Top 10 Ways to Avoid Litigation

Article by Dalton McGrath and Michael McCachen, ©2006, Blake, Cassels & Graydon LLP

The cost, time and effort expended by a company in defending a litigation claim can be substantial. A number of strategies can be implemented by companies to avoid or minimize the reputational, financial and human resource cost of litigation. While not exhaustive, the following are the "top 10" ways to avoid litigation.

Many class actions and other lawsuits are the result of not identifying a potential problem early enough. Seemingly innocuous problems may devolve into difficult situations by failing to identify the issue in the first instance. For example, in Garland v. Consumers’ Gas Co., Mr. Garland and his wife sued for CAD 75.00 in late payment charges between 1983 - 1995 complaining that the charges violated the Criminal Code’s 60% maximum interest rate. That complaint devolved into a successful class action on behalf of over 500,000 Consumers’ gas customers. The moral of the story is that even seemingly small issues can become significant problems.

While companies need not adopt a crisis management position for each minor problem that may potentially involve litigation, there should be a systematic reporting system which encourages potentially litigious issues to be reviewed. Ideally, the reporting function should involve the corporation’s in-house or outside counsel which may render such communications privileged.

This concept is married to the topic discussed above. The early identification of any potential litigious matter is obviously of no benefit unless some approach to rectification is implemented. Seemingly innocuous complaints which have merit can often escalate when the issue is not dealt with proactively, for example when the complainant is ignored or treated with disrespect. Whether the proactive solution involves either a monetary or non-monetary appeasement of the complainant, the time, effort and expense in dealing with the issue will often be minimal compared to a lawsuit.

Recently, there have been a number of high-profile cases involving corporate governance and other matters which have seen a dramatic variance in the size of the civil settlements and regulatory penalties. If a company quickly identifies a problem and related exposure early, it can often settle on a much more favourable basis than if it attempts to forestall the process. Cutting a company’s losses at an early stage can often reduce the impact of a much more significant settlement down the road.

Litigation in the normal course can be expensive and time-consuming. Adverse publicity is often immediate and can have a negative impact on a company’s share price regardless of the ultimate outcome.

Generally, most provincial arbitration statutes provide that a court must grant a stay of any court proceedings if the parties have agreed to arbitrate disputes. There has been somewhat of a trend in some recent cases which seemingly favour class proceedings over arbitration, particularly in the context of mandatory arbitration clauses in consumer contracts. The recently proclaimed Ontario Consumer Protection Act (s. 8) provides that a consumer may commence a class action in respect of a dispute arising out of a customer agreement despite any term or acknowledgement that purports to prevent or have the effect of preventing the consumer from either commencing or becoming a member of a class proceeding. Further, some arbitration clauses have been considered in the class action context and rejected on the basis that not all parties were subject to the arbitration agreement or because the arbitration agreement was not formed under a statutory dispute resolution process.

That said, contracts containing mandatory arbitration provisions can offer a defendant an opportunity to stay court proceedings, including class action proceedings (see Kanitz v. Rogers Cable Link). A properly drafted arbitration provision in a contract can potentially assist in avoiding costly litigation and even certification of a class action lawsuit.

For a relatively nominal filing fee, anyone can start a lawsuit which may require the disclosure of confidential documents and require the dedication of significant resources. A number of preliminary applications are available to stop a lawsuit in its tracks.

One such application is a motion for security for costs which, if granted, requires a plaintiff to post security for the taxable costs which are likely to be incurred by the defendant resisting the action. Although various provincial Rules of Court enumerate specific instances where security for costs may be ordered (e.g., where the plaintiff resides out of the jurisdiction, etc.), those Rules generally provide that the court may order security for costs on a discretionary basis where grounds are demonstrated showing that it is just and reasonable to do so. Other interim applications include striking out the claim, summary dismissal of all or part of the claim and other interim applications can sometimes reduce or entirely dismiss a claim in the early stages.

A "record" is defined very broadly in provincial Rules of Court and includes both physical and electronic data that is capable of being reproduced visually or by sound or both. Both paper documents and electronic records such as e-mails and telephone recordings are included. Anything relevant and material to the case must be produced once a lawsuit has been commenced, unless privileged.

