I was in a mediation the other day and realized that I haven’t really set out the basics of the considerations for settlements in litigation, so there’s no better time than the present.

There is a field of legal study known as the “economic analysis of the law”.  As an oversimplification, its view is that the law can (and should) be viewed as being guided by economic forces and that the role of the law is to effect the various human interactions governed by the law in the most economical and efficient means possible.  I am personally not a true believer in the economic analysis theory nor any other theory (such as the sociology of law or legal realism) that tries to encompass law and legal thinking in one “tidy” theory.  My main problem with economic analysis of the law is that it becomes very difficult to fit subjective concepts such as “fairness” or “equity” into objective economic frameworks.  However, economic analysis of law (like the other theories) has at least one major concept that does reflect aptly on the legal system.  In the economic analysis theory, the key feature (again an oversimplification) is that what really counts is that it’s all about money.  In that regard, I think that the theory does properly apply when one looks at the issue of settlement.

Over 95% of lawsuits in Canada settle.  Why?  Does the system not work?  Or, to the contrary, is the system so good that it effects resolutions of disputes at a super-high rate?  In my opinion, the answer to both is “no”.  Why do settlements occur?  Because it’s all about the money.  Here’s how this is the case:

1. How much is the lawsuit REALLY about?  I had a case in Ottawa a few years ago where the plaintiff was suing for just over $1 Million.  My client, a large oil company, and I had analyzed the claim and thought that it was nowhere near that amount so we tried to settle for far less and when the plaintiff would not accept that amount, we proceeded towards trial.  Before the trial there is a settlement conference (formerly known as a pre-trial conference).  At that time the judge who presided over the pre-trial conference very matter-of-factly looked at the plaintiff and the plaintiff’s lawyer and said “if this went to trial and if I was your judge, you would receive at best about $40,000 – and that’s if you win, which isn’t a guarantee.”  The second the plaintiff heard that and realized that this wasn’t going to be the huge payday, suddenly the refusal to settle melted away and we reached a settlement about an hour later.

2. How much is it going to cost to go forward to trial?  Let’s use the Ottawa example again.  If that trial had proceeded, it would have been at least a one week trial with numerous medical experts, eyewitnesses, etc.  Let’s suppose that it would have cost the plaintiff $50,000 for the trial and the most the plaintiff would have received is $40,000 (there were other cost factors such as offers to settle that would have also come into play but we’ll leave those aside for the sake of simplification of the example).  That meant that even if the plaintiff won the trial, the plaintiff would have been $10,000 in the hole and the plaintiff’s lawyers would have received $50,000.  In that situation, what is the point of going forward to trial?  Not much from the plaintiff’s perspective.  From the defendant’s perspective, if the option is paying $50,000 for my law firm to handle the one to two-week trial or paying up to $1 Million, suddenly $50,000 seems like the better option.

3. What are the realistic chances of success?  Again, keeping with the Ottawa example, the judge indicated that he would award $40,000 at best – but only if the plaintiff succeeded.  So, now we have an added element of risk because there was a real possibility for the plaintiff that the plaintiff might lose the trial.  And this applies for EVERY litigant that goes to trial because, if the case was such a slam-dunk that one side was guaranteed to win, then that party would have brought a motion to dismiss the case or for summary judgment and there would have been no need for a trial. 

Moreover, there is an element of risk in terms of not only the facts of the case, but also in their presentation.  Again, another example for you.  I was involved in extremely complex real estate litigation years ago on behalf of two banks.  One of the key witnesses was a chap who was nice enough but when we went to prepare him for examinations for discovery it was blatantly obvious that he was confusing the timing of events and who said what / when / how and even the most basic of facts.  We were super-concerned that he was going to get killed in his examination for discovery and make a bunch of admissions that he shouldn’t make, but we were stuck.  As it turned out, he went into the examination for discovery and was solid as a rock.  When it came for trial, we were again concerned about how he would do as a witness at trial so we met with him to prepare for his testimony and the cross-examination he would likely face.  To our pleasure and surprise, he was solid as a rock in practice.  When he got on the witness stand, however, he forgot everything, reverted to what he was like before his examination for discovery and did so poorly that he realized this and he ran out of the courtroom after he was done and we never heard from him again.  (Fortunately, the trial judge placed no reliance on his evidence for her decision and our clients still won the day despite this debacle.)  The point, though, is that the facts were in our favour but the one witness could have possibly cost our clients the case.  So there is always an element of risk in any trial (and hence why litigation is called an “art” and not a “science”).

