Designing A BetterPractice

A Practical Guide to LitigationPrevention For Small Businesses

Peter J. Lamont, Esq. 2ndEdition

Designing A Better Practice

A Practical Guide to Litigation Prevention For Small Businesses

By Peter J. Lamont, Esq.

©2012 Law Offices of Peter J. Lamont. All rights reserved.

 

LEGAL DISCLAIMER

This guide is intended to provide information about business liability and suggested means of attempting to reduce the risk of liability and potential litigation. The information herein should be used only as a general guide and not as legal advice. Any information provided in this document is not intended to create, nor does it create, a lawyer-client relationship.

The author and the publisher shall have neither liability nor responsibility to any person or entity with respect to any loss or damage caused or alleged to be caused directly or indirectly by the information covered in this guide. The opinions expressed in this book are the opinions of the individual author and may not reflect the opinions of the firm or any individual attorney.

The author is licensed to practice law only in New Jersey, the United States District Court of New Jersey, the Bankruptcy Courts of New Jersey and in the Third Circuit Court of Appeals. You are strongly encouraged to consult an attorney for individual advice regarding your own situation.

 

ACKNOWLEDGEMENT

I would like to acknowledge the hard working small business owners who strive each day to provide their customers and clients with exceptional products and services. The law and our legal system do not always produce fair results. Often aggressive and litigious consumers, and their lawyers, can damage the reputation of a small business while costing its owner thousands of dollars and hours of wasted time.

For far too long quality attorney representation for small businesses has been nonexistent or cost prohibitive. Lawyers, like the small business owners, must adapt to the changing times and economic conditions. Small business owners deserve high quality legal representation at affordable prices. I hate to see small business owners forced out of business because of a litigious consumer or client, and have focused areas of my practice around meeting and exceeding the needs of small business owners.

I would also like to thank my wife, Dorothy and my boys, Brendan, Luke and Noah for putting up with long days and late nights without me and for supporting my desire to provide small businesses with the legal representation that they deserve.

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ABOUT THE AUTHOR

Peter J. Lamont is a nationally recognized business and commercial litigation attorney in a wide variety of highly specialized areas within the kitchen, bath, construction and design industries. He routinely represents various national and international companies within the construction sector. He serves as general counsel to the world's oldest European kitchen company as well as to an international lighting design firm. Peter has successfully litigated matters on behalf of his clients throughout the United States and Canada.

Peter's business and commercial practice spans a wide spectrum, from commercial real estate to employment and human resources matters to corporate restructuring to litigation to intellectual property issues. He has also developed a Small Business Practice Group which provides high-quality business and legal advice and representation to small businesses at highly affordable prices.

Peter is a frequent speaker and lecturer at various corporate and community events and has been quoted myriad times by NPR, Dateline, and various other news publications. He is also a regular speaker at various business and trade conferences throughout the country and has lectured at various state universities and private corporations.

Peter is an author who currently pens a monthly business and legal column for Architectural Lighting Magazine and Kitchen & Bath Business online. Additionally, Peter has written articles for the New Jersey Law Journal, New Jersey Lawyer, Claims Magazine, and has published a consumer guide to Chapter 7 Bankruptcy.

Peter resides in Hawthorne, New Jersey with his wife and three boys. He graduated from William Paterson University with degrees in communications and business. He obtained his J.D. from Brooklyn Law School. He is very active in the community as a youth baseball and soccer coach, sponsor and regularly donates time to local schools and churches.

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I.

THE CHALLENGES OF SMALL BUSINESS OWNERSHIP

  Today's business owners are faced with a number of seemingly insurmountable obstacles. One such obstacle is our current economy. The country's economic condition is a wildcard, something that no business can control. Most businesses hope to ride out the rough waves and turn a profit during periods of temporary stability. While the unstable economy makes it difficult for businesses of any size to generate significant profits, small business owners are struggling more than ever. Generally, small businesses are highly susceptible to economic fluctuations. It is obvious just driving through your local center of town that the economic condition that we now accept as the norm has had a significant impact on the ability of small businesses to stay afloat.

Another obstacle is liability and resulting litigation. This obstacle, unlike economy, is something that can be controlled. The problem is that most small businesses don't have the funds allocated for proper preventative measures. In fact, many small business owners often close their eyes as to liability and hope for the best. Others turn to online legal support resources, colleagues and office supply store legal forms as a means of addressing their concerns over liability. Unfortunately, small businesses that rely upon such means in an attempt to control liability end up at the losing end of the judgment or even worse, out of business.

The purpose of this guide is not to convince you that you need to hire an attorney. In fact, many of the preventative measures addressed in this guide can be achieved by you and your staff.

Separately, the purpose of this guide is not to frighten or alarm small-business owners. However, small business owners will find many of the examples discussed in this guide frightening. Over the course of my career I have personally observed well-established small businesses that ended up losing everything as a result of a single consumer lawsuit.

So, now that I've told you with this guide is not, let's discuss what it is. The purpose of this guide is to provide small business owners with a better understanding of issues in your business that create liability as well as how society and current laws foster litigation in favor of your clients and customers.

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As noted in the disclaimer, the methods discussed in this guide cannot guarantee that your business will not be sued or that you can eliminate liability altogether. However, by following the opinions, guidelines and methods contained in this guide, you and your business will stand a much greater chance of reducing liability and obtaining early and cost-effective dismissals of frivolous lawsuits.

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II.

UNDERSTANDING THE LEGAL SYSTEM

Before we can discuss ways by which businesses can reduce liability and litigation, we must first understand how the United States legal system operates. I am not referring to the setup of the judiciary that you might vaguely recollect discussing in high school. I am talking about the practical aspects of today's laws and court decisions. Having a better understanding of the practical elements of the lawsuit will help you understand how the litigation prevention methods discussed in later sections of this guide can benefit your business.

Let's start with the anatomy of a lawsuit. While there are many procedural differences throughout the state courts in the country, the basic tenants of litigation remain the same. Lawsuits, regardless of the specific cause of action, (i.e. negligence, breach of contract, fraud), are comprised of two components. The first component to any lawsuit is liability. The second is damages.

Liability

What is liability? Liability is who is at fault for a particular set of circumstances. For example, if you are driving down your local street and you are struck by a driver who is busy texting her boyfriend, liability will be on the driver of the vehicle. Sometimes, courts apportion a percentage of liability amongst many different parties. So, in the example above, assume for a moment that the driver of the other vehicle alleges that she was not texting and that the only reason she struck your vehicle is because you swerved into her lane, a judge, arbitrator or jury will most likely apportion liability between you and the other driver. This might mean that you are held 25% at fault for the accident while the other driver is 75% at fault.

Without getting too technical, states have individual laws concerning apportionment of liability which is often referred to as contributory negligence. In some states, if the plaintiff is found to be greater than 51% negligent, his or her claim may be barred. The idea of apportionment of liability and contributory negligence is the subject of numerous legal treatises and studies. We do not need to get into any of that here.

Basically, for our purposes, apportionment of liability means the amount of damages that a defendant will be responsible for. For example, if in the case above

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where you are found to be 25% at fault and the other driver 75%, and you are told damages equal $100,000, the most that you will recover is $75,000.

Damages

The second element of a lawsuit is damages. Damages can take the form of compensatory, punitive, statutory or nominal damages. Compensatory damages are out-of-pocket expenses and pain and suffering. Punitive damages are monies awarded to a prevailing party, against the other party as punishment. Statutory damages are those awarded as a result of a provision in the statute, such as in the Consumer Fraud Act. Finally, nominal damages are minimal money damages awarded to an individual in an action where the person has not suffered any substantial injury or loss for which he or she must be compensated. A nominal damage reflects the fact that a person's rights have been violated and can be as little as one dollar.

Both liability and damages must be established and proven in every lawsuit. If you can prove that liability is in your favor but you have no provable damages, your case will be dismissed. Likewise, if you have significant damages but cannot establish liability, your case will be dismissed.

Liability and damages are sometimes perceived by a purported victim. The victim, in the case of the small business the client or consumer, may honestly believe that she has been wronged and wants to pursue relief through the courts. So, what is necessary to initiate a lawsuit?

