Business Lesson #3: Losing A Lawsuit In The Philippines

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We’ve been meaning to tell this story for a while.

A few years ago, an ex-manager from our company in the Philippines sued us for 1,800,000 pesos (over $40K USD). The series of events dragged out over the course of several years.

Here are some of the highlights:

Here’s the story…



Background:

We didn’t set out with much of a plan to start a full-on company in the Philippines. We’d worked with a Virtual Assistant (VA) named Karen (not her real name) from Davao City in our mortgage company and had some success.

A few years later, while working for a local SEO company, we again found ourselves in need of some VA’s and reached out to Karen to see if she’d be willing to help out again. She was, so we began contracting with her to hire more agents and help with our growth.

Our staffing needs in the Philippines grew and we quickly found ourselves in a situation where we needed to set up an actual company so we could set up services, sign contracts, etc. Setting up a corporation was a long and fairly complicated process, so we opted for a sole proprietorship until we could create the corporation. The original business was established under Karen’s name and we switched everything over to the corporation a few months down the road.

Communication with Karen was relatively good while we were in the U.S. Everything seemed to be running smoothly, but our relationship was primarily with her and we had much less communication with the individual employees and agents in the company.

Eventually, Joe and I made a trip out to Davao to oversee the operation and to make some decisions on where to open an office, how to expand the team, etc. The meeting with Karen and the staff went well and all seemed to be in order. About a year later, Joe made the move out to the Philippines to oversee the company directly and to work closer with Karen and the rest of the staff.

Problems:

It wasn’t long after Joe arrived that we ran into problems. We noticed Karen was rarely showing up to the office, harder to get in touch with, and much slower responding to questions and requests. The staff was having problems with her as well—many were frustrated with their lack of access to Karen and began to grumble and complain about their manager.

She was one of the only agents on a salary and was paid significantly more than the rest of the staff (nearly five times what the entry-level agent was paid). The fact that she was no longer around was getting concerning.

I reached out to Karen via Skype and was finally able to get her to chat for a bit. She’d mentioned that she was having problems with some of the staff and the rumors going around, that she did not appreciate Joe’s management style, and that she was thinking about leaving the company. I asked her to stay on so that we could find some resolutions to these issues and she agreed to do so.

Meanwhile, it had gotten so bad for Joe that he had to resort to tricking her. He had one of the staff reach out to her and she agreed to meet up at the mall to sign some paperwork. Instead, Joe was there with the paperwork and to see if they could have a conversation.



Resolution:

We’d hoped things would improve after this but, unfortunately, they did not. When Karen mentioned she intended to leave the company once and for all, we decided not to fight her. Instead, we offered her an alternative that we considered more than fair.

We understood she was having some personal issues and offered her a 4-month break from work. We would pay her around 20% of her regular salary (around the same rate of our entry-level agents) for up to four months to deal with her issues. We wouldn’t require any work from her during that time and we agreed to allow her to come back at any point during that period if she felt comfortable doing so.

This was one of our first mistakes, I believe. While we felt we were being extremely generous with our offer, the proper way to handle this would have been to document the issues we were having with Karen and begin the process of removing her from the company.

It’s also true that our employment documentation with Karen was pretty shaky. While she was an incorporator with our company, she was also the first person we were in contact with here. She held the most senior position in our company and effectively ran everything. While our documentation with the employees was sound, the documentation on her position and role within the organization wasn’t nearly as clear-cut due to the messy nature of the transition between her sole proprietorship and the creation of the corporation in the Philippines.

While she complained pretty heavily about the employees and her relationship with Joe, she agreed to our offer via Skype.



Lawsuit:

A couple of months after agreeing to the offer, we ended up with paperwork showing Karen had filed a complaint and suit via the Department Of Labor and Employment (DOLE) here in the Philippines. As it turns out, this is fairly common and the law is fairly protective of employees—usually to protect against abusive companies and unfair employee termination.

While there are plenty of instances where the DOLE complaints are both valid and protective of labor rights, there are also plenty of vampiric attorneys around willing to take on cases Pro-Bono if they smell a payday. Karen found one of her own and lawyered up.

The first step is arbitration, which is handled locally at the DOLE office. If the situation can’t be resolved there, we’re off to court for the next round.



We Win?

Both Joe and I arrived ready and prepared to face the issue with DOLE yet neither Karen nor her attorney were there. The meeting was rescheduled for a few weeks later and, again, nobody appeared on her behalf.

Note: We heard later this is a common tactic—the complainants will have a watcher around to see if you don’t show up. If you don’t arrive, they’ll text the attorney’s office and they’ll send a representative immediately to win a default judgment.

After the second meeting, we asked the arbiter to find in our favor and she agreed. Awesome—we win!

Not so fast…

The arbiter was not willing to find in our favor “with prejudice”. This meant Karen was free to file again with the same complaint in the future—and that’s exactly what she did.

