When Threatened With a Lawsuit, Do You Fight or Flee?

By Cliff Ennico

January 22, 2019 6 min read

"I am a big fan of your weekly column, and hope you can help me with a difficult situation.

"Last year I sold a Web-based business to a company in Europe. The terms of the deal were heavily negotiated, and the buyer had several weeks to examine the business books, records and Web analytics before paying the purchase price.

"Last week I received a letter accusing me of misrepresenting the site's performance and demanding a full refund of the purchase price. I have not heard from the buyer in almost a year and this was the first I heard they were having problems.

"Frankly, I think their claim is nonsense and would be extremely difficult to prove in court. But, of course, I do not have the resources to fight an extended legal battle, especially since the contract of sale calls for any dispute to be resolved in the European country where the buyer operates. This would require me to hire a local attorney there and possibly spend weeks dealing with depositions and other legal nonsense.

"Is there any easy way out of this situation?"

Well, you could just roll over, give the money back, take back the web-based business and see if you can salvage the situation. Lawyers call this a rescission of your contract. As long as you get a release from the buyer, that should be the end of it, and you won't be subject to any further liability.

But I don't think that would be the right way to proceed here.

The first thing you need to do is retain an attorney in the country of the buyer's principal place of business and have the attorney review the contract that's in place. If the lawyer feels (as you do) that the buyer's claim is unjustified, she should prepare a strongly worded letter to the buyer denying each and every allegation in the buyer's letter.

If the lawyer disagrees with you and feels that the buyer's claim is at least partially valid, she should prepare the exact same letter to the buyer (denying all liability) but with a paragraph at the end saying that you are willing to sell for a small percentage of the damages the buyer claims without admitting liability of any kind, and that you are willing to consider arbitration or mediation as an alternative to legal action.

Either way, this letter will have a beneficial effect in that it sends a signal to the buyer that you are prepared to fight on his home ground, as required by your contract, and therefore, that he must take you seriously. There's no way to predict what will happen, but in most cases the buyer will not want to incur the time and expense of a lawsuit either and will be willing either to settle for a much smaller amount than he claims or submit the dispute to mediation or arbitration, where you have a much greater chance of a fair result.

If you are not willing to spend money on foreign lawyers, or if you feel very strongly that there is absolutely no merit whatsoever to the buyer's case, there is another approach you can take, although I wouldn't recommend it without first talking to a good lawyer in your home state who fights contract battles.

Using this approach, you would ignore the buyer's letter and force him to file a legal action against you in their local court overseas. You would then simply not show up on the scheduled court date, and the buyer would get a default judgment under that country's laws. Unless you own assets in that country that the buyer could seize to satisfy its judgment (I'm presuming you don't), the buyer would then approach a U.S. federal court in your home state and seek to enforce that foreign judgment against you and your U.S. assets.

Many U.S. courts are reluctant to enforce default judgments in other countries, on the grounds that requiring a less-than-wealthy U.S. citizen to fight an inconvenient overseas battle can be a denial of due process rights under the U.S. Constitution. If the court were to refuse to enforce the default judgment, the buyer would then be forced to re-try the case here in the U.S., where you presumably would have the home-court advantage.

But ... your U.S. attorney will need to focus carefully on the exact choice-of-law language in your contract of sale with the buyer. If you knowingly and voluntarily agreed to submit to the foreign court's jurisdiction and waive your rights to claim that the foreign court is an inconvenient forum, the U.S. judge may be compelled by the contract to enforce the overseas default judgment, even though it will work a hardship on you.

The bad news is that you will have to pay legal fees in order to decide which approach is better. No contract — even a heavily negotiated one — is self-enforcing, and if your attorney feels your defense isn't as strong as you think, then discretion should be the better part of valor. Try for a favorable settlement, and keep the dispute out of court.

Cliff Ennico ([email protected]) is a syndicated columnist, author and former host of the PBS television series "Money Hunt." This column is no substitute for legal, tax or financial advice, which can be furnished only by a qualified professional licensed in your state. To find out more about Cliff Ennico and other Creators Syndicate writers and cartoonists, visit our webpage at www.creators.com.

Photo credit: at Pixabay

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