Good Faith Basis

In order to file a complaint a plaintiff only needs a good faith allegation against a defendant. The term "good faith basis" has been broadly interpreted throughout the United States by state courts. Good faith basis does not necessarily mean that you can prove the allegation it simply means that you believe a valid cause of action exists against someone else. For example, if a customer enters into a contract with a small-business owner for window blinds and later feels as though the blinds did not function in the way that she anticipated them to she may believe that the small-business owner was unjustly enriched or is guilty of breach of contract. Her belief is enough to establish a good faith basis and thus, she could file a complaint.

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It is important to note that so long as an individual can establish a good faith basis for an allegation that person can sue another. The plaintiff does not need to establish her proofs at the time the lawsuit is initiated. This does not mean that she will win the case, it simply means that she has overcome the relatively low hurdle of establishing a good-faith claim.

Pleadings

Once a plaintiff believes she has established a good-faith basis, or her attorney has convinced her that she has established one, a lawsuit is initiated by the filing of a complaint. The complaint contains the allegations against the defendant. Once the complaint is filed with the court it must be served on the defendant. The defendant then has a set period of time, generally 25 to 35 days depending upon the state, to submit a written response or answer to the complaint. The answer typically contains denials and stated defenses.

Discovery

After all pleadings have been filed and exchanged, the period of time known as discovery begins. During discovery the parties exchange documents and written requests and conduct investigations, depositions and obtain witness statements. The purpose of discovery is to help the parties establish evidence and facts that will prove or establish a defense to a case. Discovery periods, depending upon the state, run for a set period of time. Cases do not get scheduled for trial until the discovery period is completed. The discovery process is aimed at eliminating surprises at trial and providing both parties with ample information to prosecute or defend their positions.

Sometimes, a party fails to comply with a discovery demand. When this happens the party requesting the information usually files a motion to compel the requested discovery. There are times when a party has a legitimate right to refuse to produce certain information. Those reasons are conveyed to the court in opposition to the motion. Ultimately, the court determines whether or not the requested information must be provided. The important thing to understand is that cases can be delayed and extended as a result of various discovery related disputes. It is not uncommon for cases to be delayed an additional 3 to 6 months beyond the anticipated end date.

Summary Judgment

Once the discovery process is completed, often one or all of the parties will file a Motion for Summary Judgment. This motion is essentially a trial on paper. If the filing

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party wins the motion, the case will be concluded. Typically, the way summary judgment motions are approached by the court is as follows. Judges are tasked with deciding questions of law while juries decide questions of fact. In a motion for summary judgment, the moving party argues that there are no questions of fact to be submitted to a jury and that the judge can resolve the case based upon the law. Thus, in order to defeat a motion for summary judgment the opposing party must prove that there are questions of fact that need to be submitted to a jury. Please note that not every case lends itself to a summary judgment motion.

Trial

In the event that no successful summary judgment motion is filed, the case will then proceed to trial. Depending upon the nature of the lawsuit, a trial can last from one day to many weeks. Trials can be conducted with or without a jury. In order for a jury trial to occur one party must request it. Otherwise, the trial will be a bench trial in which the judge serves as the jury.

The majority of cases settle prior to trial. This is for a number of reasons. Trials are expensive and can take a great deal of time. Additionally, there's a great deal of uncertainty in connection with how a jury will decide a particular issue. Unfortunately, many jurors are not interested in participating and will agree with other jurors simply to terminate their jury duty responsibilities. While the law is supposed to be fair, it often is not.

There are a number of specific issues involved in the trial, such as expert testimony, that will not be discussed in this guide. The purpose of this section is to provide the reader with a basic overview of the litigation process. The important point to note is that all cases should be prepared as if they were going to trial even though 90% will settle before you get to the court steps.

Summary

In many ways, our legal system is set up in favor of plaintiffs. The simple fact that so long as the plaintiff has a good faith basis to file a complaint she may do so is theoretically unfair to defendants. That being said, there are certainly a number of remedies that a defendant can utilize in order to deter a plaintiff who files an intentionally frivolous lawsuit. However, in general once you have been sued you are going have to pay a lawyer to defend you. Depending upon the nature of the litigation, defense costs for an average case could exceed $25,000.

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Lawsuits are stressful and time-consuming. It is a much better practice to prepare your business in a manner that can drastically reduce the likelihood that you will be sued then it is to pay to defend a lawsuit.

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III.

LIABILITY & BUSINESS

Businesses, regardless of their size have been and will remain targets for litigation. You may have heard the term "deep pockets" when people refer to companies and corporations. The term “deep pockets” refers to the fact that a plaintiff and her lawyer will stand to recover more money from a corporate defendant who has significantly more financial resources than an individual person. Attorneys learn about deep pockets in law school classes. Professors routinely tell aspiring attorneys that when you bring suit on behalf of your client always focus your efforts on the defendant with the deepest pockets. In most cases, your business will have deeper pockets than any individual member. The simple fact is that if you are a business, you are a litigation target.

So what creates liability for companies and corporations? For small businesses, litigation can be triggered by failing to provide proper services, breaching a contract, mismanagement of client funds, defamatory statements, false advertising and even from personal injuries such as slip and fall accidents that might occur in your place of business.

Larger companies deal with the same triggers as smaller companies but also have claims which can arise out of shareholder disputes, corporate infighting, bribes and handouts, fraud and similar issues.

Liability is also created as a result of the following:

• Misrepresentations (intentional and negligent) • Mistakes • Confusion • Lack of formal business procedures • Lack of communication • Taking shortcuts • Failure to follow through • Improper record-keeping • Failure to report problems • Perceived overcharging

For the small business owner liability issues are often an afterthought. The primary focus of any small business owner is on the revenue stream and growth in

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customers or clientele. When small businesses hire a lawyer it is typically to deal with the setup of the business’ legal entity structure. Contracts, agreements, service marks, employee policies and handbooks are often handled directly by the small business owner.

Small-business owners should never view liability prevention as an afterthought. One significant lawsuit could put you out of business and possibly subject you to personal liability. Small businesses should embrace the old adage, "the best defense is a good offense."

Many small-business owners rely upon legal forms purchased through office supply stores or utilize online legal assistance websites, such as Legal Zoom. Small-business owners are primarily attracted to forms and low-priced legal services websites because of the low cost and because many people dislike discussing issues with lawyers. There are a number of reasons why people wish to avoid discussions with lawyers, which will not be addressed here. However, it's no secret that lawyers are not exactly America's favorite professionals. Unfortunately, overpriced and inexperienced lawyers have given small-business owners the wrong impression as to the importance of hiring adequate legal representation.

The basic problem with stock forms and online legal services is that the information and documents provided are not prepared to deal specifically with the issues that might arise in your business. For example, a kitchen cabinet manufacturer should have provisions concerning delivery dates in the lead time for production of the cabinets built into her contract. A stock contract may have enforceable legal provisions in it but will not deal with issues that your business needs to address. This is not to say that every stock form is not reliable. In fact, there are many instances, such as a power of attorney, where a stock form will do an effective job.

Most people have probably seen the television advertisements for Legal Zoom. Similar to stock forms, Legal Zoom does have its place but small businesses need to be aware of issues that can be created through using sites like Legal Zoom. First of all, as with standard form documents, Legal Zoom provides its customers with stock legal agreements. They fill out the forms for you instead of you having to do with yourself. However, they typically do not get into the specific protections that your business needs to reduce litigation.

Separately, many small-business owners purchase monthly service plans with companies like Legal Zoom and receive a certain number of allotted telephone minutes with a legal services professional. Many small-business owners can't afford the

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traditional hourly rates of regular attorneys but still desire to have some level of legal support. The problem with these service plans is that the advice that you receive is from an individual who may or may not be attorney and who knows nothing about you or the nature of your business. In fact, in 2011 Legal Zoom was involved in a class-action lawsuit where in the plaintiff's alleged that the company was engaging in the unauthorized practice of law by having paralegals and other non-lawyers provide equal documents and advice. The case was eventually settled.

So what is a small-business owner to do? Stock forms and online legal services do not provide adequate protections and traditional attorneys are overpriced. Small-business owners need to know that the latter is changing. There are many business attorneys who understand the challenges faced by small-business owners and who have done away with traditional hourly billing rates for those clients. Websites like AVVO.com, can give small-business owners specific information about attorneys whose practice focuses around the representation of small businesses.