The third time around she did show up with her attorney by her side. This is the first time we found out they were digging for a 1,800,000 Peso (41K USD) payday for wrongful termination.

We Win Again?

We knew a real court case was coming, so we began the process of documenting her position/employment and all communication we’ve had with her via email, Skype, and even our face-to-face meetings. During the course of documenting everything, we realized there there was nearly 127,000 PHP ($3K+ USD) unaccounted for in her possession when she went on leave.

While we had an attorney to help us with documents, filings, etc., we decided to seek out an attorney that has had experiences and cases regarding DOLE complaints and wrongful termination lawsuits.

In laying out our case with him, he felt that our strongest argument was regarding jurisdiction. Because she was an incorporator and held the highest management position in the company, he argued her complaint should actually be filed with the SEC and not DOLE. While we had tons of documentation regarding her intent to quit, her agreeing to our offer to take leave, etc., he felt our best case would be presented arguing jurisdiction as an a priori argument with some of the rest as added documentation.

Our lawyers both presented their cases and were allowed the opportunity to submit a rebuttal once they’d had a chance to review the other side’s argument. After a couple of months the decision was in—we’d won!

The courts agreed with our jurisdiction argument and recommended this was an SEC issue and not a DOLE issue. We knew there was a chance this may be continued, but felt pretty confident about our position and case.



We Lose

A few months later our attorney informed us the case has been sent to the Court of Appeals based out of Cagayan De Oro (CDO). The reason for the change of venue wasn’t clear to us, but our attorney presented the possibility that her attorney had connections there that may help her case.

Throughout all of this, we’d paid our attorney a considerable amount of money to keep up with all of the paperwork filings, court appearances, etc. Knowing Karen had pocketed business cash, that her attorney was free, and that we were paying through the nose was more than frustrating for Joe and I. Thinking we had the deck stacked against us in CDO, we became a bit distrustful of our attorney—could he be in league with the opposition? We went as far as consulting with another attorney that came highly recommended, but he assured us our attorney had an excellent reputation and we were in good hands.

Ultimately, our decision was in the hands of one of three judges at the Court of Appeals in CDO. The judge found in Karen’s favor—we’d lost the case at appeal.

The next step involved us handing over $1.8M to the Court of Appeals in escrow, to be held by them until our appeal with CDO could be determined. This was absolutely unacceptable to us. The fact that our attorney was asking for the cash to be sent to CDO seemed more than fishy at this point. We were pretty confident that any cash we deposited in escrow would undoubtedly be lost, either through legal means or otherwise.

If we lost again, we’d be out the cash and stuck bringing our case to the Supreme Court in the Philippines.

We made another mistake here—we ended all communication with our attorney.

We stopped returning calls from his office. We ignored requests. Unsure as to whether our attorney was in league with Karen’s attorney or not, we simply ignored the situation and continued to grow our business.

As it turns out, our attorney had scored us an opportunity. We didn’t have to put any funds in escrow and another judge was willing to review the case. With this new information, we were back onboard and in communication with our attorney. Unfortunately, we might have waited too long to get in contact—DOLE was ready to turn the screws on us.

Banking Issues

Someone at DOLE didn’t take kindly to the courts reviewing the case. As soon as this happened, they immediately issued and implemented a freeze on our Philippines bank accounts. We typically use our PI bank account for operational expenses only and we got off easy with around 600K PHP ($14K USD) being frozen. That wasn’t the biggest issue. How would we continue to operate without proper banking?

Joe and I were livid. We immediately reversed the latest transfer to the PI account at around 200K PHP and stormed down to the bank, documentation in hand.

It wasn’t pretty—we demanded to speak with the bank manager and showed him documentation of the continued dispute with the courts (and a letter from them stating as much) along with the notarized documents from our accountant showing the “missing” money that Karen had taken from the company.

The bank manager was sympathetic, but said there was nothing he could do. The bank was worried about the pressure from both sides and the bank manager’s superiors told him they could not reverse the decision without a specific recommendation from DOLE. Not good for us—they had already decided to work around the court and put in the order to freeze the account.

How would we be able to pay our staff? Pay our bills?

Paying your staff here requires a bank account where you submit a sort of manual direct deposit into their cash cards. Most of our vendors and services were paid via check.

We couldn’t go through our current bank, as any deposits there would be swallowed up until we reached the $1.8M mark, so we were forced to use other banks, personal wires, and transfers. Our admin staff went into overdrive and had to count out exact payments to each of our staff by hand and down to the last centavo (.01 of 1 peso… or around 1/50 of one penny).

Joe found himself constantly in line at various banks or walking down to the money changers with U.S. dollars and coming back with a small backpack full of cash.

Not good…



Retaliation

We were ready to go nuclear with this, but wanted to check in with our attorney to review options. He wanted to fight this on three fronts:

1. File a criminal case of Estafa against Karen

2. See if we have any friendly hookups in DOLE that could authorize leaving this to the courts (and get our banking back)

3. Expedite our case in the courts (a win would negate the DOLE move/decision)

We filed the case and a bench warrant was issued based on the evidence. The court case was moving along again, but we were stuck with DOLE—they weren’t budging.

