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How To Conduct Business with An Eye Toward Litigation

Any business transaction can give rise to litigation. This is particularly true for companies that do not regularly transact business with the same customers. These companies cannot rely on their customers' desire to maintain an ongoing business relationship to produce an amicable resolution of a commercial dispute. Given the very real potential for litigation, businessmen and women should plan for it as they do other contingencies that may befall their operations, such as a warehouse fire or the insolvency of a purchaser on credit.

Litigation is inevitable; as Forrest Gump might have said, "suits happen." But companies can take defensive measures that will benefit them when suits occur. A key strategy addressed in this article is what is known in the trade as "memorialization" of events in writing -- documenting events that occur in the course of your business' operations, such as sale negotiations or customer complaints. The benefits of preparing such documentation far outweigh the potential adverse consequences.

It is the discovery process that creates the possible adverse consequences of documentation. When litigation enters the discovery phase, each party may use a host of devices to ascertain what occurred in the transaction at issue and what his adversary intends to say about it.

One effective tool is a document demand, in which a party asks his adversary for access to documents in his possession, custody or control. With certain limited exceptions, the party receiving the demand must produce these materials. It is this obligation that creates the potential "down-side" of memorialization -- the possibility that documents will land in the hands of an adversary.

Nonetheless, transactions should be memorialized. When setting general procedures, the company cannot predict if it will be on the "right" or "wrong" side of a litigation. When a company has a meritorious claim, documents that memorialize events can be tremendously useful.

Unlike memory, documents cannot fade. They are both a record of the events that transpired and a valuable means of refreshing the recollection of witnesses called upon to testify about those events.

This is particularly true of documents a witness authored. Witnesses will generally affirm the accuracy of descriptions of events contained in such documents based on their general business practice of accurate reporting. Documents also provide counsel a road map to use in establishing what occurred and how to prove it. This is especially useful in litigations arising out of events that occurred long ago.

Another important benefit is that documents are created at a time when the author is employed by the company. Between the date of the event at issue and trial, this relationship may change, with the employee leaving for a better position or, worse yet, departing involuntarily. In such circumstances, fixing her story before departure is far better than hearing it after she has an ax to grind.

An additional advantage is that, in appropriate circumstances, such documentation can be used to prove what occurred. As a general rule, a claim must be proved using live witnesses whose recollection of the events in question can be tested by cross-examination. Documents normally cannot be used for this purpose because they are not subject to such cross-examination. Their introduction is barred by the hearsay rule.

Business Records

One of the principal exceptions to this bar is known as the business records rule.

In New York, for example, documents that memorialize an act or transaction are admissible to prove its occurrence if: (1) the documents were made in the regular course of business; (2) by a person with actual knowledge of the event or who received information about the event by someone under a business duty to report the event to him; (3) within a reasonable period of time after the occurrence of the event; and (4) it was the regular course of the business to make such a record.

Documents made solely for the purpose of litigation will not be admissible under this rule. However, documents drafted for multiple purposes -- such as business planning, accident prevention, employee discipline and possible litigation, will be admitted. Thus, the documents companies have their employees prepare can, in appropriate circumstances, be used to prove the events described.

A final benefit of documentation is the courtroom truth that documents often are perceived by the trier of fact to have greater credibility than live witnesses. Written much closer in time to the actual event, the natural presumption is that documents are drafted when memories are fresher.

Their credibility is further enhanced by the purpose for which they were prepared. Current employees often will be perceived as biased because they are testifying to aid their employer in proving his claim. Documents, on the other hand, are frequently created not to prove one's point in a litigation that neither exists nor is contemplated, but to advise a superior of events that occurred, so that appropriate responsive action can be taken.

Case Law

The benefits of memorialization are illustrated by the court's decision in Gulf South Machines, Inc. v. Kearney & Trecker Corp., 756 F.2d 377 (5th Cir. 1985) cert. denied, 474 U.S. 902. Plaintiff, a machine shop, purchased equipment manufactured by the defendant for use in making metal components. Because the machine proved to be defective, plaintiff sued and recovered extensive damages from the manufacturer.

Crucial to plaintiff's case was a logbook prepared by its employees. In this logbook, operators of the machine, under a mandate from their employer, recorded each of the problems they had with the machine within 24 hours of its occurrence. The court permitted the introduction of this business record, which went a long way toward establishing the unreliability of the machine in question.