Summary

There are a number of instances where stock forms and online services are sufficient to provide you with the legal support you need. For example, setting up an LLC or Corporation can be handled effectively through the use of these legal service options. However, in order to analyze and reduce your company’s liability you really need to hire an experienced small-business attorney. The right attorney can help prepare more complex documents and can instruct you on liability preventative measures.

The first key to selecting the right attorney is to find someone whose practice is focused around business law and small-business representation. You certainly don't want to hire a “jack-of-all trades” or a family lawyer who dabbles in business law. The second key is that the business attorney you hire must have embraced alternate fee arrangements. Small businesses cannot afford to pay the inflated hourly rates or retainer fees that many lawyers charge. By way of example, my firm has established a small business program that allows business to obtain quality legal and business services at affordable prices. Finding the right lawyer can make a significant difference in your business's success.

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IV.

CONSUMER FRAUD, ADMINISTRATIVE CODE VIOLATIONS,

& CONTRACT WARRANTY LAWS

In addition to the traditional factors that create liability, which we touched on previously, strong consumer protection laws are responsible for shutting the doors on thousands of small businesses nationwide. What exactly is a consumer protection law, and why is it so damaging to small businesses?

Consumer Fraud

Regardless of what state your business is in, state legislatures have always attempted to protect the rights of unwitting consumers from the wolf's lair that is corporate America. The original idea behind the legislation was that consumers were at a disadvantage compared to the multimillion dollar corporations from whom they were purchasing products and services. In order to combat fraud, bait and switch tactics, and other contractual breaches by corporate America, state legislative branches devised various consumer protection laws which contain serious penalty provisions for those who violate them. Originally, it was a good idea. However, crafty plaintiffs lawyers, the uncontrollable growth of the Internet and the beleaguered economy have resulted in consumers utilizing consumer protection laws as swords instead of shields as they were originally intended.

In order to dissuade corporate America from preying on innocent consumers, severe penalties were written into consumer protection statutes. Typically, these penalties include the recovery of double or triple damages for the consumer and the repayment of the plaintiffs’ attorney’s fees by the business. For example, New Jersey has the Consumer Fraud Act which allows a successful plaintiff to recover three times the amount of actual damages (treble damages) as well as the payment of her attorney's fees. So, if the plaintiff successfully proves that the business violated the consumer fraud act and her actual damages were $20,000 she would be awarded a total of at least $60,000, plus whatever her attorney charged her as fees.

While each state differs on whether to award double or triple damages, most consumer protection statutes are similar and are extremely damaging to the small-business owner. Typically, consumer protection laws can be violated affirmative acts, omissions or violations of any law or regulation. An example of an affirmative act would be where a small business offers a money back guarantee but then refuses to follow

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through. An omission is simply either a deliberate failure to advise the consumer of a particular issue or a negligent one. Finally, the violation of a regulation such as a home improvement contractor’s law or a New York City reseller’s regulation can also trigger a consumer fraud claim.

In practice, aggressive plaintiff attorneys are always seeking to expand the bounds of the protections provided by consumer statutes. Consumer fraud claims can be triggered by breach of contract issues as well as innocent misrepresentations. Many states are extremely liberal with their interpretation of consumer protection laws. For example, under New Jersey law a consumer fraud plaintiff need only show that the defendant committed and "unconscionable commercial business practice" along with ascertainable loss. This loose interpretation of the statute allows for thousands of consumer fraud claims to be filed every year against small businesses.

Administration Code Violations

  All states have enacted various administrative codes and regulations. Examples of these type laws include a home improvement contractor's regulation or regulation that a home inspector be licensed and insured up to a particular amount. Administrative codes and regulations are often triggers for consumer fraud violations. For example, under most state's laws the violation of a regulation can be considered a per se violation of its state's consumer protection laws.

By way of example, under New Jersey law, if a home improvement contractor fails to obtain a license from the state not only can the contractor be fined, but the failure to be licensed triggers a violation of the consumer fraud act. This is a critical issue for small businesses to understand. Many times administrative codes and regulations provide for mandatory penalties for the individual or business that violated the act or regulation. This is separate and distinct from any cause of action which a plaintiff may be permitted to bring against you under the consumer fraud statute.

Taking the same example above, the failure of the home improvement contractor to be licensed can result in a $10,000 fine from the state. Separately, the plaintiff homeowner now has a valid consumer fraud claim. If the plaintiff's actual damages are $100,000 and she prevails on a consumer fraud claim, she will be entitled to $300,000. So now, the home improvement contractor is responsible for paying a $10,000 fine on top of the $300,000 jury award. This is enough to put most businesses, small or otherwise, out of business.

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Many codes and regulations are not readily known by small-business owners. It is important that when your company hires a small-business attorney that the attorney is familiar with all of the local codes and regulations impacting your business.

Contract Warranty Claims

Separate and distinct from consumer protection statutes, many states have enacted consumer contract warranty laws. These laws are extremely vague and can be molded to fit nearly any claim arising out of a contractual obligation on the part of the small-business owner. For example, in New Jersey there is the Truth in Consumer Contract Warranty and Notice Act. This act applies to any contract, warranty notice or sign that is displayed, offered, given, or consummated. Thus, the TCCWNA, as it has become known in New Jersey, can apply to mortgages, consumer contracts, auto leases, credit card agreements, bills of sale, advertisements or roadside signs, just to name a few. In theory, if your business provides services under a contract, you are potentially at risk of a TCCWNA claim.

Even more concerning is the fact that contract warranty claims such as New Jersey’s TCCWNA do not require a showing of ascertainable loss, nor does it require evidence of an unconscionable commercial practice. In fact, New Jersey's TCCWNA does not even require contractual privity, or a direct relationship, between the plaintiff and the defendant. Typically, contract warranty laws also provide for the recovery of double or triple damages and attorney’s fees.

Summary

Consumer protection laws, administrative codes and regulations and contract warranty laws are significant weapons in a clever plaintiff attorney's arsenal against the small-business owner. Shrewd plaintiff lawyers use these laws to attack small-business owners and force them to pay out significant settlements.

Over the past seven years consumer claims against small businesses have more than tripled. Unscrupulous consumers also use these protections as a means of refusing to pay small businesses for merchandise and services rendered. For example, a homeowner may hire a landscape architect to perform various tasks in her backyard. The total cost of the work is $10,000. When the landscape architect is finished the consumer argues that the work was done improperly, promises made were not kept and that delays in the job cost her significant monetary damage. If she were to demand her full $10,000 back with no hope of receiving additional monies, the landscape architect may choose to fight her in court. However, with such overreaching consumer protections the architect is

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now faced with the possibility of plaintiff recovering three times the amount of her actual damages or $30,000. In an effort to avoid a $30,000 judgment, the architect may choose to refund the plaintiff's money or overpay to settle the claim.

Consumers have a tremendous amount of resources available to them through Internet websites from which they can learn about the use of consumer protection laws as weapons. Unfortunately, information on protecting yourself from consumer fraud claims is limited. A good small-business attorney will address your potential liability and help you enact provisions and policies in your business to prevent or significantly reduce consumer claims.

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V.

THE NEW BREED OF “AMBULANCE CHASER”

When most people think of a plaintiff's attorney they envision a personal injury lawyer handing out his business card to the poor lady who just tripped over an uneven sidewalk in front of the mall or the guy on TV telling you how he has helped millions just like you get the money that you deserve. These lawyers are generally referred to as “ambulance chasers”. In the past, the practice of “ambulance chasing” primarily involved chasing personal injury victims. Unfortunately, over the past few years personal injury lawyers have began chasing consumer fraud victims.

The primary reason that the traditional personal injury ambulance chaser is now targeting consumer clients has to do in part with the adoption of legislative changes throughout the country concerning automobile personal injury claims. Most states have enacted certain threshold statutes aimed at eliminating expensive and unnecessary motor vehicle lawsuits. Essentially, unless your client has been involved in a serious accident with significant injuries the likelihood of striking it rich from motor vehicle claim is slim to none.

However, with the broad and sometimes overreaching powers of consumer protection statutes, the plaintiff attorneys can chase after a new and more lucrative fleet of ambulances. Aside from the fact that automobile lawsuits are in decline due to strict threshold statutes, plaintiff attorneys favor consumer fraud claims because of the possibility of the recoupment of attorney's fees.