There was some leverage—a bench warrant was looming over Karen’s head—but we didn’t have the pull to get anything done about it and the police in Davao are generally more concerned with larger issues than white-collar crime and corporate disputes.

We don’t generally get involved with high-level locals and prefer to fly under the radar, but we do have some friends that are well connected. So we reached out to see if they could help and they put us in contact with a senior (ex) official that had some pull.

We made it very clear we weren’t willing to do anything outside of the legal framework, but asked him plainly if he would be able to help us enforce the bench warrant that had been issued against Karen. He was glad to help us out and, within a couple of days, they’d found her new address and had staked out her place to determine when she’d be home to make an arrest.

I was excited but nervous. We now had leverage and were fighting back. I got the text that they’d been to her house, but she wasn’t there. We think her neighbors informed her what was going on, she contacted her lawyer, and she ended up at the police station to turn herself in. We were in a much better position and knew her attorney would be reaching out soon.

So… we waited.



Settling

Karen’s attorney did reach out shortly after and was looking to settle. She was worried about her criminal court case and her attorney couldn’t convince her to fight both battles.

Still, there was a problem. We were looking at a few months before the judge and court would review our case, and we didn’t know how long it would take after that until this was completed and we had our bank accounts back.

Karen’s attorney had an offer: Drop the criminal case (we couldn’t really drop it, as it was criminal, but would could be less interested in pursuing, of course) and pay a total of 600K pesos, and we’ll have a deal.

Our first thought: F#%$ That.

All the hassle we’d been through was miserable and bad for business, but it was the PRINCIPLE of the issue that really burned us.

She had “misplaced” a significant amount of funds, her lawyer had pulled strings to get our bank account shut down, and we were scrambling to deal with all-cash transactions…now she wants us to pay her money? Absolutely not…

We thought about it for a while, and realized this was getting awfully expensive for us—not just in terms of actual cash frozen in our account, money paid to the lawyer, etc. Our team’s resources were heavily tied up with this and Joe and I were mentally and psychologically drained. Our options:

1. Fight this and continue to deal with the banking/cash issues for 4 – ? months

2. Pay an additional 100K pesos (They wanted 600K, but since we already had 400K frozen and Karen owed us the money from the Estafa case, that was all we had left to pay)

It crushed our spirits, but we agreed to fork over the money. Time to move on—we had to put this behind us.

Through arbitration, several courts, frozen bank accounts, and an arrest, we were finally finishing this up after several years of fighting. We hated the idea that we were settling, but in hindsight, we do feel it was the best decision for our business at the time.



Lessons Learned

1. Make sure your employment paperwork is in order

This can be difficult, especially when you’re just setting up the company/corporation, but it’s worthwhile to go back and clean up employment documentation once you’ve got things up and running. I don’t think this was a make-or-break issue for us here, but we’ve been very careful to ensure all of our employees since then have everything properly documented.

2. You have to trust your attorney

Joe and I don’t put much faith or trust in attorneys. Combine that with the crazy situation we had going on over here and this definitely hurt us. Avoiding our attorney probably gave DOLE enough time to freeze our bank accounts. Had we remained in contact, this is something we could have seen coming and stopped through the courts.

If you’re not completely confident in the attorney you’re working with then find somebody else. But at the end of the day, you have to have some trust that your attorney is representing you to the best of their ability.

3. Business Interests > Personal Pride

As painful and irritating as it was to bite the bullet and settle this, it was the best decision for our business. Joe and I despised the idea of giving Karen any more money. In fact, we’d discussed letting the entire corporation burn (and setting up a new one) just to avoid giving her anything.

At the same time, we realized this would harm our business and our focus much more than the cost of another 100K pesos. We were both feeling emotionally and psychologically drained—keeping up the fight would have cost us heavily in terms of growth and we determined it just wasn’t worth it.

The issue of Business Interests Vs. Personal Pride comes up often as an entrepreneur and in many various forms. It’s really important to weigh both paths and, where possible, choose that which is in the best interests of your business. It helps to keep in mind that you’re working on something bigger than yourself.

Final Thoughts

This wasn’t an easy story to tell. While you probably won’t be setting up a Philippines corporation or dealing with the Department Of Labor and Employment (DOLE) or the other government agencies and jurisdictions here, I do think there’s value in learning from some of the mistakes that we’ve made, whatever country you’re building your business in.

For additional business mistakes and lessons we’ve learned, you can also check out:

Business Lesson 1: Piss Poor Partnerships

Business Lesson 2: In Contracts We Trust

Have you had lawsuits or bench warrants issued (for you or someone else!) as you build your own empire?

Share your experiences below so we can all learn some valuable business lessons.

Photo Credit: Adam Jones