There can be a perception that lawyers help paper a deal that has been already agreed to or that lawyers help you write letters and start lawsuits after a dispute has arisen.
Unfortunately this perception is overly simplistic and, especially for small businesses and entrepreneurs, can end up costing significant legal fees that could have been avoided with proactive management of legal risk. Lawyers experienced with businesses and business disputes have a wealth of past experience assisting clients identifying areas of legal risk before they arise – managing both the likelihood of a dispute and, just as importantly, the costs.
I have previously written about the importance of shareholder agreements for parties entering into business together, as well as joint ownership agreements for parties looking to own (in particular recreational) property together. These agreements do not guarantee a future dispute will not arise. However, talking about the terms of the agreements in advance often informs clients of possible future areas of risk, which they can then take institutional steps to avoid, and, if disputes do arise, having the agreements in place usually ensures that the total legal cost of a dispute will be substantially lower.
There are many other similar examples. Written employment contracts significantly reduce possible future severance obligations. Representations and warranties in purchase or sale agreements ensure that the parties actually get what they think they are bargaining for and in many cases cannot simply be “added in” after a verbal agreement or agreement in principle has been reached. Different forms of construction or building contracts carry different types of risk and require different types of institutional controls. Something as simple as who between the tenant and a landlord is responsible for obtaining insurance can have a major economic impact in the event of a fire.
Managing legal risk, however, goes beyond the timely preparation of written agreements. Are you thinking about buying a competing business or approaching an employee of a competing business? Do you know how to do that without risking an allegation of wrongful competition or interference with economic relations? Are you thinking of selling your business or transitioning it to new owners as you look to retire? Have you put in place the proper share and corporate structures to minimize tax and ensure a transfer is challenged by the Canada Revenue Agency? What can you say (and what shouldn’t you say) publicly if you are in a dispute with a competitor or aggrieved customer – are you at risk of a defamation lawsuit or an unnecessary public relations hit?
Many of these issues require little more than a short conversation with an experienced lawyer to understand the general boundaries of the risk you might be facing. The business or entrepreneur can then make an educated decision about how much legal risk they wish to take on as part of their overall business model. The key, however, is to be educated about the nature and breadth of the risk in question.
As a commercial litigator, I have had far too many examples where parties didn’t enter into agreements up front, because they wanted to save $2,000 dollars and, after all, “we have been friends forever”, and by the time a dispute came to me, I had little choice but to advise the clients they were facing lengthy and costly litigation as a result. In other circumstances, the client did not even know there was a legal risk involved and by the time they came to me, there was little that could be done – yet the risk itself could have been completely avoided with even a 15 minute phone call.
Small businesses and entrepreneurs should cultivate a relationship with trusted advisors, including accountants, bankers, realtors and lawyers.The information provided above is for educational purposes only. This information is not intended to replace the advice of a lawyer or address specific situations. Your personal situation should be discussed with a lawyer. If you have any questions or concerns, contact a legal professional.