In traditional personal injury actions the lawyer contracts with the plaintiff to receive one-third of what ever amount the client recovers. The downfall is that in order for the plaintiff attorney to make money, his client has to recover. Conversely, under most consumer protection laws if the attorney can establish that a violation of the law occurred and his client recovers a nominal fee, in some states even one dollar, the plaintiff attorney is entitled to recover all of his fees.

So for example, if a plaintiff attorney sues a kitchen cabinet manufacturer for misrepresentations concerning the delivery date of his client’s kitchen cabinets, and the court determine that a technical violation has occurred but the jury determines that the plaintiff is only entitled to the recovery of hundred dollars; her attorney is still entitled to recovery of his fees. So let's assume that the consumer’s attorney, knowing how the court calculates consumer fraud counsel fees, has kept track of his time on an hourly basis and

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decided that for the purposes of this lawsuit he would claim his hourly rate to be $350 per hour. He has spent a total of 40 hours on the file. He would submit a total fee request to the court in the amount of $14,000. Assuming that the court approved the amount of the fees, which happens more often than not, the defendant would be responsible for paying the $14,000 fees.

As you can see, consumer fraud claims are highly appealing for both experienced and “fresh out of law school” attorneys. Attorneys know that by threatening consumer fraud damages many defendants will offer to settle their claims instead of risking a large jury awards.

We have defended small businesses against lawyers whose entire practices were based around the representation of purportedly “injured” consumers. These attorneys believe that every business has deep pockets and generally attempt to strong-arm them into settling defensible claims. Proper litigation prevention measures can help ward off this new breed of ambulance chaser.

Summary

Consumer fraud laws have spawned a new generation of ambulance chasers. Consumer claims are especially enticing to young attorneys seeking to make a quick buck from the unprepared small business owner. Small business owners must take consumer protection laws seriously and must be aware of the increasing amount of litigation arising from those laws. It is anticipated that over the next five years consumer protection claims will double and possible triple nationwide.

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VI.

INSURANCE

Business insurance can be the subject of an entire book. We are not going to explore every aspect of business insurance coverage but we need to address two key issues. First, every business owner should have insurance of some type. Second, depending upon the nature of your business a typical commercial general liability policy may not adequately protect you.

Most small-business owners meet with an insurance broker to determine the proper type and amount of insurance that is needed to protect their business. Most brokers will provide small businesses with standard business insurance through a commercial general liability policy. A CGL policy as it is more commonly referred to, protects you from personal injury claims arising out of injuries to clients or customers which occur within your office, showroom or store. It also provides coverage for damages that may occur to the businesses personal property, such as computers and office equipment, in the event of a flood or fire.

A CGL policy may be sufficient for a retail business. For example, a small bookstore may only need a CGL policy because the most likely and foreseeable claims arise out of injuries to store patrons and damaged merchandise.

However, an interior designer or kitchen cabinet designer may not be adequately protected under a CGL policy only. For example, an interior designer with a showroom may desire a CGL policy to protect against injuries occurring in the store or property damage. However, a CGL policy will not protect the designer against an error in pricing or design. So, if the claim arises out of a measurement error which results in the inability of the consumer to properly utilize her new kitchen cabinets, the designer will not be protected under CGL policy.

Businesses who are engaged in the professional services arena such as accountants, home improvement contractors, kitchen designers, interior designers, psychotherapy and related professions should seek out additional coverage under a policy of insurance known as errors and omissions coverage (“E&O”). An E&O policy insures the policyholder against errors that she may make in the performance of her job or omissions. So, in the above example, the cabinet designer who incorrectly measured her client’s space could seek coverage under an E&O policy if she is sued by the homeowner or is required to lay out her own money to reorder properly sized cabinets.

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Are You In Good Hands?

Notwithstanding the foregoing, insurance coverage is not a substitute for the utilization of proper liability prevention measures. The small business owner must keep in mind how insurance companies make money. They play the odds. They bet that they will make more money from their insureds who pay monthly or annual premiums then they will pay out to those same insureds.

Insurance companies are in the business of making money. They don't really care about you. So you are in “good hands” so long as the insurance company can find a way to avoid paying you on a claim. In fact, every insurance policy known to man has standard and non-standard exclusions built into it. Sometimes exclusions are easy to understand but for the most part they are quite complicated. Certain policies have exclusions for work product claims. Others will deny coverage if the complaint is based upon a consumer fraud claim.

The insurance companies themselves cannot always understand whether or not they are obligated to provide coverage. Insurance companies regularly retain lawyers to provide coverage opinions for them as to whether or not they are legally obligated to provide coverage to an insured.

The point is that insurance companies do what they can to avoid paying out claims to their insureds. Insurance, while a necessary part of your business, is not a substitute for effective liability prevention strategies.

Summary

The key is to obtaining the right coverage for you is to convey all of your concerns, needs and the specific responsibilities of your job to your insurance broker. If you are engaged in a professional services business and your insurance broker does not discuss errors and omissions coverage with you, you may need to find a new broker. Don't assume that the broker will automatically provide you with the right coverage. You need to communicate effectively with the broker and question him or her as to the specific protections policies you are purchasing will afford you.

 

 

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VII.

PREVENTING LITIGATION

Any lawyer will tell you that you cannot prevent litigation. However, if you take certain precautions and follow certain rules you can drastically reduce the number of lawsuits filed against your business. Generally, small businesses that follow the guidelines set forth in the next chapter will experience a 90% reduction in litigation over the course of 12 months.

Why can't we prevent litigation? The main reason that we can't eliminate litigation is that our legal system allows lawsuits to be filed based upon "good faith allegations." As discussed in Chapter 1 of this guide, the term "good faith allegation" is broadly interpreted by courts. It essentially allows a plaintiff to sue a small business simply because they believe they have the right to do so.

In every business there are things that you and your employees do that can create liability, including the way you maintain your client files, the way you communicate with your clients and the contracts that you use. These are the things that you need to address, the self-imposed liability. We are all powerless against individuals who “create” claims against us. The vast majority of litigation arises out of issues that the small-business owner could have prevented.

When you employ proper liability prevention strategies you can prevent up to 90% of the litigation that would have been filed against your company had you not employed the strategies. Preventing litigation means saving tens of thousands of dollars in attorneys fees, settlements and judgments. It could be the difference between the growth and demise of your business. You could be the most successful and skilled small business owner around but it can all come crashing down if your company is hit with a significant consumer fraud claim.

Summary

As small business attorneys we are sometimes faced with the same problems that heart doctors are. Heart doctors are continuously telling their patients that they can prevent heart attacks by engaging in exercise and by limiting fatty foods. Those patients that listen to their doctor’s advice have a far greater chance of avoiding heart attack. Conversely, patients who plan on eventually "getting to it" are the ones that generally find themselves undergoing a triple bypass.

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Similarly, we are constantly telling small business owners about the benefits of taking preventative measures against liability and ultimately litigation. Unfortunately, far too many small business owners don't view liability prevention as a pressing matter. By the time they "get to it" they are named as a defendant in a lawsuit and are incurring significant hourly defense costs.

The benefits of liability prevention cannot be over emphasized. Just like paying taxes, it is something that you have to do if you desire to take your business to the next level.

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VIII.

TOP TEN PREVENTATIVE MEASURES

As a small business owner what can you do to effectively limit liability? After years of working with companies ranging from sole proprietorships to multimillion dollar international corporations, I have compiled what I believe to be the top 10 preventative measures.

1. PROPER CONTRACTS

Whether you are in a retail business or provide professional services your contracts, bills of sale, subcontractor agreements and related written contractual obligations must be properly prepared. In my experience, I have never seen a stock document that could take the place of a properly prepared, industry specific contract.

Contracts are living documents. A contract is not something that you prepare once and then use for the rest of your career. I recommend reviewing and updating contracts every six to twelve months. Throughout the year you will undoubtedly deal with dissatisfied customers, disgruntled employees and other problems. Such issues should be viewed as learning experiences and should be the basis for contract revisions.

Contracts will certainly contain general clauses that can apply to any business. The following are examples of clauses commonly found in general business contracts.

