Economic Disadvantages When Filing Suit

April 13, 2006

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When navigating the court system, a small business owner encounters certain risk factors inherent in litigation.

Ironically, the same legal system that makes it easy for a business owner to be sued also makes it hard for a business owner to bring a suit of his own.

Of course, business owners also are involved in the civil litigation system as plaintiffs. Unfortunately, in these types of cases, the services of an attorney usually cannot be secured by way of a contingent fee. Where the likelihood of either a win or a substantial award of damages is small, plaintiffs will be forced to hire an attorney on an hourly basis.

Moreover, the lack of a loser pays system can adversely affect plaintiffs who have to pay an attorney on an hourly basis. In this situation, plaintiffs face a dilemma: Why bring a claim that may result in, say, $10,000 in attorney's fees, when nothing or less than $10,000 is likely to be collected?

In short, the combination of an hourly fee for plaintiffs and a lack of a loser pays system gives plaintiffs with legitimate claims a direct financial incentive to forego the claims.

Thus, for example, small business owners may find it more economical to simply write-off claims against customers that default on their accounts or other commercial parties in breach of contract, instead of filing suit.