The prudent small business owner should consider how they can minimize their potential liability when dealing with their customers or third parties. The small business owner does not have the benefit of in house legal counsel or high priced outside lawyers to protect its interests so it must be more vigilant when considering the risks it is facing on a daily basis.  The news media has reported that some of the largest Wall Street firms were forced out of business because they assumed too much risk in dealing with third parties. A small business must be just as careful that it does not put its future in jeopardy because of a single sale or transaction which has unforeseen and catastrophic consequences. Lawsuits and claims for “consequential damages” or “punitive damages” will demand many times the value of the transaction in which they occurred. The market risks inherent in starting and operating a small business weigh heavily against the small business owner. Therefore, they should structure their business relationships with suppliers and customers with an eye toward limiting risk from legal claims. Some of the important concerns that the small business should focus on to minimize its risks are discussed below. 

Know your suppliers and vendors

              The first rule for limiting the liability of a small business is “Know your suppliers and vendors”. Every small business is both a buyer and seller. It buys goods or services and then adds value and resells them to its customers. Retailing giant Wal-Mart has been criticized for importing products from China that contain lead or other dangerous substances. In the global economy, small business may have sources of its materials or products that are not subject to product safety or other regulations and create an unacceptable risk to the company. Even reputable suppliers may not always be aware of the conditions under which the products they sell are made. The small business must become aware of the environmental and safety issues relating to the business’s supplies and raw materials in order to identify possible risky sources. Government agencies are a useful source of information.

              Modern legal theory makes every company in the chain of distribution liable to the consumer.  It may not help the small business if one of its customers is injured by a product which the small business purchased elsewhere if the legal principle of “strict liability” is imposed against it. By dealing with reputable suppliers and vendors who are willing to stand behind their products, the small business owner has an important ally in addressing such legal claims.

              Another of the consequences of the global economy is enormous amount of counterfeit goods which have been introduced mainly over the internet. The sourcing of products over the internet is somewhat like “Russian roulette”. The small business who unknowingly  buys counterfeit goods for resale  is subject to federal trademark and copyright laws which are extremely severe in punishing those who  even “innocently “ offer or sell counterfeit or infringing products protected by registered  trademarks  and copyrights. The owner of the trademark or copyright may demand treble damages, statutory fines and attorneys’ fees in the thousands of dollars for a single infringement. The penalties which can be sought against the true counterfeiter are in the tens of thousands of dollars per item. Owners of the major brand names such as Nike^© have invested millions of dollars in marketing their products and do not hesitate to go after anyone who has handled a counterfeit product. The small business owner should always carefully investigate the source of products it is buying for resale and never intentionally buy a knockoff with the intent to resell. Failure to do either one can be disastrous.  

Identify the limits of your liability to your customers

            It has become accepted commercial practice to include a disclaimer and/or limited warranty on products which are sold and distributed in the United States. The content and scope of these disclaimers and limited warranties may be controlled by various federal and state laws and varies according to the nature of the products being sold. The small business owner needs to be aware of what limitations exist on the use of warranties and disclaimers and then take full advantage of them to limit its liability.  Typically, the limitation on liability would be contained on a sales form or invoice. Product warnings are another way for the small business to protect itself. They warn the customer against dangers from misuse. These warnings are often included on the product itself.

            Service providers can also limit their liability by including similar language prominently displayed in the standard service contract or retainer.

Think Defensively

           Imagine that your small business has been sued over something that happened to one of its customers. Imagine how a plaintiff’s attorney would use your own product literature, product claims, sales brochures, training manuals  or any other document, email or communication which was generated by the company against you- because that’s  exactly what could happen. Even service providers, architects, accountants and other licensed professionals are subject to suit for “negligence” based upon a deviation from a recognized standard of care owed to the customer/client. So what is the small business owner to do to keep its liability exposure to a minimum?

            First, minimize expectations. Always initiate the transaction with the customer by being candid.  If the customer has already decided to buy from you, stop selling. Address the customer’s expectations and how you want to “try” to attain them. Every small business may not be able to document the reason for every purchase but purchase orders and invoices should be structured to identify the most important aspects of the transaction, should it become an issue later.   Any invoice used in connection with the sale should clearly identify what was purchased and the basis for the transaction if it is economic to do so in each case. For example:  “The company sold XXX units of tubing as per customer specs.” If the customer asks you to recommend one of your products, you must indicate that the selection was based upon the information that was given and may not be suitable in other cases.  

           Second, incorporate all disclaimers, warranties and limitations into the sales invoice or contract and have the customer initial them specifically.  Plaintiff’s lawyers love to find fault with warranties and disclaimers which are printed in minuscule type or hidden in inconspicuous places and try to make them ineffective when they are needed most.

            Third, make friends with your insurance agent. Find out what type of coverage is available for your particular business. The best agents are those which can help you identify potential liability issues of the small business and provide coverage. Remember the insurance agent is just as interested that your company not files a claim as you are.

Employee proof your business

          By the time that the small business has started hiring employees, it is ready to seriously

address the potential liability that they represent to the small business owner. Employees expose the small business to two types of claims- employment based claims and claims by injured third parties.  An employee manual is the most effective means to limit employment based claims and every small business that has employees should have one. An employee manual need not be lengthy but should focus on what the small business expects from its employees and what it is offering them in return. Typically and unless stated or inferred otherwise, all employees are “at will”, meaning they can be fired at any time for any reason, except for “ discriminatory reasons” related to sex, age or similar limitations arising under federal or state law. An employee manual should also include a sexual harassment policy describing the necessary steps that will be taken if such conduct occurs.

          Employees can also expose the small business to liability to third parties such as customers or members of the public because employees may be considered as “agents” of the small business. The small business owner should define each employee’s duties and what they can and cannot do in their daily routine. A written job description serves as the best way to prevent the employee from overstepping their responsibilities and creating exposure to liability. But even the most exact job description will not eliminate potential liability due to employee negligent or willful bad acts.   

Summary

        The small business must be proactive in trying to minimize its exposure to liability to customers, third parties and even its own employees. It must structure is business so that these Issues are addressed at the start and on an ongoing basis as the business grows and changes.