4. How far apart are the parties on settlement terms?  This is a variation of item 1.  Both sides have to assess their likely “best case” and “worst case” scenarios.  When that is done, each side determines a “line in the sand” where the defendant determines how much it is willing to pay (and the plaintiff determines how much it is willing to accept) and any amount higher than that (or lower than that for the plaintiff) makes it worthwhile to proceed to trial.  If it turns out that the parties are within, say, a few thousand dollars of each other, then it will be much easier to bridge that gap than if, say, the difference between their two positions is hundreds of thousands of dollars apart.

5.  Are there any “non-monetary” factors at stake?  These can be quite varied.  For example, is there some “personal” factor that has taken priority since the lawsuit started?  For example, one of the parties is now ill and does not wish to proceed with the lawsuit and just “wants to get out”.  It doesn’t even have to be an illness.  I always say to my clients that lawsuits cost in terms of time, money and energy.  Sometimes a party to a lawsuit may not be as “mad as hell” as he/she was when the lawsuit first started and isn’t willing to spend more time pursuing or defending the lawsuit.  Another example of a non-monetary factor shows up in employment litigation where the client is more willing to settle if he/she gets a good letter of reference which could outweigh the amount of severance pay that the client is seeking in the lawsuit.  Sometimes there could be reputational issues at stake.

The difficulty with non-monetary factors is that they will be known for your side but rarely determined for the other side.  Approximately guesses can be made to determine the costs, chances of success, etc. for the other side as these are relatively objective bits of information.  However, for example, unless the other side happens to let it be known that he/she isn’t interested in the lawsuit any further (which would be a very rare occurrence), that will be a non-monetary factor that will never be known – but could work significantly in the background without you even knowing it.

For most litigation involving your small businesses, though, the key factor will usually be the economics of either pursuing or settling the lawsuit.  And you should visit and re-visit the economics of the lawsuit at several times throughout the litigation to ensure that you are not wasting your time, money or energy.

Something to think about.

CALC

Back in law school I had (and thankfully today still have) a very good friend and partner in the moot court competitions named Bryan Haynes. While Bryan and I were very much alike, his desire lay in practicing pure corporate / commercial law while I was happy to focus more on litigation. As the years went by, he practiced corporate / commercial law in Vancouver and then Calgary at the big law firms (he’s now a partner at Bennett Jones) while I focused on litigation with the big firms in Toronto. But that was about where our views on the practice of law ended and have remained divergent.

Bryan writes an article every month or so in Canadian Lawyer magazine. This month his article deals with a recent decision of the Supreme Court of Canada in a case involving a tender process in British Columbia where the plaintiff lost the contract to what turned out to be an ineligible bidder. The contract, however, said that no claims could be brought against the government that issued the call for tenders. The Supreme Court held that the parties could not have really thought that this meant that they would allow no claims for ineligible bidders to sneak in, make a bid and win. Bryan’s response to this result was one of displeasure and criticism and, to be honest, I share his view. I agree that the law of contract should be focused upon certainty in contractual terms and the ability of businesses to know what their contracts mean and to be able to rely upon their provisions.

While I agree wholeheartedly with Bryan and his views, though, I always have to view this and every other case through a certain context: the prism of litigation. I am asked on a daily basis: “Will we win?” And almost always my answer is something along the lines of “… it depends …” It depends on the judge – they are human after all. It depends on how the facts come out in evidence – it isn’t a matter of simply putting in the facts but how persuasively those facts are assembled and presented. Sometimes it depends on timing – for example, I once won a significant decision that appeared doomed to fail except a few days before the hearing the Court of Appeal set out new rules which completely supported my client and a “likely loser” suddenly turned into a “sure winner”. It depends on the law. But it also depends on the concept of equity. Put simply, equity is the all-powerful tool of the courts to determine that whatever the law says shouldn’t always be applied for reasons of fairness and justice. Does this mean that judges can run around making whatever decisions they simply feel like? No, there are definite rules and constraints within which equity is to be used.

