Costly Errors by In-House Counsel

  • November 26, 2015
  • Jeremy Martin

A client called the office a while ago with the craziest idea. As in-house counsel, he was planning to engage his client’s right to terminate a contract, but he thought before doing so that he would check in with litigation counsel to see what we thought about the termination letter.

That call might have saved his client half a million dollars in legal fees.

We spent the day catching up on the background of the contract and suggesting some crucial revisions.  At the end of the day, the revised letter was sent out.  Now, with the limitation period expired, there still hasn’t been any suggestion of a lawsuit. 

The letter as it was drafted, though, would almost certainly have sparked a complicated dispute over contractual interpretation and parol evidence, with enough money at stake to justify years of arbitration proceedings.

I couldn’t help wondering – why doesn’t that happen more often?  Why aren’t litigators called upon as safety inspectors more often than we’re called in as firefighters?  If health care and dentistry are emphasizing prevention above all to minimize costs and trauma, why does litigation prevention make up approximately 0% of my practice?

On a day-to-day basis, the potential for litigation is the last thing on the mind of in-house counsel, particularly when the company is small and counsel is wearing multiple hats. Events move too quickly and business concerns flare up too drastically to forever be considering the one-in-a-thousand chance that today’s fire in particular might be the one that ends up in a courtroom.

But perhaps there are specific situations that should serve as glowing amber lights: a signal to slow things down long enough to consider whether an ounce of prevention might be in order.

I spoke with a number of litigators and in-house counsel to collect war stories about the moves in-house counsel have made in the heat of the moment that came back to haunt them once a disagreement became a dispute.[1]  What ‘stitches in time’ were missed, that could have saved nine months in motions court?

  1. Taking a Generalist Pen to a Specialist Document. 

One of the most popular responses I received from practitioners both in-house and out referred to the trouble non-specialists can get into when drafting documents that could be pivotal in a dispute. 

Contract termination letters; employment termination letters; adverse franchise or partnership disclosures; letters declining options, renewals or bonuses... any communication advising someone that they will be receiving a lot less money than they expect should raise a yellow alert in your mind, especially if it could end a relationship between your client and that person. If the relationship is complex or the amounts at stake significant, an adapted generic precedent will often cause more trouble than it saves – particularly in the employment context.  A few hours of time from a specialist can minimize a potential risk of hundreds of hours down the road.

When terminating a contract valuable enough to be crucial to the operations of either party, consider litigation and evidence ‘specialties’ as well. Unnecessary or inaccurate admissions or concessions made in the course of explaining or defending an assertive position can often be pivotal evidence.  One tale of woe featured in-house counsel that went into unnecessary detail about the operations an adverse party had disrupted by its failure to perform a contract.  From that description, opposing counsel inferred that a defined term in the contract could theoretically apply, with massive associated penalties.  The case settled, but for much more than the first party ought to have paid, due to the leverage caused by the newly created legal issue.

The same can be said for any letter terminating, or potentially terminating, a major business relationship. If the disputes that might arise are not in your area of expertise, consider having a specialist – in-house or out – take a second look.  Given the costs and delays associated with litigation, if even one in 50 of these communications ever leads to a legal dispute that goes to the discovery stage, two hours of consultation in each case would still be an overall savings in your legal spend.

  1. Providing Business and Legal Input in One Communication

It’s an old refrain in advice targeted to in-house counsel: privilege, privilege, privilege.  By far the most common responses in my informal survey had to do with issues surrounding solicitor/client privilege.  But in at least one case, there was a novel issue to discuss.

In that case, a company’s relationship with a business partner was deteriorating.  In-house counsel was a respected business advisor as well as a legal professional, and (s)he responded in real-time to chime in on personnel issues, liability projections, PR feedback and everything else the company faced in that time of crisis.  Unfortunately, (s)he tended to do so in omnibus e-mails, responding to all issues at once for the convenience of the client.

The regrets came later, during the discovery process.  Oddly enough, it wasn’t a waiver of privilege or a leak that caused counsel to cringe: it was the cost of redactions across hundreds of e-mails that wove in and out of privilege from paragraph to paragraph.

