Risk Perspectives – The Commercial Litigator’s Cookbook


As a purveyor of governance, risk and compliance (GRC) services we find that our clients are usually motivated either by (a) a fear of non-compliance and potential legal claims or (b) the significant productivity increases good governance systems can deliver.

While we would love to think that the majority of purchasing decisions are motivated by the GRC value proposition, it is a commercial reality that the fear of non-compliance and legal claims is, more often than not (at least initially), the driving force behind change.

So we thought we would use this blog to look at the world through the eyes of a commercial litigator looking to mount a claim against an organisation (or in the case of an insurance refusal, defend a claim) with particular focus on leveraging upon weaknesses in an organisation’s governance, risk and compliance infrastructure.  So what organisational weaknesses is a commercial litigator looking to exploit?  What tools does the lawyer have available to assist?  What do organisations have to do to mitigate their risk?  What exactly is in the “commercial litigator’s cookbook”?

Here is a basic set of ingredients and instructions which will hopefully provide some food for thought for those of you engaged in managing your organisation’s risk profile.  As always your feedback is welcome, so leave a comment if you get the chance.

Ingredients

  • Inaccurate Public Disclosures
  • Internal Policies & Procedures not being followed
  • Breaches of Legal & Regulatory Obligations
  • Contractual Breaches
  • The Discovery Process
  • Legal Costs
  • Reputation Management

Cooking Instructions

Adverse Action, Unfair Dismissal, Sexual Harassment, Bullying, Breach of Contract, Workplace Injury, Breach of License Conditions, Misleading and Deceptive Conduct, Oppression, Directors’ and Officers’ Duties, Breach of Warranties, Privacy Infringements, Intellectual Property Disputes, Professional Negligence, Corporations Act Breaches etc.  The list goes on.  Some of these claims are purely civil in nature, others also have criminal elements. Wherever a claim comes from, an organisation and its directors and officers, need to be prepared to defend their position.

1) Ingredient – Inaccurate Public Disclosures

Litigator’s Action

At the heart of Sun Tzu’s Art of War is the concept of “know your enemy”. Well, in this modern age what better place for a litigator to start than publicly available information on the internet?

It’s simply amazing the inaccuracies in information that organisations post on their public websites.  From grandiose embellishments of fact, to straight out misleading and deceptive statements.

Whether it be an independent school promoting its “every child is treated as an individual policy”, a pro forma “code of conduct”, or an ASX listed entity not providing “why not” disclosure of its non-existent risk management systems, inaccurate public disclosures create a fertile source of risk for organisations.

Unfortunately for those that aren’t mitigating their risk in this area, enterprising lawyers will actively cross reference material contained in historical documents, such as annual reports, and use sites such as www.archive.org which can even track disclosure changes on your public websites.

Organisation’s Risk Mitigation Strategy

The simple mitigation strategy is to ensure that your organisation effectively implements a Promotional Materials Policy which includes procedures for approving the content of annual reports, brochures and web content before it is published.

Organisations that fail to effectively mitigate their risk in this area will soon learn the multiple avenues through which plaintiff lawyers can create “misleading and deceptive conduct” claims.

2) Ingredient – Internal Policies & Procedures Not Being Followed

Litigator’s Action

If you want to know an organisation “from the inside” you need to go no further than its internal policies and procedures.  Specifically what lawyers are looking for is either (a) an absence of policies (e.g. “no sexual harassment policies were in place Your Honour”; or (b) policies that are not being followed in practice.

Either way, where an organisation does not implement an effective policy management framework the plaintiff lawyer or prosecutor usually wins and the organisation and its directors and officers usually lose.

Organisation’s Risk Mitigation Strategy

Over the years we’ve come across many CEOs who have refused to write down policies because they have had a “bad litigation experience”, where lawyers have attacked them for not following internal policies.

Unfortunately we’ve seen as many organisations get taken apart for not having any policies.  Try defending a workplace safety related claim with no policies in place.  You won’t get far.  So, once again, the risk mitigation strategy is simple.  Implement an effective policy management framework focusing on high risk areas.

If you want some tips refer to our previous blogs:

Risk Perspectives – Is poor policy management holding back your organisation?

Top policy management blunders–do you recognise any of these?

3) Ingredient – Breaches of Legal & Regulatory Obligations

Litigator’s Action

With the sheer complexity of the legal and regulatory obligations facing organisations these days plaintiff and prosecution lawyers start with a huge advantage.

You’ve heard the phrase “ignorance of the law is no excuse”. Well it’s more or less true.  No court in the land is going to take into account the fact that a business was under cash flow pressure, or was distracted by a shareholders dispute, when making a determination on a breach of the Corporations Act , or a sexual harassment claim.

The simple fact of the matter is that if you are in business you need to comply with the laws and regulations that apply to you.  Of course, many organisations get away with being non-compliant for long periods of time.  However, as they say in the legal business “it’s not a matter of if it’s going to happen, it’s a matter of when” and of course if you are facing a claim “it’s already happened”.

Organisation’s Risk Mitigation Strategy

The mitigation strategy is, of course, implementing an effective Compliance Program.  The Australian Compliance Standard AS 3806 provides a good starting point and is referenced by many Australian regulators including ASIC, ACCC and AUSTRAC, as well as the ASX (not strictly a regulator, however, the ASX still notionally oversees compliance with the ASX Corporate Governance Principles and Regulations).

If you want a fun (yes, compliance can be fun) perspective on how  a compliance program can add value to your business, read our blog:

Compliance – An Expensive Black hole or a Strategic Imperative?

4) Ingredient – Contractual Breaches

Litigator’s Action

If organisations and their executives spent time properly documenting their commercial agreements, and then actually monitoring their performance, most litigation lawyers would be out of business.