The point of all of this is to say that there is no definite set of criteria to establish whether a case will win or lose. And while Bryan and all other commercial lawyers desperately search for certainty in contracts, the litigators all sit back and quietly smile and think “keep dreaming”. Over 95% of all lawsuits settle. Why? Because one side realizes that the other will win? If that’s the case then (not counting those who sue or fail to settle for purely non-legal reasons) there is usually little reason why a lawsuit would settle on the eve of trial as opposed to before the lawsuit even begins. Rather, in my opinion, one of the largest factors for lawsuits to settle – especially as one gets closer to a trial – is the inherent uncertainty of how the trial will end. If it was a foregone conclusion that one side would win, then that side would bring a summary judgment motion and there would not be a need for trial since judgment would be granted.

So, the next time you come to see me (or a fellow litigator) and say that you want to sue and then after giving all of the facts you ask whether you will win and the answer given to you is far from conclusive and lacks the certainty that a commercial lawyer would want, now you’ll know why. And, conversely, if you get close to trial and your lawyer gives you a statement of support that is full of certainty (”how can we not win?” / “the other side has no case” / “it’s like taking candy from a baby” / etc.), you might want to ask your lawyer why, if it’s such a good case and a clear winner, that there’s even a need for going to trial. Your lawyer may have a very good reason why that is the case, but, if nothing else, you should go into any lawsuit with the knowledge that the only certainty is that there is always some level of uncertainty.

Does that frustrate commercial lawyers like my friend Bryan? Sure it does. Does it frustrate our clients. Again, yes. But that’s why trials and lawsuits are more art than science.  And maybe that’s why he has more hair than I do because he doesn’t tear his hair out worrying about how to “paint a masterpiece”

Something to think about.

CALC

I read an article in the latest issue of the New York State Bar Association Journal that discusses several recent U.S. Federal Court decisions on the issue of spoliation. Spoliation (think of the word “spoil”) deals with the situation where evidence has been lost of destroyed and what sanctions should be imposed for this loss or destruction. While spoliation was an uncommon issue in litigation in prior years, it is much more prevalent today. One reason is because if the other side did not have a document previously it was likely that the other side wouldn’t have known of its existence. However, especially due to e-mail, multiple parties will be aware of the existence of e-mails and documents that are attached to those e-mails.

What is important to bear in mind is that in this area ignorance of the law is no excuse but so is innocence – at least in the sense that the loss or destruction may have been completely unintentional. Let me give an example – suppose your Outlook or other e-mail system has a default that all e-mails over one year old that are not moved to a folder and, instead, remain in the Inbox are automatically deleted. The purpose of this rule is to avoid clutter on your e-mail server, etc. and not to destroy evidence. If there has been negligence, gross negligence or intent to destroy the evidence there will be sanctions to follow.

The sanctions will run from costs imposed against a party to the inference that the evidence is harmful to your position to the Court awarding judgment against you.

The authors of the article suggest that all companies should implement archiving solutions and data maps so that documents can be retained and quickly found. That’s great if you have a larger company, but what should you do if you’re a small business? As a practical matter, you should be backing up your data at regular intervals to avoid problems if your computer system crashes. So, keeping this data for litigation purposes is another reason for backing up your data. As an example, my firm has 16 backup tapes – four for Monday to Thursday for two weeks; four for Fridays; and four for March, June, September and December. If data problems occur, we always have backups for the prior two weeks. We also have backups of data as it existed at the end of the week for three and four weeks ago, and then we have backups for the data as it existed at the end of each quarter over the prior year. The cost is very small compared with the cost of potentially losing data.

The next recommendation of the authors is to know when the obligation to preserve documents arises. At a minimum, once you have been sued this will arise. However, some of the U.S. Federal Courts have held that it can arise as early as when a customer complains to you. I agree that if it looks like matters will go to litigation then all data related to that party should be preserved.

Finally, it should be remembered that preservation is an ongoing practice. So, for example, a customer may complain, so arrangements are made to preserve the data relating to that customer on Day 1. But then further data is created on Day 21 or Day 369 – and it has to be remembered that this data has to be preserved as well and that it’s not just a “one time” obligation.

