What to do if you face being sued

Act early and you will lower your chances of ending up in court and putting your business in jeopardy, writes Christine Long.

A letter threatening legal action shows up in the post. What do you do?

Elizabeth (not her real name) acted quickly. The cease-and-desist letter alleged that the marketing materials for her fashion-related business were in breach of a competitor's registered trademark.

She was sure she could prove the claims were "bogus", but she didn't take any chances.

"I Googled for lawyers," she says.

Stevensen Business Lawyers chief executive Tamira Stevensen says Elizabeth's quick response helped her avoid being taken to court and a final settlement was negotiated via a series of lawyers' letters.

Another small-business owner took a different tack. He wrote back to the trademark lawyer, explaining why there was no case against him, and only consulted a lawyer after he was sued.

"That client ended up in the Federal Court and I had a very interesting time in the Federal Court with a highly paid barrister," Stevensen says of the case.

"We did negotiate a settled outcome against our client but the same outcome, in my opinion, could have been achieved without having to go to court had the client realised that some things are beyond the capacity of a small-business owner."

Being sued is rarely a surprise. Usually the small business will have already received several letters from the claimant, a debt collector or a solicitor.

"That's a very important period," Stevensen says. "How the small business reacts in that period will determine how much they end up paying both in terms of the claim by the other side and also in terms of lawyers' fees."

Angela McDonald, director of Optimum Recoveries, a debt-collection agency with a law firm, agrees. "Many matters escalate through a process that can be expensive, difficult and emotionally draining but ultimately could have been avoided through open conversation," McDonald says.

Offering to pay an unpaid bill in instalments could be one way to prevent a situation from escalating. "Many of my clients are open to making payment instalment arrangements if people are going through tough times," she says. "Those arrangements have to be commercially pragmatic or workable for both parties."

Whether it helps you avoid court action will depend on the creditor. Stevensen points to one small-business owner who racked up about $25,000 on an American Express card and was unable to meet the monthly repayments.

"Amex issued a letter of demand and then about two weeks later they sued," Stevensen says.

Ignoring letters from creditors leaves you open to receiving a claim or a summons or a statement of claim (the term varies between states), McDonald says. This formal legal action allows a response within 28 or 30 days and gives several options: pay the account; make an application for a payment arrangement or dispute the claim.

"If you do none of those, then expect that the creditor may make an application for [default] judgment," McDonald says.

It goes onto court records and ultimately your credit file with credit-reporting agencies such as Veda and Dun & Bradstreet.

A default judgment is a court order confirming that you owe the whole amount claimed and the claimant can then ask the court to take action to recover the money. That may include issuing a warrant of execution, under which a sheriff can seize property; individual bankruptcy; or company wind-up.

You may apply for court approval of a payment arrangement, with supporting documentation on your assets and liabilities showing capacity to pay the debt in instalments.

It gets more complex if the bill wasn't paid because the goods or services were deficient. In that situation Stevensen suggests writing to explain why.

"If after the exchange of several letters the other party isn't backing down, then I would strongly recommend that the debtor gather all documents regarding the dispute and get the solicitor to advise on a possible counter-claim," she says.

However, she adds, 28 days is often not enough time to mount a plausible cross-claim if the small business is unprepared before it is sued. It might require preparing timelines, gathering emails and looking through diaries - all time away from your business.

"Where it gets complicated is if your cross-claim is not within the power of the local court to hear because you're dealing with trade-practices law or issues related to equity law," Stevensen says.

Concerns about the potential cost of legal action can add to the stress. But often cases are settled before a hearing or trial, McDonald says.