the lawsuit has been initiated in), you might be able to move for "security for costs." This involves the plaintiff being compelled to post a bond with the court which could compensate you or other parties for some of your legal fees should the plaintiff have costs awarded against it. This might stop a lawsuit in its tracks if the plaintiff is unable or unwilling to deposit the funds with the court.

d. Move for Summary Judgment - it's recently become quite trendy (after the stamp of approval from the Supreme Court of Canada) to successfully move for "summary judgment" as either plaintiff or defendant in order to shorten the trial process. Such motions can still take up several days of court time, and have specific criteria for success, so you should carefully discuss costs and prospects with your lawyer before such a motion is undertaken, but if there is a reasonable chance of success it might significantly shorten your time and costs in court.



Thursday, April 7, 2016

WHY EMPLOYERS AND EMPLOYEES ALIKE SHOULD AVOID GARBAGE EMPLOYMENT CONTRACTS

Demanding that even lower or mid-level employees sign written employment contracts seems to have become all the rage over the last few years. In the past, such agreements were usually limited to senior managers or executives. 

In theory, there's nothing wrong with employment agreements for everyone at a business if they helpfully clarify the mutual obligations for both parties. Certainly specifying pay levels, hours and duties of work is always helpful in avoiding misunderstandings. But what isn't helpful is inserting abusive and legally defective non-competition clauses that seek to prevent a departing employee from earning a living in his or her field for the foreseeable future. 

I write this as a lawyer who more often acts for employers, rather than employees. I tell my employer clients that it's pointless to pay a lawyer to draft up an employment agreement which no court in Canada will ever enforce because of its abusive terms. 

The difficulty with a lot of these agreements is that the valid clauses state the obvious that doesn't really need to be stated - like don't steal our intellectual property - and the parts that aren't obvious - like you can't effectively work in your field anywhere in Canada (or anywhere within 100km) for the next year (or two years or three years) - are so abusive that they might invalidate the entire agreement, especially if they're combined with other abusive clauses. As an advisor to employers, the last thing a company wants is a court binning the entire agreement. 

For instance, I recently came across an agreement with wording similar to the following: "You agree that during the term of this Agreement and for a period of one (1) [why do lawyers so love to repeat words with numbers?] year after any termination of this Agreement, whether voluntary or involuntary, you will not, directly or indirectly, for your own account or on behalf of any other party, solicit, contact, contract with, supply, provide services for, do business with, or take any other action designed to procure business from any person, business or company who you solicited on behalf of ...., or with whom you did business on behalf of ...."

So what does a clause like that mean? I have no clue, and probably a court won't either. Is it a non-solicitation clause? Is it a non-competition clause? The sentence structure is so tortured, replete with so many commas, it's hard to know what it means. And I do spend a lot of time thinking about these things. Can a new employee really be expected to voluntarily consent to a clause like that in an informed way? 

How about this even more outrageous clause: "You have carefully considered the nature and extent of the restrictions upon you and the rights and remedies conferred upon ... by this Article, and you hereby acknowledge and agree that the same are reasonable in time and territory, are designed to eliminate competition which otherwise would be unfair to ... and are fully required to protect the legitimate interest of ... and do not confer a benefit upon ... disproportionate to the detriment to you." 

Really? The drafting lawyer actually expected a reviewing court to buy that "carefully considered" crap? This clause seems to suggest the earlier clause really is a non-compete, and not a non-solicitation. And how are we to believe that a little competition would be "unfair"?

You sell a business to someone for a million dollars, it's an agreement between equals. And it's completely fair for the buyer to demand a non-compete for a set time and territory to ensure you won't simply set up the same business across the street. 

Occasionally senior executives execute non-compete clauses in exchange for multi-million dollar golden parachutes. Nothing wrong with that. 

But to say to a mid-level employee: "we can fire you any time we like, and you won't be able to work for anyone else in your field," is ridiculous. 

I'll give you one last example of the most ridiculous, wordy clause of all: "You agree that the remedy at law for your breach of the foregoing provisions will be inadequate, and ... shall be entitled to both temporary and permanent injunctive relief (without notice or bond) enforcing such provisions, in additional to any other remedy it may have at law or in equity."

What does this mean? That they can throw you in jail for earning a living? Take away your birthday? And not give you notice of doing so? 

The moral here is for employers to closely question their lawyers when they ask for employment agreements to be drafted. Can you guarantee me that a court will uphold this agreement? If you have doubts, why? Are there ways we can improve our agreements that will make them more defensible, and easier to enforce, in court. 

The message for employees is that I know you're going to keep signing these kinds of abusive agreements because you need a job. Take some comfort in the fact that the more abusive the agreement, the more impossible it will be to enforce late. But do get some legal advice before you part ways with your employer, in case there is a chance some of the agreement might stick.