But does all of this REALLY matter? You bet. I am going to trial soon on a matter where my client has produced almost 1,000 documents – most of them being e-mails between himself and the other side. The other side has produced under 100 documents and does not have many of the e-mails produced by my client. At trial we will be able to argue that not only has the other side “hidden” the e-mails we know about which are harmful to them, but then those e-mails make reference to other e-mails which appear to be even more damaging and we will ask the Court to infer that these other e-mails are harmful to the other side and there’s a very good chance that the Court will make that inference. Will this win the case for us? Who knows – maybe that’ll be the subject of a further posting. But, if nothing else, the other side is now in the equivalent of being in a boxing match with one hand tied behind its back. Not a good position to be in if it could have been avoided.

Something to think about.

CALC

I just had an opportunity to read an interesting little decision from a couple of weeks ago by the New York Court of Appeals. It involved the French fashion designer John Galliano. It seems that Mr. Galliano entered into a licensing agreement for various products in the U.S. with a company known as Stallion, Inc. After a dispute regarding how much money was owed by each side to the other, Mr. Galliano sued Stallion in the Paris courts in 2002. (The contract had specified that any disputes should go before the French courts – yet again why I trumpet/warn you all about these clauses.) Stallion was served with notice of the lawsuit but decided not to put forward a defense in Paris. Not surprisingly, Mr. Galliano obtained a default judgment and Stallion waited for Galliano to try and enforce the judgment in New York – which is what Mr. Galliano proceeded to do.

In opposition to the action by Mr. Galliano to have the New York Courts recognize the Paris judgment, Stallion tried to argue that certain technical defences applied. The New York Courts gave short shrift to these arguments. What was interesting, though, was that Stallion also argued that the process was unfair, and ought to be overturned, because the papers that it had been served giving it notice of the lawsuit in France were written in French and had not been translated into English. The Court of Appeals gave even shorter shrift to this argument and found that since Stallion had been personally served that this was sufficient – even though there was no English translation provided.

So, the next time you get served with something that looks official but isn’t in English, you might want to take a trip right away to a translator or interpreter’s office and find out exactly what it says. Hmmm, mais où est-ce qu’on peut trouver un avocat qui peut lire et parler le français? [Transl: "Hmmm, but where can one find a lawyer who can read and speak French?"] Did I mention my phone number and e-mail address? Let’s see, given the number of times that a New York client is going to be sued by a French company and suddenly find itself in need of a lawyer who can read the French documents … yeah, I won’t hold my breath or sit by the phone in anxious anticipation.

CALC

There are two key considerations that should be made when dealing with transactions involving parties in different locations: what law should govern the transaction and whose courts should be able to determine any disputes that arise from the transaction. The first consideration is known as a “choice of law” while the second is known as a “choice of forum”. So, for example, if Person A is in Toronto and Person B is in New York City and they enter into a contract, which law will govern – Ontario or New York? Similarly, can Person A sue in Ontario? Can Person B sue in New York? What if Person B wants to sue in Ontario or Person A in New York?

There are numerous rules that will determine which law would apply and which courts would agree to assume jurisdiction to hear the dispute. However, the best way of doing this would be to make an express provision for this in the contract. For example, one can add a provision in the contract that says something along the lines of “The parties hereto agree that the subject-matter of the within Agreement shall be construed in accordance with the laws of [whichever location is selected] and the parties hereby agree to attorn to the exclusive jurisdiction of the Courts of that [state / province / country] for the resolution or determination of any disputes arising out of this Agreement.” [Please note that this is not properly worded and has been used solely for illustrative purposes - I wouldn't want you to simply cut and paste this and think that it will do the trick for you.]

So, this then takes us to the next question – which laws and which courts should you use? In my example, the two obvious choices are Ontario and New York. But are you restricted to just those two choices? Nope. If you wanted to choose the law of the Ivory Coast and the courts of that country to govern, you could do so if you really wanted. It probably wouldn’t be a very cost-effective choice to make, but both parties could do that if they really wanted to. Why would they want some other location? The objective answer would be that the courts of that other location would not necessarily prefer one party over the other. As well, it could be that the law in that other location is seen as being more favourable to the parties than, in my example, either the law of Ontario or the law of New York State.