• Merger and Integration Clause The purpose of a merger and integration clause is to prevent the parties to a contract from later claiming that the contract does not reflect their entire understanding, was changed by a subsequent oral agreement, or is not consistent with prior agreements:

This Agreement and the exhibits attached hereto contain the entire agreement of the parties with respect to the subject matter of this Agreement, and supersede all prior negotiations, agreements and understandings with respect thereto. This Agreement may only be amended by a written document duly executed by all parties.

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A party entering into a contract which includes this type of language should make sure that all promises and agreements are actually included in the written contract, as otherwise it may be impossible to enforce those unwritten promises.

• Choice of Law and Forum Clause

Contracts will often contain language expressing that they are to be interpreted under the laws of a particular state or jurisdiction, and that any litigation will occur within a specified court system:

This agreement shall be interpreted under the laws of the State of California. Any litigation under this agreement shall be resolved in the trial courts of Los Angeles County, State of California.

Please note that this language may not always be enforceable, particularly in relation to consumer contracts.

• Statute of Limitations Clause

A statute of limitations clause changes the statute of limitations which applies to litigation relating to the subject matter of the contract. For example, the law may provide for a six year statute of limitations for litigations, but the parties can contractually agree to shorten that period, to eliminate the "discovery rule" (which may extend the statute of limitations during the period a party is unaware of the breach), or both:

The parties agree that any action in relation to an alleged breach of this Agreement shall be commenced within one year of the date of the breach, without regard to the date the breach is discovered. Any action not brought within that one year time period shall be barred, without regard to any other limitations period set forth by law or statute.

Please note that, for public policy reasons, states will not always enforce a reduction in the statute of limitations, particularly in relation to consumer transactions. Before assuming that you don't have a valid cause of action on the basis of this type of contract language, consult with an attorney in your jurisdiction. However, until it is held invalid by a court, you should assume that this language is

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valid and whenever possible should commence any litigation within the contractual period.

• Indemnification Language

An indemnity clause requires that one party indemnify the other, in the event that certain expenses are incurred. Example language:

The subcontractor agrees to indemnify and hold harmless the contractor against loss or threatened loss or expense by reason of the liability or potential liability of the contractor for or arising out of any claims for damages.

Be careful with this type of clause, as it can significantly increase your exposure in the extent of an unexpected event or breach of the contract.

• Time of Performance

Some contracts will provide that "time is of the essence", which may support an action for breach of contract where the contract is not completed within a reasonable (or specified) time. This is often seen in construction contracts, where it is important that work be resolved such that a homeowner or business can return to normal life or operations:

Time is of the essence for the completion of the work described in this contract. It is anticipated by the parties that all work described herein will be completed within two (2) weeks of the date of execution, and that any delay in the completion of the work described herein shall constitute a material breach of this contract.

Others may specifically provide that time is not of the essence:

The parties agree that time is not of the essence in the completion of the work described in this contract. All parties shall act to complete the work described within a reasonable time.

Where a contract includes language of the latter variety, you may wish to ask yourself why the other party wants the language. That is, do they anticipate delays which will leave you dissatisfied with the timeliness of their performance?

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• Savings (Severability) Clause

Most contracts include a savings clause, which is meant to ensure that the contract remains enforceable even if part of the contract is later held invalid:

If any provision of this Contract is held unenforceable, then such provision will be modified to reflect the parties' intention. All remaining provisions of this Contract shall remain in full force and effect.

In the absence of a savings clause, it is possible that if a single clause is held invalid, the entire contract will also be rendered invalid.

• Attorney Fees Clause

An attorney fees clause requires that, in the event of litigation, the loser reimburse the prevailing party's attorney fees:

In the event of litigation relating to the subject matter of this Agreement, the non- prevailing party shall reimburse the prevailing party for all reasonable attorney fees and costs resulting therefrom.

• Non-Waiver

The purpose of non-waiver language is to protect a party who excuses the other party's non-compliance with contract terms, and to prevent the parties' course of conduct under the contract from resulting in the loss of enforceability of the actual terms of the contract:

The failure by one party to require performance of any provision shall not affect that party's right to require performance at any time thereafter, nor shall a waiver of any breach or default of this Contract constitute a waiver of any subsequent breach or default or a waiver of the provision itself.

For example, if a contract requires monthly payments but the party owing payments only pays every other month, in the absence of a non-waiver clause, after a year of acceptance of the late payments a court would be likely to hold that the bimonthly payments do not constitute a breach of the contract. With a non-waiver

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clause, the party to whom the payments are due would typically be able to enforce the monthly payment provision, despite the course of conduct which was inconsistent with the contract language.

• Liquidated Damages Clause

Where it can be difficult to calculate actual damages, it may be appropriate to include a "liquidated damages clause" in a contract. The most common form of "liquidated damages" is probably the late fee charged following the late receipt of payment on a lease or credit card. An example for the rental of a University dormitory room:

Students canceling their housing contract after occupying their room shall pay liquidated damages in the amount of $5.00 per day for the remainder or unexpired portion of the term of the academic agreement, not to exceed $400.

The damages are "liquidated" in the sense that the contract sets forth a specific sum that will be paid as damages, whatever the actual amount of damages may be. However, the amount of "liquidated damages" should roughly parallel what actual damages might realistically be. Courts will typically not uphold "liquidated damages" clauses if the damages are disproportionate to the injury, or if the amount of liquidated damages appears to be intended as punitive as opposed to fair compensation for the injury.

Most of the above listed provisions can be found in the stock contracts. While these provisions are critical to any contract, what is missing is the industry specific clauses that can help protect your business. For example, if you are an interior designer, you should include a clause that forbids a client from "shopping" you. If you are a kitchen cabinet designer, you should include a clause that addresses expectations about book matched finishes and the impact of light or moisture on cabinet veneers. These specific issues can help protect you from liability.

Small business owners should take care to craft a clear and enforceable payment clause. All of the payment terms must be clearly explained in the contract so as to avoid confusion or non-payment. Separately, service contracts need to clearly spell out the full scope of the agreement. When you engage in activities beyond the scope of the contract you open your business and yourself up to liability and loss of revenue.

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Another major factor in constructing an effective contract is the use of plain English. It is time to do away with the legalese. In fact, there have been a recent number of laws requiring consumer contracts to be avoid the confusing legal terms. Legal terms such as heretofore and herein do not add anything to your contract except confusion. Confusing contracts are fodder for litigation.

It is interesting to note that on October 13, 2010, President Obama signed into law the “United States Plain Writing Act of 2010. The law requires that federal agencies use "clear Government communication that the public can understand and use." On January 18, 2011, he issued a new Executive Order, "E.O. 13563 - Improving Regulation and Regulatory Review." It states that "[our regulatory system] must ensure that regulations are accessible, consistent, written in plain language, and easy to understand."

Summary

You cannot sufficiently protect your business through the use of form contracts. Your contracts need to address specific provisions that address your business. Contracts should be written in plain English and should be reviewed and updated every 6-12 months.

2. PROPER COMMUNICATION

Effective communication alone can reduce your company’s liability significantly. There is a drastic difference between hearing your clients or customers and listening to them. A large percentage of litigation can be prevented by simply listening to and understanding your client’s needs and requests.

In Person Meetings

There are a few general rules concerning proper communication. When you communicate with the client you should let them explain what it is that they are looking for before you begin to offer any suggestions. Next, you should repeat your client’s request to confirm that you have understood them. Repeating what your client has asked for has a psychological effect on consumers which results in the customer having increased confidence in your products and services. Next, you should reduce the conversation to writing. In other words, write down exactly what the customer is looking for a piece of paper that will eventually make it to the client's file.

Let’s take the above steps and apply them to a real-world example. Assume that you are a custom cabinet designer and you were meeting with a client for the first time. The client tells you that they want a full set of kitchen cabinets and that they would like

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one glass cabinet suspended from the ceiling. After listening to the customer you should repeat, “okay, so as I understand it you want a full set of cabinets and you would like us to design a hanging glass cabinet which would be suspended from the ceiling. Is this correct?”

Right off the bat the customer will feel as though you "get her" and that you completely understand what she is looking for. Now, during this same conversation you should be taking detailed notes as to what the customer is requesting. These simple step will help you establish rapport with you new customer and will be the beginning of a “paper trail” that you could use as evidence to support your defense should the customer sue you at a later date.

