To Serve and Protect

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Lawyers. They may not wear capes and they certainly don’t have x-ray vision, but a good one can save your company from the perils and pitfalls of the business world. Take contracts – signing one you don’t entirely understand can bring a promising start-up business to a grinding halt, or bog a more established one down with debts and lost revenues. Sarah Bradley saw this happen to a young manufacturing company that was brimming with potential until its owners signed an agreement with a large distributor.

“Without legal advice, they entered into a very large contract with an important customer that relied on them to produce this product in very large quantities,” says Bradley, a professor at Dalhousie University’s Schulich School of Law. “However, their production method wouldn’t work on a large scale and, because of the way the contract was worded, they were unable to get out of it and were on the hook for some very significant damages.”

The company ultimately went out of business, which is something that would not have happened if its owners had sought out legal advice before signing the dotted line. A lawyer would have identified any risks connected to the contract, drafted cautionary clauses to protect the company and provided some negotiating assistance. “They would have certainly not had the big downside that they ultimately had, or at least would have fully understood the risk before they entered into the contract,” says Bradley.

It’s a problem that’s all too familiar to Maureen Ryan, Stephen Winter and Tauna Staniland – all corporate lawyers with the firm of Stewart McKelvey. Despite the complex language used in a contract, and despite its ability to make or break a business, they say too many people just decide to write their own or recycle an old one without getting professional advice. But it’s a decision that can result in future disputes, hefty legal fees and, in the worst cases, litigation or bankruptcy.

“That’s the danger sometimes in non-lawyers writing up contracts,” says Ryan. “They don’t always understand the ramifications of how they’ve said something or what they’ve said. Businesspeople take risks all the time and I think that sometimes they’re afraid that lawyers are too conservative and all we do is point out all the risks.”

All three say it’s cheaper for businesspeople to visit a lawyer before signing a contract – or even before starting a company – than it would be to fix any mistakes made along the way. “We all see time and again that when they don’t do that, it ends up costing them more in the long run,” says Staniland. “Whether it’s that you have to go back and re-do what was done or whether it results in litigation.”

Litigation Limbo If a problem does result in litigation, it could mean years of court battles and tens of thousands of dollars in legal fees. One of the most high-profile and lengthy court cases to come out of Atlantic Canada involves Knowledge House – a Halifax-based educational software company that was worth $100-million in 2000 but went bankrupt one year later. During a single week in August 2001, the company’s shares nosedived from five dollars to a mere 65 cents. Investors lost millions virtually overnight and the Toronto Stock Exchange issued a cease trading order on the company. Knowledge House announced it could not meet its payroll and other obligations in September 2001, leaving 70 employees suddenly out of work and with no severance pay.

In the wake of the collapse came a flood of lawsuits and counterclaims alleging that stock manipulation and insider trading had made the company’s shares appear to be worth more than they actually were. It’s a difficult case to keep track of – the various lawsuits have dragged on for years and involved more than a dozen high-profile defendants, including Knowledge House CEO Dan Potter, some of the company’s major shareholders, a corporate lawyer who was both Knowledge House counsel and one of its directors, and National Bank Financial Ltd., which lost millions when the company collapsed.

The heaviest litigation began in August 2003, when National Bank Financial launched a suit against Potter and 18 other defendants alleging they conspired to manipulate the stock price of company shares. The institution even named one of its own former brokers as a defendant, claiming he helped to orchestrate the alleged scheme. In return, Potter, who denies any wrongdoing, filed a countersuit against National Bank, claiming the institution laid charges against him in an attempt to cover up its own operational failings and inability to control one of its brokers.