Reducing the Risk of Litigation

The best defence for reducing the risk of litigation is to avoid it.  The second-best defence is to be prepared for it in terms of structure, practices and process that record contemporaneous evidence trails that provide a defendable position.  

Companies with a contracted workforce must also mitigate and factor in vicarious liability should their independent contracted workforce do something that exposes the company to risk.

Regardless of the preventative measures put in place, it is inevitable at some point that a business’s activity could result in litigation or regulatory actions. 

Litigation brings unintended outcomes that involve redirection of valuable resources, reputation risk, brand damage and personal liability. Avoidable litigation is costly, time consuming, distracting and an activity which contradicts the profitable nature of a business.

So, what can your business do to reduce the risk of a dispute in the first place? As they say, better be safe and prepared than sorry. 

Let’s look at sensible and practical approaches that can help prevent or reduce the risk of litigation:

Strategies for managing and protecting against common commercial risks 

There are five (5) common areas of commercial risk for a business.

1. Transaction Risk

Transaction Risk refers to the adverse effect that is associated between entering into a contract and settling it. The more complex the transaction, the greater the risk. For example, construction projects, complex financial transactions and major acquisitions.  There are a few known effective strategies for managing this risk. They are:

• Ensuring clear pre-contract procedures are air tight and in place. You have to set strict limits on authority when delegating tasks.  They should be skilled in principles of contracting and due diligence. Make sure that you incorporate a litigation risk review at the pre-contact stage and establish a set of in-house transaction documents wherever possible, reassessing it from time to time.
• Documenting the contract or agreement with utmost care and clarity. You have to meticulously understand and examine specific substantive provisions and boilerplate clauses integrated within your contract.  
• While transactions and contacts are regularly reviewed and properly documented, you have to ensure that compliance is established.  Train key management and staff. Problems often stem from a lack of understanding about basic legal principles or applicable policies and procedures.
• Obtaining appropriate insurance cover, ensuring contracts and insurance arrangements do not contradict each other and there are no gaps in the coverage.

2. Counterparty Risk

Counterparty risk is the likelihood or probability that one of those involved in a transaction might default on its contractual obligation. This can exist in credit, investment, and trading transactions.

Probity enquiries should be a part of a thorough background check in relation to the proposed counterparty before embarking on a contract to determine whether it has (a) a well-established reputation in the relevant industry, (b) has a litigious reputation, (c) is a creditworthy and has sufficient financial resources to support and meet its contractual obligations, and (d) has valuable assets against which any loss or damage could potentially be recovered. 

In order to have a thorough background check, you can extract information from:

• company searches of the Australian Securities and Investments Commission database
• Industry references
• Bank or credit provider references
• credit ratings searches
• inspection of financial accounts
• internet searches
• searches of court records
• Land title register searches 

3. Jurisdiction Risk

Jurisdiction risk (geo-policitical) refers to the risk that arises when operating in a foreign jurisdiction. You have to negotiate choice of governing law and jurisdiction at the outset. This risk includes instances when laws unexpectedly change in an area in where a party has exposure. This type of jurisdiction risk can often lead to volatility. 

Certain countries have a poor reputation for litigation due to factors such as:

• biased or corrupt judiciaries;
• litigious culture;
• inadequate procedural systems;
• frequency of large damages awards; or
• difficulties in enforcing judgments given or awards granted.

Whatever the choice of law or jurisdiction, parties should be aware of any relevant limitation periods keeping in mind any relevant limitation periods, the types of loss that are recoverable, and the treatment of exclusion and limitation clauses. 

Parties will generally not be able to choose the law to govern a non-contractual dispute (for example, tort and product liability). One strategy to avoid such claims is to ensure that operations are conducted in the relevant country by a third party, such as an agent or a subsidiary of the contracting parent. Check that the parent is not liable for the subsidiary in the relevant jurisdiction. 

