Liability & indemnity

Damage limitation: Protecting your interests in business disputes

There are various ways that a business can implement ways of damage limitation in the event of a dispute, whether this is limiting its liability, restricting its financial exposure or protecting their sensitive or commercially important information.

Prevention is better than cure

Firstly being correctly established as a limited company goes some way to protecting the owners personally if things go wrong. Ensuring the business is a corporate entity means it can sue and be sued in its own name, rather than as you as an individual.

It is always important to have proper and relevant contracts in place with your staff, co-founders, suppliers and customers. These should clearly set out the duties and responsibilities of each party. The saying ?prevention is better than cure? is never so relevant than trying to limit your businesses exposure in the event of a dispute.

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It seems to have come as quite a shock to people that you don?t have to play fair when negotiating a contract.

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Whilst it may be easier said than done it is important to consider early whether there are processes and procedures you can implement in your business, and in any commercial relationship, which may limit your exposure to a dispute and making the likelihood of a dispute lower.

Methods might include not disclosing sensitive or commercially important information to everyone, having clearly defined structure as to who can access this information and anyone who does have access entering into a properly drafted non-disclosure agreement or strict confidentially clauses.

You should consider at the outset of all commercial relationships what would happen in the event of a dispute. Good alternative dispute resolution clauses may minimise the costs of legally dealing with a dispute.

It is also important to consider at what stage any asset or title in any goods pass under an agreement, for example with a website you should consider whether there is a need to put the source code in escrow to protect it from being held to ransom in the event of a dispute.

It is important to have on hand trusted advisors who know and understand your business and who can respond swiftly and effectively at the outset of a dispute. Retaining good advice at an early stage is crucial. Any and all actions will be scrutinised if the matter ends up in Court. It is important to show you have been as reasonable as possible in the circumstances.

Limiting your liability

Most commercial contracts will include a clause, sensibly titled, ?Limitation on liability?. This would typically place a maximum cap of financial exposure that the business may owe to the other contracting party, this cap may be based on the value of the deal or an annual subscription or amount paid in fees or another amount.

Further, consider whether you should include an indemnity but be wary if one is being sought of you. An indemnification or indemnity clause is effectively a contractual transfer of risk between the two parties. Its purpose generally is to prevent loss or compensate for a loss which may occur as a result of a specified event. When the contract includes an indemnity clause it is similar to ?I?ll give you some protection? clause.

It makes the party giving the indemnity responsible to pay the other party back if they do wrong which causes harm or damage. An indemnity usually kicks in when there is a third party involved but you can also have ?hold harmless? clauses which protect the party themselves.

You should also consider whether you want to contractually force the other party to take out insurance to cover you if there is a specific breach, you might even ask to be named on the policy so you can claim directly.

It is also important that you consider your insurances carefully to limit your exposure to damage in the event of a dispute, you should ask your insurance company whether they want a copy of your terms and conditions or relevant contracts and ensure you check the fine print to ensure that you comply with your policy.

You should also ensure all your contracts have properly drafted confidentiality clauses to give the business some form of general protection by limiting the amount of information reaching a wider audience.

Dealing with the aftermath

Other ways in which a business can limit its exposure may be from a public relations or marketing perspective. This is particularly important where the dispute is likely to reflect badly on the company, such as breaching data protection rules or discrimination or unreasonable conduct.

Conclusion

It is important that you carefully consider your business’s risk in respect of a dispute from the outset, and long before any dispute. Have in place properly drafted agreements that accurately reflect what has been agreed and if a dispute does surface, act quickly. Do not ignore the problem and hope it will go away but act reasonably and sensibly in an effort to resolve it.

Karen Holden is the founder of A City Law Firm

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