The longer you're in business, the greater the chances you'll be sued by someone who is disgruntled. This might be a disgruntled former employee, a disgruntled client, a disgruntled competitor, or even a disgruntled partner.
If you've survived in business for more than a few months, you've hopefully moved past dwelling on the possibles, and only deal with the realities. So while all those people could sue you, fortunately few ever will. It can be very hard to predict from what quarter the litigation will come, but there are a few important proactive mitigation steps you can take to protect your business and yourself from such suits.
1. Incorporate and Buy Sufficient Insurance
Incorporation and insurance aren't either or propositions, but they are most effective when used in combination. For really small businesses, the cost and hassle of incorporation (like preparing financial statements and filing corporate tax returns) may not be worth the benefit. Insurance has its limitations as well, but for professionals who can't shield themselves from legal liability through a corporate veil adequate insurance is an absolute necessity.
Be aware that incorporation is not an absolute shield to personal liability, especially when you have a "closely held" corporation with only a couple of owners and directors as is the case for many small businesses. You still might get sued personally, and court decisions are inconsistent on whether individuals should be let off the hook for actions or debts of corporations. The Income Tax Act can be especially onerous in pursuing directors and owners for tax corporate debts. But having a corporation operate as an intermediary between you and your customers and suppliers is usually a good thing once your business gets to a sufficient size.
There's a tendency amongst both businesses and professionals to be underinsured, as people don't count on the high cost of legal defence eroding damages policy limits. Get a $1 million policy, spend $500,000 on defence costs, and you don't have a lot of insurance left. So buy excess coverage where available and affordable.
2. Carefully Document Your Business Relationships with Defencible Wording
Many business people think themselves smart by committing all relationships to writing through employment contracts, purchase contracts, and partnership agreements. But if you draft abusive and vague agreements, they may be worse than not having anything at all in writing because those unfair agreements can turn a court against the party who drew up the lopsided written document.
Employment contracts that effectively prohibit former employees from working anywhere in the same field for years locally or nationally, purchase contracts that absolve the vendor of all liability for products or services sold, and partnership agreements that lock partners into a marriage with no escape until death can all be worse than no written agreement at all as courts may unpredictably strike down various agreement clauses as unconscionable, while leaving other clauses in place that create a two legged table that tips over but can't be predicted where it will fall.
Instead, get a lawyer's help drafting something that will later stand up in court. Taking a "we'll leave it to the courts to sort it out" attitude, be it lawyer or business owner who is drafting the document, will only cost the business in the end with litigation legal fees that will be many times greater than the fees charged to draft the original contract. I'm not saying an agreement can't tilt slightly in your favour and still be upheld by a court. But there is an indistinct line of unreasonableness that can't be crossed, and which you must carefully consider.
3. Defuse Business Conflicts Prior to their Escalation to Litigation
While keeping employees, clients, suppliers and partners happy - within reason - might seem self-evident in avoiding litigation, many businesses violate this rule, and later pay the price in litigation costs. Taking the employee/client/supplier/partner is always right approach will not solve all your problems; I defend businesses against what can only be called frivolous and vexatious lawsuits that should have never been initiated, even after my clients have attempted reasonable accommodation. But at least some suits will melt away before they are filed if sufficient communication and moderate appeasement is offered to the other party. This will usually save you money in the long run, especially if you couple those measures with ensuring that complaining party signs an informed release of liability in your favour. However, simply giving in to the other party without getting anything in your return might not be in the best interests of your business.
4. File a Timely Defence, Consider Early Settlement, move to Strike Parties, move for Security for Costs, or move for Summary Judgment when you Do Get Sued
If and when you do get sued, in Ontario you usually only have a short twenty days to draft, serve on the opposing party, and file with the court your defence! That time limit can be extended through various means, but you really need to contact a lawyer immediately upon receiving a claim so that you can understand your rights and the right of your business.
Even if you're only getting sued in Small Claims Court for $25,000 or less, I generally don't recommend people represent themselves because of the complexities involved. If you win, you're able to claim legal costs of up to 15% of the value of the claim (under Ontario rules), so you can recoup some legal fees.
It's clearly pointless to spend more on legal defence fees than the value of the claim, but it's still worth consulting a lawyer to determine likely fees and whether it could be advisable to self-represent. If being sued in Superior Court outside of the Small Claims realm the Rules in Ontario require all corporations to be represented by a lawyer except with explicit permission of the Court.
You need not feel that you're trapped into some multi-year court process if you move proactively when you do get sued to consider one of the following four options.
a. Consider Early Settlement - if settlement costs will be way cheaper than legal fees, consider it a cost of doing business to buy your business out of the court case, even if you think you're in the right, so long as you get a solid release of liability, and aren't facing similar claims from others where there would be value in setting a court precedent.
b. Move to Strike Parties - if you or your business have been named as peripheral parties in a multi-party lawsuit, or you've been named personally as a party that should only have been brought against your corporation, discuss with your lawyer whether a motion to strike you or your business as parties from the suit might work. Motions are cheaper to bring than being subjected to a trial, and if a motion can effectively kill off a case for your business, or at least protect you personally from a judgment, then it might be worth bringing.
c. Move for Security for Costs - if you or your business are being sued by an organization or individual with no assets in Ontario (or whatever province the lawsuit has been initiated in), you might be able to move for "security for costs." This involves the plaintiff being compelled to post a bond with the court which could compensate you or other parties for some of your legal fees should the plaintiff have costs awarded against it. This might stop a lawsuit in its tracks if the plaintiff is unable or unwilling to deposit the funds with the court.
d. Move for Summary Judgment - it's recently become quite trendy (after the stamp of approval from the Supreme Court of Canada) to successfully move for "summary judgment" as either plaintiff or defendant in order to shorten the trial process. Such motions can still take up several days of court time, and have specific criteria for success, so you should carefully discuss costs and prospects with your lawyer before such a motion is undertaken, but if there is a reasonable chance of success it might significantly shorten your time and costs in court.