October 15, 2000

AVOIDING LAWSUITS THROUGH "SKUNK FACTORS"

When a deal goes bad, each side assesses its options. Should you cut your losses and walk away? Should you try for a compromise? Or should you play hardball and file suit? Obviously, you want to discourage those with whom you conduct business from fighting with you. You want them to conclude that their best option is to back off.

To do that, you need to make yourself more trouble than you're worth. You want your adversaries to know that whether you are making a claim or defending against one, it won't be worth their while.

One way to do that is at the deal-making stage. You can add terms to the deal that, after things go sour, will make your adversaries think twice about the wisdom of taking you on. We call those deal terms "skunk factors" - most predators know that, win or lose, a fight with a skunk is usually not worth it, and they generally seek out an easier prey. The same logic works in business.

Here are three tried and true "skunk factors" that you might consider in your business transactions.

1. Make them pay interest. Your customer owes you $100,000. Chances are that, even if you win a lawsuit against him, he will only be required to pay you interest at the legal rate, normally 6%. He may as well string you out for as long as he can; to him, it is the equivalent of a low interest loan. If, however, your deal requires a higher, compounded interest rate, your customer will be more likely to borrow the money at a cheaper rate, or use his available funds to pay you, and string someone else along.
2. Make them pay your attorney's fees. How about a provision that states the following: "In the event of non-payment, Customer shall pay all reasonable costs and counsel fees incurred by Company in the effort to collect all balances that are deemed to be due and owing." This helps you avoid the infamous "litigation discount," in which your customer tries to settle for 50% of the balance owing by convincing you that you will spend at least that much in counsel fees. This turns the tables and, particularly when combined with an interest provision, gives you the ability to let the customer know that delay works against him and in your favor. He may as well pay you now, since paying you later will be much more expensive.
3. Make them fight in your backyard. Especially if you are doing business with customers outside of your area, you can gain a huge advantage if you can force your adversaries to litigate where you are, as opposed to where they are. If a Utah company has to litigate in Pennsylvania against a Pennsylvania company, it faces the prospect of retaining counsel it does not know, incurring substantial travel costs and time, all so that it can present its case on foreign turf against a native son, which even today can subject it to some prejudices and problems. All of this gets factored into the Utah company's "fight or settle" decision. The law's rules on where a lawsuit should take place can normally be altered by a contract provision like this: "The parties agree that all claims which either of them may bring against the other arising out of this transaction shall be commenced and maintained only in the federal or state court located in [fill in your courthouse of choice]."

A word of caution . . . To be effective, "skunk factors" must be a part of your contract. Often, executives engaged in business transactions first raise the "skunk factor" after the contract is made. For example, they might include an interest rate provision in an invoice. By the time the invoicing process eventuates, however, the agreement has long since been made, and you will not be able to add terms, such as an increased interest rate, to the deal.

In addition, you need to become familiar with the "battle of the forms," which will be the subject of a future Avoiding Lawsuits analysis. You send out a request for proposal with your "skunk factors" and other boilerplate; they send back a quotation with their completely opposite "skunk factors" and boiler-plate; you send back a purchase order with more of the same; they send back a confirmation with the same old stuff; and so it goes. Whose forms win? The answer depends upon how you played the game, but the message for present purposes is this: if you think you are safe just because you use lawyer-drafted forms replete with protective provisions and "skunk factors," think again. Consult with counsel so that you can be certain that the deal you think you made turns out to be the deal you actually made.

SUMMARY: Emulate the skunk.

Powell, Trachtman, Logan, Carrle & Lombardo, P.C. is a full service law firm with offices in suburban Philadelphia, PA, Harrisburg, PA and Cherry Hill, NJ. Powell Trachtman represents a variety of commercial enterprises, entrepreneurs and business executives in respect to their litigation, litigation avoidance planning, business formation, business transactions, estate and tax planning, and other needs. We are also approved defense counsel for numerous insurance carriers in matters pertaining to professional malpractice, products liability, employment practices, directors and officers liability, and many other fields. For more information, contact us at info@powelltrachtman.com and visit our website at www.powelltrachtman.com.

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