Clear business procedures reflect more than a common sense need for order over company activities and affairs. In reality, deciphering business versus legal process is not intuitive. What is deemed “business” versus “legal” becomes further complicated as facts and issues becomes more and more are tangled in webs of multiple department and disciplines, relevant and irrelevant issues, operating and legal activity costs, internal and external communications and decisions by senior management and executive teams. Particular to the railroad industry, fact patterns encountered in the normal course of business exemplify common complexities. For example, consider the following:

Railroad A (“USA Rail”) and Contractor (“Build-it Corp.”) have been in an escalating disagreement for years over a services account supporting a bridge construction project along tracks owned by Railroad B. The subject bridge is now crumbling causing damage to Railroad B's track and forcing train service disruptions. The underlying contract documentation and historical communications between USA Rail and Build-it Corp. are offline due to expiration of records retention periods of USA Rail. Build-it Corp. is also involved in a separate mechanics lien situation filed against USA Rail's property relating to Job #2 for USA Rail which is unaffiliated to the bridge job.

This situation for USA Rail necessitates many levels of analysis in order to identify appropriate business and legal strategies opposite Build-it Corp., Railroad B, tenants of Railroad B and possibly other users under the crumbling bridge.

Understanding when lawyers should step in and when to keep them out is a tricky discipline, and costs increase proportionately with investment of legal's time. Keeping lawyers out can lead to bigger, worse results and conversely, from the business team's standpoint, involving them frequently generates additional delay and costs. However, there should be no guesswork. When it comes to cost-effectively educating the company on all facets of the problem and correlating solutions, active collaboration according to a tangible process executed by both in-house business and legal teams is the key.

Specifically, the Six Point Checklist offers a practical guide for in-house business and legal teams on how to fully assess and develop strategic response and action plans. A thorough and competently performed assessment will (1) allow for smooth, efficient movement of information through the company's org chart to inform all business representatives who need to know; (2) deliver clarity throughout the company on priority matters, including all information associated to costs and business impact; (3) relay recommended action or response plans for decision makers' consideration and approvals; and (4) present certified specific time-bound tasks and action plans that can be supported by both business and legal teams.

Six Point Checklist

(1) What is the Issue, literally? (suggested action for Business and Legal Team). Isolate a written description to identify the basic scope of the matter at hand. The goal is to capture not too much information but enough so that your audience can understand what problem is being raised. The description should be narrowly tailored to indicate other entities or parties involved in the situation, the main triggering event that has caused the issue, and importantly where things currently stand. In the USA Rail/Build-it Corp. hypothetical, the description used above is insufficient since no details were included about the status between Build-it Corp. and USA Rail. For example, is USA Rail refusing to pay Build-it Corp.'s invoices but presently continuing to perform? Has Build-it Corp. threatened suit? Is Build-it Corp. leveraging its mechanics lien case because of the bridge job nonpayment? In other words, the description of issue must contain details as to what USA Rail actually can or cannot do as a result of the issue. “Issue: USA Rail and Build-it Corp. entered into a contract where Build-it Corp. would construct a bridge along milepost 178.0 and 178.4. Build-it Corp. has completed the bridge construction but USA Rail refuses to pay $900,000.00 due to crumbling of bridge over Railroad B's tracks. USA Rail and Build-it Corp. have been discussing this arrears for several years and letters between the parties discussing a 5% reduction cannot be located by either side. Build-it Corp. refuses to re-issue another form of reduction therefore, USA Rail is unable to process payment to Build-it Corp and faces potential suit per Build-it Corp's letter on January 1, 2018. USA Rail is also presently responding to auditor inquiries.”

(2) Why does the situation present an issue and why does it matter? (suggested action for Business Team). Providing an adequate explanation of why the presented situation poses an issue for the company is important because it helps define the true size of the problem. For example, in the case of Build-it Corp., USA Rail's withholding of $900,000 payment creates potential litigation and may flag an issue for USA Rail's auditors. However, if Build-it Corp. is uniquely qualified to perform certain work for USA Rail on future projects, the harm to the relationship with contractor, potential inability to complete future additional projects, etc. In other words, whether it is one narrow issue, or whether the issue will balloon into additional issues, it is necessary to develop the full picture.

(3) Who do we need to involve within the company to address the situation? (suggested action for Business Team). The question of “whose” is critical, since ownership over the situation determines who will manage and decide questions about purported resolutions. Identifying who owns the situation is also important for purposes of developing a clear internal communication plan, so that those in the organization who need-to-know will be fully engaged through all stages of discussions and considerations. For USA Rail, ownership of the situation may reside with the contract administration group in charge of the Build-it Corp. relationship, or possibly the Engineering team in charge of building infrastructure projects. It is also possible that financial claims are “owned” by the Finance department rather than by the contracting team, or since the payable is withheld and potentially actionable, jurisdiction goes to Legal.

(4) What is the end goal and what are the “to-dos” in reaching that goal? (suggested action for Business and Legal Teams, jointly). This area requires intensive cooperation between business and legal teams since all appropriate course(s) of action to a problem should be considered. Many response plans are possible depending on the type of solution matched to the size/type of problem. For example, if the problem is simple but high in value and relatively low-cost to litigate, then litigation can be considered, the legal team will determine the necessary tasks. On the other hand, if the simple problem is lower in value, and expensive to litigate, litigation is not the answer so the business team becomes responsible for associated tasks. If the problem is simple and one that can be addressed amicably through discussions/negotiations, the business team would plan a correlating communication plan. If, however, the problem is highly complex, negotiable but not yet contentious, the pressure of litigation may add effectiveness to the underlying negotiations. In this last scenario, both the business and legal teams would work together in jointly identifying all associated tasks.