So which one should you choose? That I cannot tell you because it will depend on your particular circumstances. However, I did read this evening the June 2010 issue of the American Bar Association Journal and they had a little note that indicated that the 2010 survey of U.S. businesses showed that for the fourth year in a row the worst tort liability system among the U.S. States is West Virginia while the State of Delaware is viewed as the best lawsuit climate (and this has been the case since this survey’s inception in 2002). So, if you are negotiating a contract and the other party wants to have disputes resolved by the Delaware Court applying Delaware law, you should be more willing to agree to this than if they suggest that the Court in West Virginia have authority to apply West Virginia law.

Whichever location you are thinking about, please bear in mind one thing: speak to a lawyer in that location! I often get calls from clients or potential clients asking me to look at a contract that will be governed by the laws of somewhere other than Ontario or New York State. I would like to say that all laws are the same but they are not. Let’s suppose that you are selling your business (and it is an asset sale – as opposed to a share sale). If you are selling here in Ontario, then there are special rules under the Bulk Sales Act that you have to comply with. Most other Canadian provinces have repealed their versions of the Bulk Sales Act. If you are in Saskatchewan and agree to a contract being governed by the law of Ontario, your Saskatchewan lawyer may not know about the Bulk Sales Act requirements. Similarly, I will not know whether there is some quirky legislation in Saskatchewan, in West Virginia or in Delaware that you should be aware of before you enter into the transaction. So, before you agree to any clause that is for the law to apply of someplace other than where you are conducting business, you should definitely check with a lawyer there to avoid any unpleasant discoveries regarding that law after the litigation has started.

Something to think about.

CALC

Another opportunity to preach from the pulpit of experience.  I was in the Superior Court today on a motion asking that the claim against my client, a large bank, be dismissed.  The situation was, unfortunately for the bank’s customer, something that is happening more and more frequently.  The customer left all of its accounting to its bookkeeper and gave total control to the bookkeeper.  In this instance, the bookkeeper went on an extended leave and the company brought in another bookkeeper from a temp agency.  After a month or so, the temp bookkeeper proceeded to cut a bunch of cheques to his company and deposited them.  By the time he had over $340,000 he suddenly “disappeared” along with the money.

Now comes the bad part for the customer.  Because it had left absolutely everything to the bookkeeper (and then to the temp), the customer had no clue what to do about its accounting records and decided to wait until the regular bookkeeper returned about 6 weeks later.  The problem, though, was that by the time the regular bookkeeper had returned and immediately discovered what had happened, it was too late to do anything.  The temp had left the country with the money so the bank couldn’t get it back.  The company then said to the bank that the bank ought to reimburse the company for its lost money – to which the bank replied that it wasn’t an insurance company and the lack of supervision wasn’t the bank’s fault.

The customer sued the bank and the bank responded with a motion to have the lawsuit dismissed.  The bank relied on two portions of its account opening agreement.  The first provided that any problems with the account should be brought to the bank’s attention within 30 days of the monthly account statement being issued.  The second portion provided that forged cheques would not be covered unless the customer could show that it had adequate supervision and took steps to avoid the forgeries.  These are both standard provisions that you see in every bank account opening form.  They are even usually put in bold lettering (as was the case here).

The customer effectively said “but nobody brought this to my attention” and besides, the bank should have warned me that my accounting systems were inadequate.  The Court disagreed and the case against the bank was dismissed and the customer now has to pay the bank over $14,000 in costs.

The primary moral of the story – if the customer had stopped to look at its obligations under its contract with the bank, it would have known that it should have reported this matter more quickly to the bank and should have taken more care to avoid any forgeries from occurring.  By disregarding the fine print, the customer is now stuck with not only the more than $340,000 in lost money, but also a further hit of $14,000 + for costs.

