Tips to Stay out of Litigation

December 2005/January 2006 asialaw - 17

It is a well-acknowledged fact that

litigation is the ultimate tool for

harassed parties to obtain justice.

However, litigation as far as possible

should be the last resort to be exercised

by either the litigant or the defending

party, having exhausted all other

avenues available. Before exploring

the various methods available to avoid

litigation, it is important to understand

why litigation takes place and why it

should be avoided.

Why litigation takes place

Litigation can be necessary due to

both controllable and uncontrollable

factors. Controllable factors include

the disputing parties’ attitudes,

communications and actions.

Non-compromising attitude: A non-

compromising attitude and stubbornness

is what separates an unsuccessful

business from a successful one. It is

advisable and prudent to be willing to

compromise or even to negotiate instead

of being too egoistic or stubborn.

Lack of communication: Poor

communication produces unnecessary

misunderstandings between business

partners, which in turn lead to

misconceptions. Litigation is often

unnecessarily initiated when it would

have been possible to avoid it by merely

talking to the other party.

Acting by emotion and not reason: It

has often been seen that the decision

to opt for litigation is taken in the heat

of the moment by those who are most

personally affected by the disputed

matter. However, emotions often cloud

objectivity and the ability to evaluate

and think rationally about whether or

not to litigate.

In the auto sector, litigation normally

occurs because of the following:

(i) the profile of the customer has

undergone a significant change

from a passive to active mould and

the customer has become more

knowledgeable and demanding in

nature;

(ii) the company / distributor / dealer

doing business with the customer

does not provide sufficient product

quality;

(iii) poor customer service (pre/during/

post-delivery), and

(iv) poor after-sales service.

Typical examples of such problems

include customers promised products

with exact dates of delivery which are

not met, thus resulting in unnecessary

litigation. The correct method is to give

an indicative time for delivery instead

of the exact dates when it is not clear

whether delivery can be given on the

designated date.

Sales consultants, in their exuberance

to sell, giving unsubstantiated promises

to customers under various incentives,

including commenting on the

performance of cars, without specifying

under what conditions the performance

can be guaranteed. A common example

is an assurance on a particular mileage

of a car without actually explaining

under what conditions the mileage can

be obtained.

Why to avoid litigation

It is prudent to avoid litigation, as it

compromises business relationships,

incurs additional unnecessary costs,

damages a company’s reputation and

goodwill and detracts from a company’s

core work.

Risk to business relationships: Litigation

generally has the effect of either directly

or indirectly resulting in personal

grudges, which impacts existing and

future business relationships.

Practical Tips

to Stay out of

Litigation

Litigation is often considered

the last resort for business

partners involved in a dispute,

given the significant drain

it has on resources and

the heavy damage it can

bring to both companies’

reputations and relationships.

S Ramaswamy of Honda

Siel Cars India discusses the

various litigation prevention

methods available to

companies in Asia.

Tips to Stay out of Litigation

18 - asialaw December 2005/January 2006

Cost: Whether initiated by an individual, corporation or a government,

cost plays an important part in taking a decision whether or not to

litigate and can be a significant drain on resources.

Reputation/goodwill: Litigation brings with it the peril of damaging a

company’s reputation and standing, particularly within the industry

and with its employees and investors.

Shifting attention away from core work: Litigation has the effect

of not only distracting key personnel from discharging their core

jobs but also of leading to wastage of time and emotional stress,

resulting into reduced productivity. Litigations can be messy, time

consuming and expensive affairs, particularly in Asian countries

such as India where they take several years to resolve and thus

require the commitment of significant resources.

As far as possible, it is advisable to avoid litigation without in any

way compromising on a company’s values, ethos or principals by

meeting with customers and offering viable and workable solutions

in an agreed timeframe.

Ways to avoid litigation

Communicate: Lack of communication is a common reason for

ending up into litigation. By talking frankly, a channel of dialogue

is opened and if both parties approach it in good faith through

communication, a resolution to many problems can be reached.

Act fast: Typically, litigation is caused by a delayed reaction to

a situation which is not perceived to be urgent. This could be

due to lack of adequate resources available to manage potential

disputes and a limited level of dedication to resolve a dispute at its

inception stage. A company can overcome this problem by having

a faster review process which conforms to its business structures

and categorizes all anticipated risks.

Empathize: It is quite likely that the litigating party will have a well-

founded cause. It would thus be desirable to at least consider

the other party’s position in order to try and pursue a win-win

situation. Thus, by being empathetic to the cause of the other, an

amicable solution can be easily concluded.

Avoid working with litigious parties: Before deciding to conduct

business with new companies, it is worth researching into whether

they are litigious. If they are, such business partners are best

avoided, as they are likely to treat litigations as part of a cost

centre rather than something to be avoided at all costs.

Involve impartial parties: It is important to bring in representatives

who are not a part of the dispute to help resolve the issues. Many

times those not involved in the dispute can quickly discover the

real controversy at hand and offer a realistic alternative. Most

countries in Asia have formal and informal dispute resolution

bodies to help disputing parties reach a speedy settlement out

of court.

Deal in an ethical manner: Undoubtedly, the key to avoiding

litigation is to conduct all business dealings in an ethical manner

and in conformity with the terms of the agreements formed.

Irrational actions which violate contracts will only antagonize

business partners and may result in litigation.

Evaluate the economics of litigation: Before entering into litigation,

it is important evaluate all the possible results of doing so,

including the cost of lawyers, travel and hotel expenses. If the

economics do not provide a positive result, it is worth exploring

the option of meditation.

Documentation: To avoid all doubt, it is vital that business

partners enter into written documentation so that there are no

questions about the terms of the deal between them. It is best to

use industry-specific documentation which is commonly used and

understood. In case of doubt, it is worth having the documentation

drafted by an experienced law firm, as it is cheaper to pay for the

documentation review upfront rather than to litigate later.

Include litigation provisions in contracts: Every business dispute

will be either directly or indirectly related to a contract. A safe way

to avoid litigation is to build litigation-avoidance provisions into

business contracts. These should include:

(i) indemnity provisions associated with identified risks in the

other party;

(ii) clauses covering natural disasters;

(iii) the required notice period in case of a breach of contract

before filing for litigation, including details of a time period to

remedy a breach;

(iv) mandatory mediation and conciliation provisions before

arbitration;

(v) an arbitration clause in case mediation and conciliation fails,

and

(vi) an agreement to be bound by neutral experts opinions.

About the author

S Ramaswamy is currently working at Honda Siel Cars India, a

subsidiary of Honda Motors Japan, as company secretary and

head of legal, secretarial corporate affairs and internal audit. He

has held the position since 1996.