Resolution of Disputes by Small Businesses: Should You Settle or Sue?

Joel SowalskyIf you own a small business, the day will come when you have to decide whether to sue or settle.  Perhaps you have a customer dispute, and your customer is not paying you because they claim that there is something wrong with what they bought.  Or, you may have a vendor dispute, where you purchased a product or service and did not get what was promised, so you refuse to pay, and the vendor is threatening to report you to a credit agency and sue.

In either case, the demands have been made and the other party refused.  Now what?

The short and simple answer is that you never should litigate a dispute if there is any possible way to avoid it.  Almost always, the lawsuit will cost you more than you estimate, and the outcome is always unpredictable. Despite what anyone will tell you, the cost of the simplest lawsuit, from beginning to end (and without an appeal), is at least $25,000 (and that probably is an underestimate), and if the other party to the lawsuit wants to cause your costs to be higher, they can do it easily.  Add to that the very real, non-monetary costs of a lawsuit; it will distract you from the other things that you should be doing to grow your business and make profits, and it will consume the time of your employees who likewise should be doing other things.

Statistically, we know that less than 5% of all filed lawsuits go all the way to a trial, and in some places it is as low as 2%.  Why?  Because at some point, the cost and time of the lawsuit makes no sense compared to the anticipated outcome, and one side or the other (or both) finally decides to pay more or accept less, which they should have done earlier.

I was consulted about a construction lawsuit a few years ago.  Prior to the lawsuit, the vendor was seeking $1.5 million but was willing to accept $900,000 to settle.  The contractor offered $150,000, but was willing to pay up to $450,000 to settle.  Neither side budged from its settlement numbers, each was certain it was right, and the case went to lawsuit and trial.  Four years later, after each side had spent over $300,000 in lawyers and expert witnesses, plus hundreds and hundreds of hours of employee time, the vendor won a total of $750,000.  The vendor netted about $450,000 and the contractor paid over $1.1 million.  Each side would have been far better off taking the other side’s pre-lawsuit settlement position.  This is not uncommon.

So, what should you do when you have to decide whether to sue or settle?  Settle!  If it’s a situation where you are seeking money, accept less than you want.  If it’s a situation where someone is looking for money from you, pay more than you want. Don’t stand on principle or get emotional and get drawn into a lawsuit.  Get the dispute behind you, learn from it and get back to business.  “A bad settlement is better than a good court fight.”  Only the very rarest of disputes cannot be settled.

General Counsel says:  When customer or vendor disputes arise, address them quickly and make them go away.  Don’t avoid them and hope that they go away by themselves; they rarely do and the avoidance often makes things worse.  Do whatever it takes to settle.  And in the event that you have a dispute that you cannot settle by yourself, make sure that your contract has an enforceable mediation clause, so you will have a formal mechanism in place to promote settlement and speedy resolution.

At DailyGC, we provide legal advice and counsel on the full range of legal problems and legal-related business issues that small businesses and startups routinely face in their management, sales, operations and administration. The following are examples of these kinds of problems. You may use these descriptions on your Priority Issues Identifier Form� or you may write your own descriptions.
Business Contracts and Relations:
� Customer Contracts and Disputes
� Vendor Contracts and Disputes
� Collections
� Bank/Lender Relations and Issues
� Landlord/Tenant Relations and Issues
� Bonding/Insurance
� Nondisclosure and Confidentiality Agreements
� Procurement and Management of Outside Counsel
� Recruiting/Hiring Practices
� Employment Agreements
� Employee Compensation and Benefits
� Employee Manuals, Policies and Procedures
� Compliance with Government-Required Benefits Programs
� Payroll Compliance with Court Orders
� Discrimination and Harassment Claims
� Management and Discipline of Problem Employees
� Terminations
� Unemployment Insurance Claims
� COBRA Procedures
� Hiring Independent Contractors
Dispute Resolution:
� Case Analysis and Assessment
� Mediation/Arbitration
� Strategies for Litigation, Discovery and Negotiation
� Settlement Analysis
General Corporate:
� Entity formation
� Corporate Governance and Record-Keeping
� Shareholder Relations
� Compliance with Governmental Regulations
� Compliance with Corporate Contractual Obligations
� Contract Review, Analysis and Negotiation Coaching