Telephone Calls

Lawsuits are much harder to deal with when there is an excessive amount of "he said-she said" testimony. One of the areas where we see this sort of testimony is with telephone communications. It is common for a customer to contact small business via telephone and request additional merchandise or a new design element. These conversations can lead to confusion and ultimately to litigation. The way to ensure that you have documentary evidence to support your defense in the event that you are sued is to write a telephone memo for every call that you get and then place the memo in the customer's file.

I recommend creating a form that contains a space for the caller's name, client or job number, date of call and space to write notes about the conversation. Memorializing phone calls in this manner can help eliminate a significant amount of confusion which could ultimately lead to litigation.

Contract Explanation

Another area of liability deals with the customer's understanding of the contract or sales agreement. If your contract is more than a simple sales agreement, for example a design-build contract offered by contractor, you should sit down with your client and explain each provision of the contract. This serves two purposes. The first purpose is that it eliminates confusion on the part of your client. Your client knows exactly what to expect from you and the contract. The second purpose is that it creates additional support for you in the event that the customer ultimately sues you. The fact that you took the time to explain the terms and conditions of the contract to your client will benefit you at the time of trial.

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Be Specific & Do Not Exaggerate

There is no value in being vague when dealing with your customers and clients. Your clients should know specifically what to expect from you. It is never good to have a client create unrealistic expectations because you made vague statements.

Separately, exaggeration and puffery about your skills or services is never a good idea when dealing directly with customers. All business owners like to "pump up" their reputation to attract customers. This is generally fine so long as your marketing tactics remain truthful. However, when you are dealing with a client that you've already landed, there is zero room for anything but specific facts about what you can and cannot do.

For those businesses that deal with ordering shipping and delivery of goods, it is always a better idea to overestimate your lead time then to sell yourself short simply because you want to impress the customer. Delivery delays are a major factor that contributes to liability, especially in the construction and design-build industries.

Obtain Approvals

Finally, depending upon your business, you may need to obtain customer sign-offs and approvals on certain documents. Obtaining approvals is generally more important in the professional services industry than in the retail world, however, there are time when a retail business would want to obtain a sign-off (i.e. a refund or return of merchandise). For example, assume an architect or kitchen designer creates drawings for a client of the proposed construction elements. It is critical that the architect or designer review the drawing with the customer and obtain a sign-off or approval signature.

Over the past few years we have been involved in a large number of lawsuits involving kitchen cabinet designers. They typically involve customers who were dissatisfied with the height of the cabinets or an island. They filed suit alleging consumer fraud and various other causes of action. Those cases where the designer had obtained signatures on each of the designs generally were dismissed within 30 to 60 days of the initiation of the lawsuit. Conversely, when designers failed to obtain signatures the cases rarely received an early dismissal and continued for a year to a year and a half.

Summary

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Effective communication is a significant weapon in the battle against liability. However, it is often overlooked by small-business owners. Learning to effectively communicate can take time. Certainly, getting used to writing telephone memos and similar notes may seem like additional work that you don't have time for, but when you saved tens of thousands of dollars on litigation costs you'll realize how valuable it is.

If you have staff, I strongly suggest that you discuss the benefits of effective communication with them and set in motion the various practices addressed above.

Finally, one issue which I will discuss later on in this guide concerns an exception to the hearsay rule known as the “business record exception”. The types of written communications discussed above are generally held to be exceptions to the hearsay rule and can be utilized as admissible evidence at the time of trial. This is of great significance when you are sued by a consumer.

3. SCOPE CREEP

Scope creep refers to uncontrolled changes or continuous growth in a project's scope. This phenomenon can occur when the scope of a project is not properly defined, documented, or controlled. It is generally considered a negative occurrence, and therefore should be avoided.

When the scope, or extent, of a project is improperly or insufficiently defined, confusion, delays, and/or cost overruns - scope creep - typically result. Scope creep can form the basis for liability. Preventing and managing scope creep is critical for controlling liability and maintaining profit.

One of the best ways to prevent scope creep is to specify in the contract exactly what services or products you will provide to your customer. Remember, being specific is a good thing and can effectively reduce liability. The following are some other suggestions concerning managing and controlling scope creep.

Just Say No

There is no harm in telling a customer or client "no". Small business owners often feel compelled to help their customers regardless of the request. I have worked with some small businesses that have nearly been forced out of business because they agreed to too many customer changes. The fact is that once you accept one change, additional changes will follow.

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Try to set boundaries of what is and isn’t appropriate to revise, this not only prevents unneeded requests for changes, but gives the project strict quality-control guidelines. When you do decide to comply to un-scoped demands, make sure that you indicate that you’re doing something out-of-scope, and that this can cause delays and additional financial requirements. This may make them re-consider the value of the feature requested, or at least give you an extension in time and budget.

Research Before Committing

In the event that you are contemplating going beyond the scope of your original agreement, you must avoid the temptation to immediately accommodate a change in project scope, no matter how seemingly simple. If you think the budget and timeline can handle a modification in plans, research thoroughly on what the change actually entails before committing.

Use Change Order Forms

Assuming that you have fully analyzed a particular change requested by your client, before you do anything to initiate a change you must reduce the change to writing, typically, in the form of a change order. No matter how simple the change may be must generate a change order.

Summary

Scope creep happens. However, you can control the effects of the unemployed and the tactics addressed above. Scope creep can lead to liability when you engage in activities were changes beyond the original intent of the contract, and you fail to fully document the customers change requests.

4. DESIGNER EGO

For those businesses focused around design services, including construction, kitchen and bath designers, interior designers, architects and supporting trades, it is important that they are aware of the liability factor that I like to call “designer ego”.

All designers, of every type like to think outside the box and apply progressive approaches to their designs on behalf of their clients. However, just because something can conceivably be achieved, does not mean that it should be. The designer must keep their ego in check and focus on realistic implications of creating a particular progressive design.

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For example, I was involved in a case where a high-end customer hired a kitchen cabinet designer. The customer’s kitchen was part of an open concept floor plan and was visible from the dining and living areas. The cabinets ordered were meant to be mounted on one long wall. After the cabinets were installed the customer asked the designer if he could create a hanging cabinet which could be suspended from the ceiling to give some visual interest and separation between the kitchen and the rest of the space. The designer, who welcomed the challenge, failed to acknowledge the realistic potential for liability and move forward with the design.

An all glass cabinet, which was meant to be wall mounted, was affixed with steel piping and was secured to ceiling rafters. The client was thrilled with the outcome as was the designer. Unfortunately, during a party, the cabinet separated from the steel pipes and fell to the floor striking a six-year-old girl as she ran underneath. Needless to say, the designer was sued and ended up settling for an amount in excess of $55,000. Also noteworthy is the fact that he did not have errors and omissions insurance coverage and was forced to pay the settlement out of his own pocket.

Summary

Think realistically with an eye towards the potential for liability. You may be an excellent designer but there are things that the customer may want that you should not provide even if you can.

5. PROPER ACCOUNTING

Just about every small business owner understands the importance of having a good accountant on board. I am not going to address the specifics concerning accounting procedures, however one important issue that has become a popular litigation topic is when a professional services business such as interior designer, mismanages client funds.

For those of you in the professional services business who regularly receive payments from clients, especially for items ordered like furniture or window treatment, you need to establish a separate account or accounting procedure for your client’s monies. The temptation to “borrow from Peter to pay Paul” must be avoided at all costs. The best way to explain the importance of proper accounting is through a real life example.

An interior designer landed a large client. The client's job began to consume her daily life to the point that she did not have the time to take on any other clients. Originally, the homeowner was “gung ho” on ordering all sorts of expensive merchandise. At some point during the project, the designer had received money from the client that

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was to be allocated as deposits for various pieces of furniture. The designer had submitted a number of hourly bills to the client and was awaiting payment. While she was waiting, she needed money to pay for some personal expenses. Anticipating that she would be paid, she borrowed from the deposits that the client had given to her. She anticipated being able to return the borrowed money wants her design hours have been paid.

To her surprise, the client challenged her billed hours and refused to pay 50% of the invoiced time. She found herself in a precarious situation since she did not have the money to repay the borrowed funds. Fortunately, she was able to borrow money from her ex-husband because she was facing serious civil and criminal penalties.