Let’s take the simple employment contract as an example.  Properly drafted, an employment contract can be an extremely powerful tool for employers (think restraint of trade clauses, intellectual property protection, employee conflicts of interest etc).   Badly drafted, these simple agreements can become a nightmare.  Despite the Nikolich decision in 2006 we still see contracts that make an organisation’s policies an express term and thus, make the organisation liable for its failure to follow its own policies.

We still often see organisations putting clauses in employment agreements to undertake regular performance reviews.  Great in theory, however, when the performance review doesn’t take place the organisation has just breached its contractual obligations, giving an employee a get out of jail card in a termination dispute.

Organisation’s Risk Mitigation Strategy

The mitigation strategy? Ensure that you document your contractual agreements properly and, perhaps most importantly, you monitor the performance and currency of the contracts.

Spending money having lawyers draft agreements only to throw them in the bottom drawer is a very bad idea as the smart lawyer will pull the “estoppel card” out of their kit bag before you can say “Jack Flash” which may prevent you enforcing those very clauses that you paid all that money to your lawyer to get right in the first place.

5) Ingredient – The Discovery Process

Litigator’s Action

The discovery process is a plaintiff litigator’s best friend and an organisation’s greatest nightmare.   For those not familiar with the concept you may be surprised to learn that once legal proceedings are commenced, through the discovery process, your opponent can compel you to hand over any documents (including directors’ minutes, consultant reports etc) that relate to the issues at hand.

That means anything that you write today (including diary entries, emails, internal memos etc) could well be the subject of examination by a court in the future.  The only limited exception relates to privileged documents (which generally means communications with your legal representatives).

A plaintiff lawyer or prosecutor looking to expose weaknesses in an organisation’s internal processes and procedures will target key policies and procedures and evidence of their implementation, looking for evidence of internal system failures and conflicts of interest.

Organisation’s Risk Mitigation Strategy

The best way to mitigate this risk is to ensure all your managers and staff are made aware of the risks associated with litigation and the fact that anything that is put in writing may, and probably will, be held against them at some time in the future.

Directors and officers have to be particularly wary of long-winded consultant reports that point out in graphic detail the deficiencies in their current systems.   If these reports are not effectively actioned (which is probably what the consultants want) they can sit like ticking time bombs just waiting to be “discovered” by an enterprising plaintiff lawyer.

6) Ingredient – Legal Costs

Litigator’s Action

Like it or hate it, litigation is expensive and it is usually the litigator with the deepest pockets that comes out in front.

It is no coincidence, for example, that ASIC has a terrible track record against the big end of town, while enjoying a healthy strike rate against those who are not able to engage quality legal representation or “go the journey” through the maze of appeals that inevitably follow initial determinations.  Legal costs are an important element in a commercial litigator’s cookbook because an organisation’s ability to fund litigation will have a huge bearing on how a legal claim plays out in the long run.

Organisation’s Risk Mitigation Strategy

Apart from getting rich quick (whereupon you can follow the fun time examples of some of Australia’s most prominent business people and use litigation as a commercial weapon) the best mitigation strategies are (a) to not to expose yourself to litigation in the first place; and (b) ensure that you have adequate insurance cover, especially with respect to directors and officers, product and professional liability claims.

7) Ingredient – Reputation Management

Litigator’s Action

An organisation’s brand and reputation can take years to build and a moment to destroy.  There has been an increasing trend lately for plaintiff law firms to actively use media strategies to place commercial pressure on organisations in an attempt to get them to increase their settlement offers.  Kristy Fraser-Kirk’s claim against David Jones is a prominent example.

No matter the size of your organisation you will have a reputation to protect and you can guarantee that “reputation management” will become a critical part of dealing with any legal claims you may face.

Organisation’s Risk Mitigation Strategy

Litigation that can adversely affect your reputation should be managed through a Business Continuity or Crisis Management Strategy. Such a strategy may, for example, involve developing a crisis management communication strategy, media training for key executives, and identifying organisations with media management skills.

Ultimately the best mitigation strategy is to avoid litigation in the first place, or if this not possible, position your organisation to proactively defend a claim.  This will ultimately come down to having a strong policy management framework in place, through which you can demonstrate your organisation’s defence to any claims made against it.

Litigation is all about creating a set of commercial pressure points and using these as leverage against your opponent.  An enterprising litigator will use every trick in their “cookbook” to get a result for their client. The legal rules of engagement place plaintiff lawyers and prosecutors at a huge advantage against their opponents because they get an “open window view” on documents created (or not created) well before anyone contemplated litigation.

Ask yourself how your organisation’s internal policies and procedures would hold up under the intense scrutiny of expert witnesses?  If in doubt follow some of the risk mitigation strategies outlined in this blog.

How CompliSpace can help

CompliSpace combines specialist governance, risk management and compliance consulting services with practical, technology-enabled solutions.  Our programs, which are designed in accordance with recognised standards, are delivered online through an advanced policy management framework, and in a format that allows clients to quickly and efficiently tailor the content to their own particular specifications.

If you are looking to streamline your existing governance, risk or compliance programs, or your organisation’s policy management framework give us a call. We are passionate about helping organisations to implement sustainable governance, risk and compliance solutions.

Contact Details

P: +61 (2) 9299 6105 (Sydney) / +61 (8) 9288 1826 (Perth)

E:  contactus@complispace.com.au

W: www.complispace.com.au

This blog is a guide to keep readers updated with the latest information. It is not intended as legal advice or as advice that should be relied on by readers. The information contained in this blog may have been updated since its posting, or it may not apply in all circumstances. If you require specific or legal advice, please contact us on (02) 9299 6105(Sydney) or (08) 9288 1826 (Perth) and we will be happy to assist.


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