Things go wrong in business, we know they do, but how can you lessen the impact? How can you limit your legal responsibility, or as lawyers like to say, limit your liability? Is it by using disclaimers?
The best way is always to be proactive. To understand the legislation that applies to you and your business, to ensure compliance, and to have tight, well drafted legal agreements – with disclaimers in place. You may also decide to structure your business in a way that helps you to benefit from limited liability, such as setting up a company.
In Australia, the most important legislation that you should be aware of as a small business is the Australian Consumer Law. When you understand what your obligations are under this law, you can take responsibility when you need to, and avoid responsibility where you don’t. For example, if you didn’t know that it’s not necessary under the law to give refunds when a customer changes their mind, then you may end up losing out. Knowing that a refund is not required means that where a customer does change their mind, you can tell them with confidence, “no refunds”. If you want to give a refund to a customer that changes their mind – to keep customer relations nice and smooth – then that’s great! But if change of mind refunds would send you broke, then that’s fine too, you don’t need to give them.
You should also be aware that if you say you will do something, then you need to deliver. So, for example, an e-commerce store that guarantees their product will arrive before Valentines Day, needs to make sure it does. Or if you guarantee that your product will make someone happy, then you better make sure it does too! If you are a service provider and promise certain results, or promise delivery for a certain time, you need to ensure that you can deliver also.
A great way of looking at legal responsibilities is to look at what is in your control and what is out of your control as a business owner. Somethings are clearly within your control – like the quality of a service you provide, but somethings are outside of our control – when Australia post delivers a parcel for you. Whilst it’s ok to make promises for matters within your control, it is risky to make promises for matters that are outside of your control, and ideally you have disclaimers for those matters.
Well drafted legal agreements with adequate disclaimers will help you limit your liability. For example, well drafted client or customer agreements will set out their obligations clearly; a digital marketer may require various login details of clients, and perhaps some images or copy to enable them to do their work. A coach may require various personal or business information from the client to assist with goal setting. The client legal agreement will then include a disclaimer to limit your liability (your legal responsibility) for things that could go wrong. For example, a digital marketer or may want to set out that an increase in revenue is not guaranteed as a result of a campaign. Or a business coach may wish to set out that an increase in sales is not guaranteed as results are dependent upon the client’s actions. And then their liability will be limited to a refund of the cost of the service, rather than the amount lost where there is no increase in revenue or sales.
Most business relationships such as those with suppliers, manufacturers, contractors, should be formalised with well drafted agreements with limitation of liability clauses or disclaimers. Even relationships with strangers or prospects such as website visitors should be formalised with website terms and conditions including disclaimers. For example, you may not have control of any viruses that may be present online which may cause a loss of someone’s data or other damage as a result of visiting your website. As much as possible (subject to the law) you should include disclaimers.
Well drafted legal agreements will help you allocate risk to the most appropriate parties who have control over the obligation. They will limit your liability for risks, or exclude your liability entirely.
Another way to limit liability is to set up a different business structure, and the most common is the company. A company has limited liability meaning that shareholders are generally not responsible for the company debts, and can limit their personal liability. This is especially useful if you have personal assets such as a family home or investment property.
If you want assistance limiting your responsibility or liability by setting up a company, or arranging well drafted agreements and disclaimers to be put in place, please contact us.