Summary

It is extremely important that you keep separate client funds allocated for various pieces of merchandise and services. There is very little defense to a lawsuit arising out of the mismanagement or misapplication of funds provided by a client to a small business. Not only can you be sued, but you could actually be charged with a criminal offense.

6. WARRANTY ISSUES

Most products on the market today contain manufacturer's warranties. Consumers rely on manufacturer's warranties and often make them a deciding factor in whether to purchase a particular item. However, when a business owner modifies a product he may often void the manufacturer's warranty. When the customer contacts the manufacturer to submit a claim under the warranty and learns that the warranty is no longer applicable you will be the target of a lawsuit.

For example, a cabinet reseller passes along the manufacturer's warranty to his client when he sells her the cabinets. Knowing that her cabinets are warranty from defects for three years is important to her. The customer loves the cabinets but wishes that she could have an espresso maker built into one of the cabinet units. She asks the reseller if mounting an espresso machine is a possibility. He advises her that it is, and she agrees to pay an additional fee for the addition of the mounted cappuccino maker.

Two years later, the veneer on the cabinet fronts begins to peel. She contacts the manufacturer in an attempt to submit a claim under the warranty. The manufacturer sent an authorized agent out to inspect the cabinets. When he learns that the cappuccino maker had been mounted to the cabinet he advises the customer that the warranty has been voided. The customer sued the reseller. Even though she authorized the modification to

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the cabinets it remained the reseller's duty to advise her of the possibility that the warranty could be voided.

Summary

If you are an authorized reseller of a particular product be very careful when making modifications to the product. Make sure that you are fully aware of the limitations of the warranty and what impact your modifications may have on it. Always advise your client that modification to the product could result in a voided warranty and should the client decide to move forward with the modification, always obtain their signature on a document or letter advising of the possibility of an invalidated warranty.

7. MAINTAINING PROPER CLIENT FILES

Maintaining proper client records and files is an often overlooked liability prevention strategy. By utilizing a proper filing system you can eliminate a lot of confusion and potential liability. Additionally, it makes your job easier because you don't have to spend hours per day looking for certain documents.

I recommend having a separate file folder for every client. Preferably, use file folders that have foldout prongs attached to them for easy securing of the documents. Every piece of information that involves a particular client should be placed into that client file. This includes notes, telephone memos, contracts, change orders and all other related documents. It is also a good idea to place the documents in the file folder in reverse chronological order. This means that the oldest documents are on the bottom and the newest are on the top. Maintaining a filing system such as the one described above will save you a great deal of time and aggravation.

However, there is another benefit which greatly impacts your ability to defend a lawsuit. As I briefly mentioned above business records maintained in the ordinary course of business constitute an exception to the hearsay rule. What is the hearsay rule? Basically, hearsay is the rule stating that testimony or documents which quote persons not in court are not admissible. Because the person who supposedly knew the facts is not in court to state his/her exact words, the trier of fact cannot judge the demeanor and credibility of the alleged first-hand witness, and the other party's lawyer cannot cross-examine (ask questions of) him or her. Examples of hearsay include an expert report or police accident report.

However, they are our certain exceptions to the hearsay rule, one being the business records exception. Business records, for the purposes of the exception, are any

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writings or records of acts, events, conditions, opinions, or diagnosis, made at or near the time by, or from information transmitted by, a person with knowledge are admissible if kept in the regular course of business and if it was the regular course of business to make that record, unless the source of information or circumstances of preparation indicate a lack of trustworthiness.

The basic rationale for the exception is that employees are under a duty to be accurate in observing, reporting, and recording business facts. The underlying belief is that special reliability is provided by the regularity with which the records are made and kept, as well as the incentive of employees to keep accurate records (under threat of termination or other penalty). The exception functions to allow the record to substitute for the in-court testimony of the employees, but it can only substitute for what the employee could testify about. The availability of the declarant (the employee whose testimony is being replaced by the record) is immaterial for the purposes of this exception.

Thus, in the event that you are sued and you have maintained a comprehensive client file containing memos notes etc., you will be able to use those documents to defend yourself.

Summary

The benefit to maintaining a properly organized client file system is twofold. First, it prevents confusion and waste of time and second, it can be your saving grace in the event that you are sued by a customer.

8. MEASURE TWICE, CUT ONCE - NEGLIGENCE

Contractors are familiar with the saying, “measure twice cut once”. Basically, it means, “make sure you're right before you execute”, in legal terms, don’t act negligently.

What is negligence? Legally speaking, negligence is the failure to use reasonable care or the doing of something which a reasonably prudent person would not do, or the failure to do something which a reasonably prudent person would do under like circumstances. In order for a plaintiff to be able to recover for negligence she must be able to prove that the breach of duty was the proximate cause of her injuries or damages.

People make mistakes, so eliminating negligence altogether is not possible, but be being cognizant of issues that create negligence can help small business greatly reduce the risk of liability. In my experience negligence is typically a result of failure to take the time to review your work and your obligations to your customers (i.e. failing to measure twice and cut once). Negligence really comes down to carelessness. For example, the failure of

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the contractor to install anti-tip bracket to a refrigerator is a result of failing to review his work and to tick off the boxes in his mental checklist of the steps that needed to have been taken.

Summary

Don't rush through things. Take the time necessary to double check your work. Find the time to measure twice and cut once.

9. PROPER REPORTING & INVESTIGATION OF CLAIMS

Regardless of how good you are at what you do, you will have customers who complain about your goods and services. Often, lawsuits arise out of a small business owner’s refusal to acknowledge and plan for potential problem as soon as he or she gets wind of it. Most people stick their head in the sand and hope that the problem goes away. It will not go away. It will only get worse, much worse.

Whether you are a sole proprietor or have a staff of employees, you need to set into motion a system for dealing with suspected problems before they grow into lawsuits. I recommend that if you get a sense that the customer is going to be a difficult one or create issues for your business that you document your client file with the memo or note. If you are an employee, you need to document the issue and then immediately report the potential problem to your employer. I immediately I mean the same day that you learn about a particular issue, not two weeks later.

Generally speaking speculation is not a good thing. However in preparing for customer problems and potential litigation speculation is extremely positive. You or your employees may have a feeling that something is not going to go right while your belief is speculative in nature it can help you prepare for potential problems that you may have with the customer.

In addition to documenting the client file with a note or memo, you should prepare an accurate timeline of events concerning the client to timeline can be a bullet point list with explanations and information dating back to your first encounter with the client. The key is to be accurate and specific.

While you are preparing the timeline you need to be focused on potential witnesses and evidence that may be valuable at the time of trial. Think about who may have additional information about the particular issue and write down their name and contact information think about documents and other evidence that may be relevant to your defense in the event that litigation arises.

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Finally, make sure that the client file is in order with every single document available. Make sure that all agreements that should have been signed our site. Also pull together all e-mail correspondence between Tommy your client and any other relevant parties.

If you believe that litigation is a distinct possibility you may want to consult with small business attorney and provide him with copies of the file. It makes far more sense to speculate on litigation and have the defense strategy planned in advance that it does to find yourself behind the eight ball, struggling to get things together.

Summary

Preemptive defense strategies can save a significant amount of time and money. However, in order to prepare such a strategy you and your employees must adhere to a strict policy of reporting and documenting potential claims before they arise.

10. PROTECTING AGAINST DAMAGING ADMISSIONS

This final measure may go against all that you were taught with respect to consumer dealings and customer service. Frequently, customers and clients complain about particular items, events or results in connection with their purchases. Just because you feel badly, or you are trying to appease an angry customer or because you actually screwed up, doesn't mean that you have to offer up a damaging admission. What sort of damaging admission by referring to? I am referring to the two most dangerous words a small business and utter, “I'm sorry.”

Why is it so terrible to tell a customer or client that you are sorry? Unfortunately, your apology can be used against you if a customer decides to sue you. Let me illustrate this point through an example.

Assume that you own a flooring business and you just tiled your customer’s kitchen floor. A few days later your client calls you and tells you that one of the tiles is loose. You say, “I’m sorry” followed by, “I don't know what happened” or “the grout must not set properly” or “this is our fault and will take care of it” or some other variation. Many times your client will appreciate your apology, you will remedy the situation and all will be good with the world.