The secondary moral of the story – think twice before you try to take on the big banks (or even landlords or other companies with standard form agreements) when you have signed a contract that makes it quite clear what you are required to do.  If you didn’t read the fine print before you signed, then you’d better make sure you do before you sue because you could end up wasting a lot of money on a lawsuit that won’t get very far.  To give an example, the costs awarded were $14,000 – of which the total amount of costs for the bank were approximately double that amount.  The amount of the customer’s costs have been approximately the same.  So, to bring this lawsuit, the customer has spent approximately $28,000 so far for its lawyer and now has to pay the bank another $14,000 – for a total to date of $42,000.  It may well be that the customer will have a good claim as against the temp agency, but if it doesn’t win (and it might not depending on what background checks the temp agency did or could have done), then this could prove to be a VERY expensive lesson in futility – due, in part at least, to not paying attention to the fine print.

Something to think about.

CALC

Yesterday, Ontario’s former Attorney-General, Michael Bryant, had charges against him dropped.  For those of you who are not in Ontario, last year Mr. Bryant got involved in an altercation with a bicycle rider while Mr. Bryant and his wife were driving in their convertible with the top down.  The result of the altercation was that Mr. Bryant sped off and unknowingly dragged the cyclist to his death.  What really happened that night?  I have no idea.  And I’m not going to get into a debate on the merits of the charge against Mr. Bryant or the decision to withdraw those charges.  Why?  Because I don’t have all of the facts to know whether either or both of the decision to lay charges or the decision to withdraw them was proper.  The only things I am certain of are: (a) this was an unfortunate loss of life; (b) it will be argued that the only reason Mr. Bryant was charged was because of who he was – that is, if he wasn’t charged then cries of preferential treatment would have been made far and wide; and (c) preferential treatment allegations will be made far and wide with the decision to withdraw the charges.

The key aspect, though, is one of optics.  Mr. Bryant had to be charged (so the theory would go), because of who he was.  Similarly, no matter the merits of the decision to withdraw the charges, the issue of the optics of potential preferential treatment will also be raised.  These are not unimportant issues because one has to remember, after all, that the court system is a human system.  Optics can be sometimes just as important as the facts.  And, to take it one step further, sometimes where there are no facts, then optics can become just as important.  Let me give you a quick example.

I was speaking with a potential client the other day who wanted to bring a claim against another person on the basis of an alleged contract.  The contract was never put in writing.  This is not fatal but it immediately leads to an opportunity for the other person to say that either there was no contract or else that the terms were radically different from what my potential client said were the contract terms.  Even though the lack of writing was not fatal, because there could be a question of whom the Court should believe, we then had to look to the “optics”.  In this sense, optics come from the circumstances and how the parties acted – or in this case failed to act.  My potential client was willing to swear on a stack of Bibles that there was a contract and what those terms were and that there had been a full-blown breach of the contract.  The problem, though, was that the potential client did absolutely nothing about this breach for almost two years.  No complaints, no e-mails, no letters, nothing.  And now the potential client will have to ask the Court to find that not only was there a contract, but that it was seriously breached and that the potential client’s failure to do anything about it was simply an oversight.  Again, not impossible, but it certainly is not an easy task to achieve.

Another quick example.  It is said that if you have 5 witnesses to an accident you are likely to get 5 different versions of what happened because people will focus on different things or they may have had different vantage points from which to view the accident.  Whose version of events should prevail?  Again, an issue of optics in terms of the lawyer making the preferred witness look like the most credible person.

All of this is to say that if you are, or you think you are, in a dispute with a supplier, customer, creditor, etc., you should focus not only on the main issue but also give some consideration to optics.  For example, you can write back and say that the supplier’s goods were nothing but *()&^!! pieces of ^&*(%!, OR you can say that you were displeased with the goods and set out the key reasons.  The result may well be the same and it is not even a matter that the latter version will achieve a resolution whereas the former will not – I will assume that the supplier will disagree no matter how nicely you put it.  But, if you come across looking like a jerk (for lack of a better word), the Court will be less inclined to give you the benefit of the doubt.  And if the facts are either not completely in your favour or they are fairly easily balanced, then you may well need the benefit of the doubt – and it could be the optics of the matter that prove to be determinative.

Something to think about.

CALC

There is an article in today’s Toronto Star that talks about the concern of school boards regarding what appears to be a growing number of claims against them in Small Claims Court.  Is this really a concern?  I believe that it is and that it is not only a concern for school boards or large institutional organizations, such as banks, but it is also a concern for your small business.  Why is that the case?  A few reasons.