A number of defensive strategies can be implemented prior to the commencement of legal proceedings not only to reduce the risk and costs associated with production of records, but to persuade a plaintiff there is no merit to their claim in the early stages. Employees should be instructed to assume that e-mails or recorded telephone calls (used by many commodity trading companies) may be subject to the scrutiny of a counterparty or a court.

While the speed of e-mail communications has greatly transformed the pace of business, from a litigation perspective, one big downside is that employees often say things in e-mail messages that they would never say if care had been taken to prepare a letter. Where a matter has become identified as potentially litigious, control on e-mail as part of the above defensive strategy regarding documents is not only prudent but critical.

The lack of proper documentation of agreements, occurrences and negotiations often creates ammunition for an opponent to allege a contrary version of events which may escalate into litigation. Quite often, a simple follow-up letter or internal memorandum will greatly assist a corporation in addressing a complaint which may not surface for many months, even years. Proper documentation can sometimes nullify complaints which would otherwise become lawsuits.

It is equally important to document all resolution efforts. Inadequate follow-up on complaints or threats of litigation, evidenced by gaps in documentation, will be used by litigants to demonstrate that a proper investigation did not occur, was not comprehensive or was managed half-heartedly. In employment cases, for example, the failure to fully investigate a complaint of harassment or bullying in accordance with a company’s internal policies, even if the complaint is without merit, can be used by a litigant to demonstrate a failure to protect an employee and to maintain a safe work environment, potentially resulting in increased damage awards. In many cases, being able to show that a proper investigation took place and that proper follow-up steps were taken can stem the tide of litigation before it starts.

All employees have strengths and weaknesses. Where a matter has become potentially litigious, having the wrong staff person as the point of contact with a potential plaintiff or class of plaintiffs can be disastrous. There is no hard and fast rule here. For example, some situations call for personal toughness while others call for consensus-building and mediation skills. Further, it is very often the case that the person most deeply involved in the background to a dispute may not be the right person to attempt a resolution once litigation begins to loom, despite their background knowledge. The involved person often feels the need to vindicate prior actions and this can restrict their effectiveness in dispute resolution prior to litigation. A liaison person who consults with the person "on the ground" is often a wise choice.

Litigation is, by its nature, a costly, slow and imperfect process. Litigating "on principle" is seldom particularly rewarding because the process of getting to judgment day is often difficult and the "principle" can even get lost along the way. Of course, there are exceptions, for example, where the reputation of key employees is involved, or even the public image of the corporation as a whole. It will often be the case, however, that a practical settlement is preferable to protracted litigation. Settlement can be achieved where parties are carrying on business over a broad horizon in which the litigious matter is but one aspect. Rolling a small litigation problem into a much larger business deal is often an acceptable way to resolve a dispute without having to focus all of the parties’ energies on "who is right".

Too often there is a reluctance to contact litigation counsel before a matter has actually become litigious. One early phone call may save a hundred worried calls later. Typically, parties are reluctant to contact litigation counsel early because they are concerned that the complexity of the matter will require too much time to explain and often the circumstances are urgent. However, very often the contractual, tortious or other principles of law that apply are not themselves complex. Although there is no substitute for a formal opinion, well-researched and firmly grounded in a complete understanding of facts, very often an early "smell test" can avoid creating a monster.

Government regulators are increasingly given broader jurisdiction and ability to cause financial and other harm to corporations. Whether it is an investigation under provincial environmental legislation, the Competition Act or other provincial or federal legislation, the mere public disclosure of an investigation can cause severe harm to the public reputation of a company. In addition, such investigations and charges can spawn civil lawsuits. In most cases, investigations are preceded by inquiries or requests of information from a government department. While the purpose of such inquiries may be self-evident in some cases, it is often difficult to predict the full extent and nature of what the real concerns may be. Creating the proper context to communication in those circumstances is critical. Moreover, understanding the motive and background behind such an inquiry is key information which should be gathered at the outset. It is critical to have a strategy and protocols in place beforehand to deal with government regulators, whether that inquiry appears routine or devolves into a formal investigation and/or charges.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.