Handling small contract disputes Featured

1:13pm EDT September 20, 2006
At times, corporations become engaged in contractual disputes in which the dollar amount of the contract is small (say, less than $100,000). Yet the parties, due to emotion, lack of forward thinking, or both, engage in litigation that results in attorneys’ fees being out of proportion with the size of the amount in controversy. Worse, they endanger their business relationships and adversely affect their future sales.

Smart Business talked to Andrew Sarne, a partner with Godwin Pappas Langley Ronquillo LLP, to learn more about how business owners can balance attorneys’ fees and the costs involved in their small contract legal disputes while retaining business relationships and goodwill.

What methods exist to prevent attorneys’ fees from ‘eclipsing’ the amount at issue?
Internally, reasonable business decisions need to be made regarding disputes that remove the emotions of the parties. Although two corporations might have a dispute, it often seems that there is a substantial likelihood they will continue to do business in the future. As such, the dispute itself can be resolved by knowing that whatever loss is taken on that deal can be made up in the future.

How can the parties resolve their disputes without incurring unnecessary legal costs?
An informal meeting without attorneys by two unemotional representatives of the respective corporations can generally yield a dialogue for resolution. Parties can also include appropriate clauses in their contracts that dictate that the matter shall be submitted to mediation (prior to litigation being commenced), arbitration, a bench trial, or be resolved by way of other creative means.

If mediation or arbitration is selected, the quality of the mediator or arbitrator is extremely important.

Assuming internal mechanisms are not available, the entities can engage counsel to attempt to resolve the matter through an alternative dispute resolution mechanism. Ultimately, a decision has to be made that the attorneys’ fees that will be invested in the dispute may very well eclipse the matter at issue. As such, a business decision needs to be weighed in comparison with those fees.

Although many contractual causes of action will allow for the recovery of attorneys’ fees, this is not always a guarantee. The party that seeks to litigate ‘to the end,’ assuming it will get its attorneys’ fees paid, may learn that this is not automatic. In fact, if the opposition is pushed too hard, they may find themselves litigating against an insolvent party.

What can an attorney do in small contract disputes that the parties involved cannot?
An attorney can, if empowered by the client, often take the emotion out of the situation, which generally drives the litigation. If the attorney is properly objective, he should explain to the client that regardless of the principles involved, the attorneys’ fees are a legitimate issue in these types of matters, and that immediate resolution tactics are more prudent than litigation tactics.

On occasion, attorneys give in to their clients’ emotions and allow the matter to escalate into such a tremendous lawsuit that, at the end of the matter, the parties would have been much better off negotiating a reduced amount on the front end versus paying out the attorneys’ fees and ultimate judgment on the back end.

Additionally, sometimes public relations issues and future business contacts can be impacted negatively.

At what point in the negotiation process should an attorney be introduced?
The attorney should always be involved from the beginning, but given clear objectives by the client.

In terms of contract negotiation, it is best for the parties to have a clear understanding of what goal they want to reach before attorneys are involved. Frequently, a client who relies solely on an attorney to provide direction for the contract can veer the project away from the intended goal by trying to protect the client.

In any event, once the attorney is involved, he should receive clear direction from the client, as all too often clients provide a contractual document to an attorney and allow the attorney to have free rein, which can destroy the goal. However, if an attorney is given proper direction and has negotiation latitude with the opposition, this is a useful tool. Additionally, the dispute resolution options mentioned above should be incorporated into any agreement.

What benefits accrue to the clients from the attorney’s involvement?
Often, in addition to reduced attorneys’ fees, a number of potential problems can be avoided by having an attorney involved on the front end of a negotiation. It is important to note, though, that other problems can also be created if attorneys are not given the proper objectives.

ANDREW SARNE is a partner with Godwin Pappas Langley Ronquillo LLP in the Houston office. Reach him at (713) 425-7405 or asarne@godwinpappas.com.