The first is that, as of January 1 of this year, the amount that can be claimed in Small Claims Court is now $25,000.  It’s not that $10,000 was an insignificant amount, but many defendants took the approach (quite reasonably) that if their exposure was only $10,000 plus costs then they would not hire a lawyer to represent them.  Or, alternatively, they kept the lawyers out until the matter got to the trial stage in order to save money for the steps before the trial.  Now small businesses can face a claim of $25,000 plus interest plus costs and that amount is suddenly requiring business owners to reconsider whether they should get a lawyer involved from the beginning of the case – with the increased amount of money that has to be paid on legal fees.

The second reason is that the costs of filing a lawsuit in Small Claims Court are still relatively nothing – it only costs $75.  Now, one immediately has to put this into some perspective because the cost of filing a Statement of Claim in the Superior Court is only a little more than double that cost at $181.  But, when combined with the third reason, the small amount’s impact becomes more noticeable.

The third reason is the fact that Rule 13 of the Rules of the Small Claims Court were changed in 2006 for settlement conferences.  Before that time, settlement conferences were not mandatory and many self-represented plaintiff’s did not think about settlement conferences.  As of 2006, the rule was changed to make settlement conferences mandatory for all claims.  The result is not only additional costs (at least in terms of time or productivity lost for businesses in having to attend the conferences) but also the fact that, when combined with the second reason, a plaintiff now needs only to pay $75 and he/she/it gets a chance to haul a small business before a judge who will try to put pressure on the small business (and, in fairness, on the plaintiff as well) to settle the claim.  If nothing else, that’s $75 to easily “roll the dice”.  And what happens if the matter doesn’t settle?  The plaintiff does nothing, eventually a notice dismissing the claim is sent and the defendant gets to go after the plaintiff for costs thrown away.  Oh, and that’s where the fourth reason kicks in.

In 2007 the Osborne Report recommended, among other things, increasing the judgment amount from $10,000 to $25,000.  However, Justice Osborne expressly found that there was no need to change the method by which costs are awarded in Small Claims Court.  The costs regime is governed by a combination of Section 29 of the Courts of Justice Act (which caps the costs at 15% of the amount sought in the claim – so, a maximum of $3,750 for a $25,000 claim) and some Rules – mainly Rule 19 which provides for quite small amounts for fees.  For example, $50 for the cost of preparing and filing pleadings.  However, if you use a process server to file your defence, that will easily run you $30 (that’s not a criticism but a statement of fact) so the most you can get reimbursed on whatever legal fees you have to pay to draft and revise and finalize the Statement of Defence – $20 or less.  Meanwhile, Rule 13.10 provides that unless the Court determines that there are special circumstances, the costs of a settlement conference is not to exceed $100.

So, let’s look at a scenario where someone sues your small business, forces you to defend and then takes the matter to a settlement conference, the matter doesn’t settle and the plaintiff is convinced to let the matter just die and eventually the claim is dismissed as being abandoned.  What has it cost the plaintiff in terms of “hard” costs?  The $75 fee to have the Statement of Claim issued.  IF, and only if, the judge at the settlement conference orders that costs are to be paid (which is a rare event), then we have an additional $100.  Then we have the costs which can be awarded for preparing and filing the defence – $50 maximum.  And that’s the amount that you will get, $150, IF you go to the trouble of going to the court and asking for your costs to be paid.  Most people wouldn’t even bother.  With all due respect to Justice Osborne and his report, the failure to modify the costs system for Small Claims has left a huge hole in the system and is now, in part, why we see the increase in Small Claims Court claims.

The fifth reason is that not only do you not need a lawyer to have a claim in Small Claims Court (technically you don’t need one either in Superior Court or the other courts), but the rules and the system are geared towards helping people “do it themselves”.  That is not a bad thing at all.  But the simpler system also contributes to the number of people who have less than meritorious claims bringing those claims forward when a lawyer’s assistance might have shown them that their claims are doomed to fail for whatever reason.

