All small business owners engage in some form of risk prevention in the operation of their business. They create various forms of legal entities to protect their personal assets from business liabilities. They purchase various forms of property, casualty and liability insurance to protect their business assets in the event of a claim. However, contracts are sometimes an overlooked component to a business’s overall risk management plan. All businesses do, or should, utilize contracts while providing goods or services to its customers.
While contracts can be very complicated and lengthy, simple contractual terms and conditions can be utilized as a risk prevention tool with a business’s purchase orders, proposals, invoices or similar documentation provided to your customer when you sell goods or services. The following are several key components typically included in contractual terms and conditions that, if properly crafted, can supplement your business’s risk management plan:
Warranty. A provision as to the duration and extent of the warranty for the goods and services being provided to the customer is a common contractual term and condition. For example, a service provider may want to provide a limited warranty to its customer for a period of one (1) year to the extent defects arise in the work provided. Similarly, a goods manufacturer may want to disclaim all warranties with regard to merchantability or fitness for a particular purpose which are otherwise implied by the Uniform Commercial Code. Without these warranty disclaimers or language limiting the length of the warranty, your business could be subject to warranty claims for many years.
Indemnification. Ideally, you want to receive indemnification from your customer as to any potential claims that may arise due to their negligence or intentional acts with regard to the performance of the contract. A carefully worded indemnification clause can provide you with that protection. Business owners should be particularly wary when reviewing indemnification clauses provided by customers, suppliers or other subcontractors as most boiler plate indemnification clauses provide for very broad indemnification rights. Many indemnification clauses may obligate your business to wholly indemnify your customer from any claim that arises from your negligence, even if the customer, or other third parties, are also negligent in causing the claim. A careful review of, and potential revisions to, indemnification clauses can be very beneficial in preventing future claims and limiting unknown risks.
Limitation of Liability.
A limitation of liability clause in your contractual terms and conditions can be one of the most important risk prevention tools. Typically, a limitation of liability clause will prevent a customer from making claims against your business for certain damages, including, but not limited to, consequential damages, lost profits and incidental damages. For example, your business may be providing services to a manufacturer, and your employee negligently causes an accident on the job causing your customer’s facility to shut down for hours, or even days. A properly worded limitation of liability clause may prevent a customer from making a claim for lost profits or other individual damages due to its operations being shut down. As you can imagine, damages such as lost profits can multiply quickly, making this clause a very important risk prevention tool.
Confidentiality. To the extent your customer, supplier or subcontractor will have access to information you deem confidential, a confidentiality clause can avoid that information becoming public or otherwise available to a competitor, causing harm to your business. Many times, confidential items such as customer lists, production methods, processes, techniques or ingredient lists must be provided to your customers or third parties to facilitate contractual obligations. A properly worded confidentiality clause can ensure that your customer is only utilizing that confidential information for the project or contract they are preforming and the information will not be utilized for other purposes or provided to the public, mainly your competitors. Also, to the extent you provide any intellectual property to your customers, the contractual terms and conditions can ensure that you retain ownership of that intellectual property and that it cannot be utilized by your customer on other projects going forward.
Business owners many times overlook the importance of having even simple terms and conditions with their purchase orders, invoices or proposals to protect themselves from uncertain risk. Reviewing contractual terms and conditions provided by third parties is an important risk prevention tool. By utilizing the concepts above, business owners can easily add value to their risk management plan.