Of like effect is the court's decision in Manhattan Fruit Export Corp. v. Royal Netherlands S.S. Co., 271 F.2d 607 (2d Cir. 1959) cert. denied, 363 U.S. 812. Plaintiff sued to recover damages it contended were caused by defendant during the transport of a shipment of plums. The bill of lading called for the plums to be shipped at a temperature maintained between 35 degrees and 41 degrees Fahrenheit. The plums were in good condition when delivered to defendant, and rotten when they reached their destination.

The appellate court nevertheless found that the defendant was not responsible for the damage to the plums, based principally on two charts offered into evidence by the defendant.

These charts were business records prepared by sailors every two hours throughout the course of the trip that reflected the temperature in the "reefer" in which the plums were stored. The court held that these records demonstrated that the temperature had in fact been maintained within the contracted range, and that plaintiff's case was therefore meritless.

It would have been much more difficult for the litigants in these cases if they did not possess these records, or were obligated to prove their contents through the numerous machine operators or sailors who created them. Could all of their employees be reassembled at trial? Would they remember what occurred? The records prevented such problems.

Many other cases similarly illustrate the benefits of memorialization. For example, in American International Pictures v. Price Enterprises, 636 F.2d 933 (4th Cir. 1980) cert. denied, 451 U.S. 1010, records of "blind" checks, which evidenced the number of patrons who attended a movie showing, were found admissible in a case in which the defendant exhibitor was charged with underreporting the number of patrons and therefore underpaying the distributor.

In Re Estate of Philips, 10 Misc. 2d 714 (Dutchess County Surrogate's Ct. 1958) daily work sheets prepared by a contractor were admitted to establish the work the contractor performed for the defendant from whom payment was sought; in Funk v. Modo Lora Realty, 145 Misc. 805 (1st Dept. 1932) ledger and monthly statements were admitted to show defendants' failure to pay rent; and in Tillman v. Lincoln Warehouse Corporation, 72 A.D. 2d 40 (1st Dept. 1979) a written inventory prepared 33 years before trial was admissible to identify goods plaintiff delivered to defendant's warehouse for storage.

Unmeritorious Claims

There are potentially adverse consequences to memorialization when your claim is not meritorious. A company's documents may well aid its adversary in establishing her claim against the company, be it as admissions or otherwise.

Additionally, these documents will not always be prepared with potential litigation in mind. Thus, their authors may describe events that occurred in language the company later finds unfortunate, in an effort to highlight the incident as an example of conduct to be avoided in the future. Indeed, not being prepared by lawyers, they may reflect conclusions at odds with legally sustainable positions.

Large volumes of relevant documentation can also increase the costs of litigation, as they will be reviewed by lawyers and shown to the participants in the event during depositions.

Nonetheless, the benefits of memorialization still out-weigh these potential adverse consequences.

First, while it is true that documents can aid an adversary in proving his claims, documents are not the only way to establish what transpired. Even without them, witnesses may well recall what occurred, and the adversary may well be able to prove his case against the company.

Second, just because a company has not directed its employees to document transactions does not mean that documents memorializing those transactions do not exist. An adversary may have had such documentation prepared or an employee may have prepared a memo to file. This documentation is likely to be slanted against the company's position. It is better to have employees prepare documentation that fairly presents the story and includes all of the facts in the company's favor. Absent such documentation, these facts may be lost.

Third is the problem of the departing employee previously discussed. If a company waits until an employee has left to record his testimony of the events in question, it may well not be as favorable as it would have been had it been given when he was still employed by the company.

Fourth, employees may prepare unfavorable documents regard-less of the company's standard policies. Thus, whether there is a corporate policy, managers wishing to prevent certain occurrences in the future may highlight past incidents to underscore their point -- in colorful language the company might regret.

Fifth, the company may never have to produce the documents to its adversary. Documents may be shielded from production by applicable privileges or appropriate document retention policies. It is beyond the scope of this article to explain in depth the privileges that shield documents from production.

Certain communications between a client and his attorney, whether oral or written, are protected from disclosure by the attorney-client privilege. In addition, depending on the court in which the case is litigated, certain documents prepared at the request of an attorney also may be privileged.

Another way to minimize the "risks" of memorialization is to enact document retention policies, which call for the destruction of material within certain periods of time. There are many statutes that govern how long a party must retain certain documents. Documents should never be destroyed once litigation has begun. And, of course, while such policies can limit the "downside" of memorialization by destruction of "bad" documents, they also restrict its benefit by destroying "good" documents.

Litigation is a very real prospect in today's business world, and you should plan for it appropriately. Part of that planning should entail having your employees memorialize in writing events that occur during your business' operations.

Reprinted with permission from The New York Law Journal, © 1996, all rights reserved.

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