These five reasons, combined with other lesser reasons, have contributed to the increase in the number of people willing to “roll the dice”, “take a run”, whatever phrase you wish to use.  While I have gone on rants in the past about one item or another, this is NOT a rant against the Small Claims Court system.  It has its faults, no question.  However, if there was a perfect system for dispute resolution, then there probably wouldn’t be a need for that system because we would also have found a way to avoid the disputes in the first place.  Moreover, every one of the changes that were made over the years were made for perfectly laudable reasons.  The point of this post is to show how a convergence of the different rule changes, some taking place recently, some in 2006, some going back for decades, appear to stand now for the possibility that your small business could face more litigation than in the past – with most of it taking place in the Small Claims Court for $25,000 or less.

How can you avoid or reduce this effect?  One is to have your standard contracts, purchase orders, etc. include alternative dispute resolution clauses – for example, any disputes under $25,000 have to go to arbitration.  Another way could be to provide for shorter limitation periods (for an amount of time less than two years) - so that if the plaintiff doesn’t sue in time you can bring a motion to have the claim dismissed.  But you have to remember that whatever you do you have both benefits and detriments.  For the two examples, the benefits are to avoid the lawsuit in Small Claims Court or to quickly kill the claim.  The detriments are, respectively, that with arbitration you can have severely limited appeal rights in some cases and if the limitation period applies to all parties then you could also be caught with more restricted deadlines if you want to sue.  As a result, any changes to your documentation to avoid or reduce the risk of being caught in this growing trend to sue in Small Claims Court should be discussed with your lawyer to ensure that any “positive” changes you make don’t find a way to backfire on you.

Something to think about.

CALC

I read an article that appeared in last week’s Your Business magazine in the Globe and Mail.  It is entitled “There Must be 50 Reasons to Leave Your Partner”.  Although the reference is to “partner”, it is not solely to a partnership in the purely legal sense, but, rather, a partnership in the generic sense – that is, whether the “partners” actually have a formal partnership, are in a joint venture or are shareholders in a corporation or some other arrangement.

The article talks about what happens when the two or more partners decide to go their separate ways and what to do about their business.

I have to admit, though, that there’s something about the lawyer they’ve quoted.  I agree with absolutely everything he said.  I hear he’s pretty good looking too … at least in his own mind

CALC

There has been a lot of buzz in the Toronto media for the past few days over an offer by Ashley Madison to advertise on Toronto Transit Commission buses or streetcars.  For those who don’t know, Ashley Madison is, for lack of a better expression, a dating service for people who are married who want to cheat on their spouses.  I have to admit that I am not a member of Ashley Madison so I do not know exactly how they work.  However, as a natural-born nightowl, I see their commercials often on late night TV and have always wondered if they are open to a lawsuit.  The claim would be for  inducing breach of contract and the claim would be made by one or both of the spouses who were cheated on.

Now, if nothing else, it would appear that Ashley Madison has a niche market and most small businesses would not have to worry about claims from innocent spouses, but it provides a good excuse for me to explain the law of inducing breach of contract.  As described in a court case earlier this year, to successfully claim for someone inducing breach of a contract the plaintiff must establish:

An example of where this might occur would be where Company A has a long-running supply arrangement with Company B.  Company C comes along, knows of this arrangement, and purposely tries to “undercut” Company A in an attempt to steal away the business of Company B.  As you can see from the requirements, in this example Company C has to not only know of the contract, but it must go to Company B with the intent of causing (and, in fact, causes) Company B to breach its contract with Company A.  Not the easiest thing in the world to prove.  However, in today’s economic climate where more companies are fighting to get smaller shares of existing work, claims for inducing breach of contract may become more common.

So, if you are considering going after new business with a potential customer who has been involved in a long-term supply or other relationship with a competitor, you may want to be more cautious about your sales pitch.  Similarly, if you find that your customer with whom you have long-term contract suddenly decides to go with someone else, you may have a claim not only against the customer for breach of contract, but also against your “replacement” for causing the customer to breach the contract.

Something to think about.  … And if there are any disgruntled spouses with lots of money to spend on litigation who want to take on Ashley Madison (which seems to have lots of money to fight the lawsuit based on what they were offering to the TTC to advertise on the buses), then give me a call as that would be a very interesting case to take – assuming you could prove that your spouse wouldn’t have left you if it hadn’t been for Ashley Madison’s “assistance” (and good luck proving that).

CALC