Unfortunately, there are times when your apology can backfire. Staying with the same example, what happens if after you have issued your apology your customer's young daughter tripped and fell on the loose tile and fractured her ankle? My money is on the fact that your customer will now see you under theories of negligence, consumer fraud

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and related causes of action. When she tells her story to her lawyer she will make certain to mention the fact that you knew and actually admitted that you had screwed up. She will explain to her lawyer how you spoke with her over the phone and apologized for your mistake.

Throughout the rest of the case your apology will haunt you. The law is not fair. The law is based upon the facts perceived by a judge or jury to be true. If the jury believes that you apologized to the customer because you were aware of mistakes that you made their verdict will be based upon their own perceived reality.

So how do you deal with mistakes and unhappy customers if you can't say, "I'm sorry". There are a number of other responses that you need to develop in order to appease disgruntled customer. For example, taking the same scenario, the owner of the flooring company could have said, “I understand what you're saying and it is our policy to make sure that our customers are 100% satisfied with our work. I will be out there tomorrow to see what's going on." Advising your customers of your commitment to their satisfaction and your desire to follow through is a good way of defusing their anger. More importantly, there is no admission that can be extracted from the foregoing statement.

Summary

Small-business owners want to keep their customers happy. The business's reputation in the community and the referrals that they get from satisfied customers is critical to the business's success. Quite often, in an effort to appease angry customers small business owners offer apologies. By saying "I'm sorry", you are opening yourself up to potential liability. Savvy customers and shrewd attorneys will take your innocent apology and turn it into a damaging admission.

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IX.

LITIGATION EXAMPLES & RECENT CASELAW

The following are some examples, broken down by industry, of actual litigation that could have been prevented had our client's listened to our advice and invested a little time and money into preventative measures.

Kitchen & Bath

1. Case Identifier: Hanging Ceiling Cabinet Cause of Liability: Scope Creep Facts: A client requested that a kitchen designer design a ceiling mounted glass cabinet. The designer modified a pre-manufactured cabinet by mounting steel posts to its top and then secured it to the ceiling rafters. During a party, a six-year-old girl ran underneath the suspended cabinet. The cabinet broke free from the top mounted posts and fell on the girl. The girl suffered injuries including a fractured arm. Outcome: The designer, who did not have errors and omissions insurance policy, settled the case for $55,000. The settlement funds came directly out of the designer’s personal savings.

2. Case Identifier: Refrigerator Anti-Tip Cause of Liability: Negligence Facts: A kitchen cabinet and appliance installer failed to install an anti-tip bracket when he installed a high-end refrigerator into his customer’s kitchen. Shortly after its installation, the homeowner was opening up the refrigerator when it tipped forward and came to her between the refrigerator and the kitchen island. The homeowner suffered cervical and thoracic injuries as well as six broken ribs. Outcome: The installer, who did not have any insurance, settled a claim for $125,000. However, in order to obtain the settlement funds he was forced to take a second mortgage on his home and sell his boat. Unfortunately, he could not maintain the payments of the second mortgage and recently declared bankruptcy.

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3. Case Identifier: Television Appearance

Cause of Liability: Failure to Communicate/Negligence Facts: A high-end kitchen designer and cabinet fabricator were hired to design and install a kitchen into a historic home located outside of Boston, Massachusetts. The homeowner advised the designer at the kitchen was going to be featured in an upcoming television program. The homeowner stated that the kitchen needed to be completed within 14 weeks. The designer and fabricator both agreed that it could be done. Unfortunately, the designer and fabricator failed to see on a number of issues resulting in delay. Nevertheless, the kitchen was still on schedule. However when the cabinets were delivered and being prepared for installation, a member of the city historical Society obtained a court order halting the installation until various approvals have been obtained. As a result, the kitchen installation was seriously delayed and the television program was canceled resulting in a loss of money to the customer. Outcome: The customer sued under a consumer protection theory and was awarded treble damages. A total jury award of $145,000 was split between designer and cabinet fabricator. The kitchen designer is no longer in business.

Home Inspector

4. Case Identifier: Botched Inspection Cause of Liability: Negligence/Contract Deficiencies Facts: A licensed home inspector failed to identify the existence of outdated electrical services, significant asbestos and serious plumbing defects. As a result, the homeowners were faced with making $135,000 of repairs which they could not afford. They sued the home inspector and alleged violations of consumer protection laws and negligence. The homeowner's alleged that the inspector failed to provide proper contracts in accordance with their state's laws. Outcome: The matter was settled at mediation for $250,000, part of which represented the resolution of per se violations of the state's consumer protection laws.

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Interior Designer

5. Case Identifier: Client Files Cause of Liability: Failure to Maintain Client Files Facts: An interior designer charged the client over $200,000 for the purchase of numerous items of furniture and decor. The client became concerned over the chargers and requested a full accounting to determine where his money was going. The designer failed to maintain a proper client file and could only produce records evidencing $25,000 worth of purchases. Outcome: The client sued in the designer settled the claim for $75,000 at mediation. Shortly thereafter, the designer filed for bankruptcy and no longer practices.

Lighting Designer/Sales

6. Case Identifier: Lighting Misrepresentations Cause of Liability: Failure to Communicate/Negligence Facts: A lighting designer and sales consultant showed a lighting display to a client. The client ultimately purchased the lighting fixtures based upon the look and lighting characteristics displayed and showroom. When the client received the lighting fixtures they did not illuminate his room as they did in the showroom. He later learned that the showroom used specialty bulbs and additional illumination from nearly hidden lights to increase the impact of the lights he purchased. Outcome: The lighting designer was sued for violations of the consumer fraud act. The case was tried in the jury awarded the plaintiff $65,000.

Plumber

7. Case Identifier: Improper Hook-up Cause of Liability: Negligence Facts: A master plumber switched the hot and cold water lines running to a new faucet that he was installing. Unaware of the error, the homeowner turned on what she expected to be the cold water and left it running while she tended to one of her young children. She returned to the sink and attempted to wash four-year-old son’s

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hands. The hot water scalded the child's hands resulting in second degree burns. The plumber was sued. Outcome: The plumber settled for $35,000.

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X.

FINAL THOUGHTS

It seems as though it has never been more difficult to run a successful small business. The economy combined with a new breed of savvy, Internet educated consumers and aggressive and shrewd plaintiff lawyers may be to blame. You've worked too hard at developing and growing your small business to see your dreams go up in smoke simply because of a disgruntled consumer.

Small businesses across the country need to defend themselves against unscrupulous consumers and lawyers. While small business groups and continuing education classes can help, nothing can reduce the risk of litigation like employing strategic liability prevention tactics.

Small businesses should seek out qualified and understanding small business lawyers and consultants who can help them prepare for and significantly reduce the risk of liability. Think of it as preventative medicine. Just about everyone would rather endure a colonoscopy than be faced with colon cancer. Doesn’t your business deserve the same treatment?

I believe that small business owners who employ the tactics discussed in this guide will experience greater success and an unparalleled reduction in liability.

I wish you and your small business every success possible.

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Designing A Better Practice: A Practical Guide toLitigation Prevention For Small BusinessesCopyright © 2013-2013 by Peter J. Lamont, Esq.Peter J. Lamont, Esq.Law Offices of Peter J. Lamont623 Lafayette Avenue, Suite 2 Hawthorne, NJ 07506Phone: (973) 949-3770Fax: (866) 603-0471Toll Free: (855) NJLAW01www.peterlamontesq.com All rights reserved. No part of this book may be reproduced in anyform or by any electronic or mechanical means including storageand retrieval systems without permission in writing from Peter J.Lamont, Esq. This guide is intended to provide information about businessliability and suggested means of attempting to reduce the risk ofliability and potential litigation. The information herein should beused only as a general guide and not as legal advice. Anyinformation provided in this document is not intended to create,nor does it create, a lawyer-client relationship.The author and thepublisher shall have neither liability nor responsibility to anyperson or entity with respect to any loss or damage caused oralleged to be caused directly or indirectly by the informationcovered in this guide. The opinions expressed in this book are theopinions of the individual author and may not reflect the opinionsof the firm or any individual attorney.The author is licensed topractice law only in New Jersey, the United States District Court ofNew Jersey, the Bankruptcy Courts of New Jersey and in the ThirdCircuit Court of Appeals. You are strongly encouraged to consultan attorney for individual advice regarding your own situation. Powered By Bookemon. www.bookemon.com