For USA Rail, if its end goal is to reach disposition of the delinquency and walk away from Build-it Corp. permanently, the plan of action would differ from if USA Rail needed to secure three more contracts with Build-it Corp. for a $5 billion project where there were no alternate contractors. The contrasting strategy and to-do lists are illustrated below—

• In the first scenario, USA Rail could plan to initiate litigation immediately on the construction defect claim, without subsequent steps to address any damage control for loss of Build-it Corp. relationship. Legal team would lead and address action items.

• In the second scenario, business and legal would coordinate closely since the list of tasks could be designed around, Step 1: attempt good-faith negotiation for a period of 90 days with Build-it Corp. to settle the $900,000 claim; Step 2: transmit an offer by letter through CEO of USA Rail within the first 7 days of the negotiation to pay higher rates to Build-it Corp. on the next 3 construction jobs as incentive for Build-it Corp. to enter into new agreements; and Step 3: if settlement discussions fail, follow up, with a plan to initiate breach of contract case for defective construction within end of year; Step 4: leverage threat of litigation in the last 10 days of the 90 days negotiation period through letter transmitted by legal team.

For both scenarios, discussions between legal and business teams as to which team should execute the tasks on the to-do list will lead to transparency and better internal planning and coordination. The joint effort will also optimize use of the full panel of in-house resources' skills and disciplines which helps to generate different pressures and optics, as needed against the external party.

(5) What is the cost and/or operational impact of the issue? (suggested action for Business and Legal Teams, jointly)

This analysis is the crux of the company's cost-benefit analysis and coincides with section 4 above. The goal is to determine a tangible metric for the following values:

(a) Direct costs caused by or resulting from the issue. The direct costs of certain issues are easier to calculate than others. Between USA Rail and Build-it Corp., the direct costs caused by the issue for Build-it Corp is $900,000 plus any expense of litigation and internal business costs of supporting settlement discussions with USA Rail. From USA Rail's standpoint, direct costs are not limited to the potential litigation against Build-it Corp., because it must also include other generated costs, e.g. complaints by Railroad B for the crumbling bridge; damages to other users of track, etc.

(b) Operational impact caused by the issue, which must be monetized. Indirect costs or costs associated to addressing hindrance, harm, delay or loss for the business in any other manner should be calculated as an operational impact. Oftentimes for railroads, the operational impact will outweigh the direct costs from an incident. For example, if the crumbling bridge causes repeat delays in train operations for USA Rail and Railroad B, then the cost of the delays to USA Rail should be calculated. In addition, any financial repercussions from Railroad B should also be included. If the crumbling bridge increases tort claims for USA Rail, then that is also a calculable impact. Operational impacts that are decidedly “priceless” can also be included if such impact is significant and certain to occur.

(c) Costs to company associated with each plan of action. In USA Rail's two scenarios it is easy to understand the points of cost that can be calculated in Steps 1 through Step 4. Where there are business negotiation phases (Steps 1 and 2) to be handled internally by the business team, the company's time spent to support those negotiations are measurable costs. Where there is litigation (Steps 3 and 4) the legal team costs, including outside counsel fees, are measurable costs.

(d) Financial outcome for company if action plan is successful. If the identified action plans are approved and carried out successfully, the financial outcome should confirm either a recovery or a positive value on the bottom line, or should describe some other tangible reflection for the bottom line. In the second scenario against Build-it Corp if the action is successful, the outcome for USA Rail could reflect a successfully negotiated resolution, reconciliation of the $900,000 payable, a percentage reduction resulting from the settlement, savings on litigation costs, nominal legal fees for advice and support on communications.

(6) What are the consequences and alternatives? (suggested action for Business Team). The in-house assessment will allow the presenting business team to confirm for the company that the consequences and alternatives to any suggested action plan(s), is to allow the underlying issue to remain. In the event the company does not accept the plan(s), the associated costs in the long term should be monetized and included in the team's assessment to reflect the ongoing issue.

Conclusion

The in-house team's goal should be to synthesize the checklist information into a protected format that succinctly summarizes the gathered information for use and review by decision makers and to support additional assessments by outside counsel. If done properly, the resulting product becomes a valuable foundational tool that can be used to equip the company to strategically discuss, plan and coordinate in the normal course of business. At the outset of the company's implementation of a routine checklist process, counsel should be consulted so that proper, timely and appropriate application of attorney-client and/or work product protections can be considered. Importantly, if done successfully, active collaboration between in-house teams will achieve repeat savings and significant positive impact to the bottom line.

Jean Dober, of counsel in Baker Donelson's Washington, D.C. office, has more than 15 years of litigation, bankruptcy, and transaction experience in corporate and commercial cases, with substantial exposures in railroad operations, industrial construction and government contracts. Before joining Baker Donelson, Ms. Dober served as senior associate general counsel in the commercial litigation group for a prominent national transportation company. She can be reached at [email protected].