4. Product Risk

Product risk is the risk that you may not actually be able to convey the product to market within the resources like time and money that is available to you. And if you do deliver the product, the risk is also in that the product may not function or operate exactly as you envisioned. Every business has a degree of product risk and it can be mitigated and kept low by: 

• quality management systems
• crisis management (for example, product recall) plans
• clear product instructions and warnings displayed on products
• contractual protections
• insurance
• marketing communications input

These strategies should be inspected and frequently reviewed by a committee comprised of a cross-section of personnel like for example, in-house lawyers, product managers, designers and marketing personnel.

5. Process Risk

Process risk exists when the process that supports a business activity lacks both efficiency and effectiveness, which may then lead to financial, customer, and reputational loss. This form of risk may be present within any stage of business transactions.

Day-to-day business operations can give risk to a number of commonly occurring issues, including environmental, health and safety issues; employee disputes; intellectual property disputes; and regulatory investigations. 

The risk of such issues arising can be managed by appointing multi-disciplinary teams comprised of specialist personnel to regularly review business processes; identify particular risk areas; revise procedures where necessary; develop new procedures to manage emerging risks; and implement compliance programs that strictly adhere to rules and regulations.

Compliance with trade practices legislation

A product/service that is supposed to violate laws or standards can attract new regulations if it is perceived to damage markets, the environment or quality of life. 

Sales and marketing activities are an area of risk that can give rise to misleading or deceptive conduct in contravention of trade practices legislation, including the Australian Consumer Law (ACL). The risk also applies to the need to act in a manner which investors and customers expect, for example, by ensuring proper corporate governance.

The vast and complex government guidelines for compliance means it can be easy for business owners to find themselves in violation, usually unintendedly. This means leaving their companies open to litigation risk.

However, everything can be avoided by developing a trade practices compliance program within your business. 

Again, it is crucial to have a detailed and intensive training management of key staff in relation to misleading or deceptive conduct and how to avoid problems and the risks of non-disclosure.

• Review all representations, warranties and statements before they are used in the market and relied on by others; and
• Ensure that all advertising and marketing materials are vetted and approved by in-house lawyers before being used in the market.

 Adapting to technological and regulatory change

Rapid developments in technology are changing how people work, consume, play and interact, it is imperative that a business can adapt to its Government policy and regulations enforced. These changes will influence the direction of technological developments, and laws and regulations. 

Technological and regulatory changes occur at a rapid pace (and sometimes applied retrospectively or with short timeframes to become compliant) and it is essential that businesses are across them at all times. 

Strategies:

• Ensure that risk management systems require that risks arising from technological and regulatory change are identified and proactively addressed;
• Obtain advice from appropriately qualified experts; and
• Give particular focus to managing cybersecurity and data breach risks.

Risk management for new products and business activities

Staying competitive in the world of business is vital to every company, especially if it hopes to grow and expand. To achieve competitiveness, remain viable and profitable a business must be vigilant to its litigious risks across all fronts. 

Behind the need to expand a business is an underlying risk for possible litigation problems. 

Therefore, it becomes crucial for organizations to personalize their approach to each development project in order to lower risks associated with product development.

Issues arising from new products and marketing strategies may be a result of privacy breaches; intellectual property disputes; contraventions of anti-spam legislation; and contraventions of trade practices legislation.

Mitigate these risks by:

• Ensuring that risk management systems require all new product or services be reviewed by in-house lawyers before launch; and
• Reviewing and identifying any potential regulatory issues from a new marketing strategy or way of conducting a business before they are introduced. 

Every business faces risks that could present threats to its success. The best way to manage these risks, however, is to be perceptive and well-rounded in every step or decision you make from transacting with other parties to policies and laws covering your industry.

Be mindful in identifying what the risks are, and take action before they fully affect the whole business adversely. It will not do you any good to just act when the problem has already damaged reputations, put the business at risk and been costly. You’ll only end up “putting out fires”, spending your resources on damage control instead of investing them on growing your business.

Interested in chatting with us?

Contact us here. Or shoot us an email at hello@biztechlawyers.com.au. And of course you can always pick up the phone +61 2 9043 1376.

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