5 Ways to Keep Your North Carolina Business Out of Court
No business owner looks forward to a lawsuit, regardless if they’re the one suing or the one being sued. In some situations, there is no choice, but in our experience there are at least five ways to keep your business dispute out of court. This article explains what they are.
1. Arbitrate the Dispute Instead of Litigating It.
Arbitration is when the parties to a business dispute agree to have a third party resolve it. This third party is the arbitrator – not a judge. Arbitration proceedings are usually conducted in private, unlike court proceedings which are almost always public.
The purpose of arbitration is to provide a faster resolution, so it often has streamlined procedures and timelines. Whereas a lawsuit may take months or even years, in arbitration you may have the option to set shorter deadlines, limit the amount of discovery, and reduce the number of witnesses.
The decision of the arbitrator is binding just like a court judgment. Though the arbitration is privately conducted, the arbitrator’s award or decision can be filed in court after the proceeding is concluded. It is then entitled to be enforced exactly the same as a judgment rendered by a judge or a jury. It has the same legal weight.
Many contracts include an arbitration clause expressly stating that all disputes must be settled out of court via arbitration. One of the main arbitration providers is the American Arbitration Association (AAA). If the arbitration clause permits, however, you can choose any arbitrator or organization to decide the dispute. To initiate the arbitration, you simply send the arbitrator a request to begin the proceedings.
Many people forget that even if arbitration is not required under the contract, you can still arbitrate it – so long as both parties agree. Otherwise, the case can, and probably must be, resolved in court.
2. Mediate the Dispute and Try to Work it Out.
Mediation is similar to arbitration in that a third party is called on to make a decision in a private proceeding. The difference is that the mediator’s decision is not binding. If one of the parties does not like the decision, they don’t have to follow it and can still take the case to court. What mediation does offer, though, is the ability for the parties to make their case to an independent third party to get an objective assessment of the merits.
Mediation is a smart choice where the parties are not communicating well and need a third party to give them guidance. Our office likes using retired judges to mediate disputes because their experience hearing cases gives the parties a good idea of what would happen in court.
Mediation can even be good if the parties are communicating well. Sometimes each side’s demand is too far apart to reach a settlement, and the mediator can step in and help find a resolution that takes both sides’ risks into consideration. It is important having a mediator that both sides trust, otherwise neither party is likely to take the mediator’s recommendation.
3. Have a Contract That Already Addresses the Situation.
It’s wise to prepare for the worst to and expect the best. A well-written contract will address any eventuality or contingency. The purpose of a contract is for both parties to know what to expect. There should be no surprises.
For example, the operating agreement of an LLC might say that if one of the members dies, the other members can buy out the deceased member’s ownership interest at the market value. What is market value, though? There are numerous ways to value a company, so this could lead to a dispute between the deceased member’s heirs and the other members about how much to buy the interest for. If the contract were written wisely, it would explain exactly how to determine the market value. It might also say that if they still can’t agree, the dispute should be arbitrated.
If your contract is clear about what the parties to it should expect, it reduces the likelihood of litigation.
4. Keep Complete and Accurate Documentation.
When clients contact us about a legal dispute, they fall into two general categories: the ones who have documentation, and the ones who don’t. The clients who do have documentation have a better chance of a resolution in their favor. Why? Because documents and records are evidence. In every single legal dispute – whether negotiating with opposing counsel, arbitrating, mediating, or trying a case to a jury – you have to present evidence.
If you have records, you can prove that you were right. If you don’t, your credibility instantly diminishes. This is true regardless of whether you are telling the truth. Judges, juries, and arbitrators don’t know you or your stellar reputation – all they know is what you can prove with evidence. As the philosopher David Hume said, “A wise man proportions his belief to the evidence.”
In a business dispute, if you already have the documentation you need to win, it is much less likely that the other side will move forward with a lawsuit. And if you’re already in a lawsuit, the other side’s attorney will probably encourage their client to settle or drop the case if they see your evidence is overwhelming.
5. Incorporate Your Business and Maintain Business Formalities.
If you own a business, you may already know that you can avoid personal liability for business debts by forming a corporation or a limited liability company. If you’re a sole proprietor who has not incorporated yet, do it. If you do not incorporate, a single accident or a single broken contract could be an event that forces you into bankruptcy. On the other hand, if you incorporate, you have a layer of protection such that even if the business goes under, you don’t have to go down with it.
That’s not all there is, though. Failing to keep your business and your personal finances separate could lead to “piercing the corporate veil.” This is where creditors are permitted to go after you personally – even though you incorporated.
Not maintaining business formalities is an error that many businesses make, especially small business. Your business should not pay for your mortgage, for romantic dinners out with your spouse, for vacations, or for anything else that is not legitimately business related. You should not take unaccounted-for cash withdrawals from your business account. If you do these things, or fail to keep other aspects of your business and personal finances separate, a court just might disregard the protection you thought you had from your corporation or LLC, and instead hold you personally liable for the company’s actions or debts.
On the other hand, if you maintain business formalities, a lawsuit against your company might be filed, but it won’t be against you personally. The ramifications are much less severe. Your business insurance will probably pay for a lawsuit – the last thing you need, though, is an additional claim against you in your personal capacity.
These are just five of the many ways that you can keep your business dispute out of court. If you have a dispute, Fairview Law is experienced with negotiation, arbitration, mediation, and litigation. We are a Charlotte business law firm that serves clients throughout North Carolina. We represent entrepreneurs, franchisees, and start-ups. If you have a question about your business, contact us at 980-999-3557 to see how we can help make your business our business.