The simple act of sending separate e-mails for business and legal issues could have saved thousands in discovery costs.  This may be impractical on a day-to-day basis, but at the very least, when litigation is on the horizon with a certain party, this cost-saving measure is a must. 

Some counsel even suggest the best practice of using a small code (like “#$”) in privileged e-mails, which facilitates a digital search and curtails the cost of privilege review over all your communications drastically, if not completely.

  1. Communicating Privilege Issues to Management

On that same note, some counsel lamented that they, or their clients, did not take sufficient steps to mark or otherwise flag documents or conversations as privileged – not for the caution of adverse parties, but for their own executives!  As it turns out, competitively minded executives sometimes consider strategy documents a rollicking good read, since they put down the goods and services of their competitors and show their own best practices and good faith. 

Sometimes they even feel like sharing that salacious material with potential customers. After all, who could be more interested in the failings of a client’s competitors than the rest of the industry?  And it was presented as just one of the handouts at Tuesday’s meeting, so why not?  And certainly the defendant’s current business partners would be most interested of all in the allegations to be made in the brewing lawsuit, right?

  1. Being Reluctant to be the Party Pooper

Now that good faith performance is a live duty in contract law (Bhasin v. Hrynew, 2014 SCC 71), in-house counsel have a responsibility to be the ‘fun police’ in a new and challenging way.  The common practice of executives and employees griping about the other party to a contract over e-mail needs to be phased out, since the most extreme statements of bitterness and antipathy can now be considered damaging evidence as to the performance of a contract.

Any counsel that has done document review in advance of discoveries is familiar with the vitriolic language that can be thrown around a client’s office as a business relationship deteriorates.  Statements to the effect that the other party can wait, or that employees are reluctant or adverse to making their best efforts for them – as well as the attitude underlying those statements – have to be addressed early to keep that evidence out of an Affidavit of Documents.

By the same token, the advice that many in-house counsel already give to employees and management to segregate personal e-mails from work e-mails is crucial and can never be repeated often enough.  Those of us that have had the experience of conducting document review have seen everything from inter-office affairs and ridicule of co-workers or clients to racist or sexist conversations between senior executives.  When those e-mails are filed as public documents in, say, a wrongful dismissal or harassment claim, these communications can go beyond legal liability and into full-scale brand damage.  Some executives have even e-mailed business contacts to complain about their legal tribulations, thus bringing that juicy new customer right into the crossfire of discovery in commercial litigation.  We live in a world of infinite social media options; your clients need to remember that work e-mail is for work, and for a good reason.

  1. Allowing External Counsel to Act in Default Mode

This concern ought to headline another article about the most common errors external counsel make, printed in big red letters, ideally with a hologram or pop-up section.  That being said, it was also a concern expressed by in-house counsel, who share some of the responsibility for keeping the solicitor/client relationship healthy and communications open.

It’s not at all unusual for in-house counsel to be frustrated with their external counsel for proceeding doggedly towards trial or the best possible settlement.  It’s a litigator’s default setting, and it’s often counterproductive.  While it falls to external counsel to seek the best possible instructions and to understand the client’s business priorities, in-house counsel have expressed that they have often been glad that they put the brakes on a strategy session in order to reinforce the fact that there would be no money for a settlement in the first quarter; or that the client would rather concede a non-critical evidentiary motion than waste earmarked legal funds on defending it.

The risk of litigation obviously cannot be top-of-mind for in-house counsel in their day-to-day practice; but huge potential costs to a legal budget, not to mention weeks or months of personal aggravation and valuable time can be avoided entirely if low-cost preventative measures are considered when:

  • Drafting significant “bad news” or termination documents;
  • Responding to requests for business and legal advice;
  • Drafting advisory documents for management;
  • Noticing vitriolic or inappropriate internal communications; or
  • Attending aggressive strategy sessions with external counsel.

Jeremy MartinAbout the Author

Jeremy Martin is an associate with Cassels Brock & Blackwell’s Litigation Group.


[1] None were willing to be quoted; details of the disputes have been changed to protect confidentiality.

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