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You may have heard the term liability used in a lot of phrases. It’s a rather common term both in business and everyday life.
Liability often comes up in a range of scenarios, whether it be choosing a business structure or drafting customer contracts. So, what is it?
Liability is essentially a legal responsibility.
Business owners are often exposed to multiple types of liability in the course of their business venture, so let’s take a closer look to better understand the role it plays.
What Is Liability?
Liability is the responsibility you have over something. If something were to go wrong, liability clauses in contracts determine whether it is you or someone else who will be responsible.
For example, who will cover the cost of damages? Who will pay the owed amount?
So, the legal consequences of those actions are known as liability, where the party found to be liable often has to make amends by paying a sum of damages to the aggrieved party.
For example, when a driver gets into a vehicle they have a responsibility to drive safely and make sure they don’t bring harm to their passengers or other drivers on the road. If they do, they could end up paying damages to the people they hurt (and even face criminal charges).
A business is often liable for the health and safety of their customers. Let’s say a customer entering the premises of a business slips and falls on a wet surface. If there was no sign warning the customer of the potential danger, the business is likely to be liable for their injuries (these fall under Work Health and Safety obligations as an employer).
There are ways that a business can limit their liability for certain high-risk business activities – we’ll cover these later.
First, let’s go through the main types of liability you may come across as a business owner.
What Is Product Liability?
Product liability is the responsibility placed largely on the manufacturers of goods to ensure their items don’t bring harm to consumers. Generally, a company will be considered the manufacturer of a good if they:
- Imported the goods from outside of Australia
- Made the item themselves
- Allow others to promote those goods, as the manufacturer
- Claim to be the manufacturer of the products
- Endorse the goods with their brand name
If a claim is to be brought against a manufacturer, then consumers have three years from learning about the defect and no later than 10 years since it was manufactured.
Limited Vs Unlimited Liability
Limited liability and unlimited liability are exactly as the terms suggest.
Unlimited liability is where an individual is completely and even personally responsible for any losses or harm that occurs. An example of this can be seen with sole traders. As their business cannot be considered a legal entity on its own, a sole trader is completely liable for any debts, losses or claims brought against their business.
Limited liability, on the other hand, caps the extent to how much someone can be responsible. Companies often choose to have a limited liability structure as it protects owners from being personally responsible for the business’ debts. If not, all the owners of the company are then equally responsible for any debts or other legal consequences the company may face.
For more information, check out our guide on business structure which goes into depth about how liability works for each one.
What Is A Limited Liability Company?
A limited liability company is a private company that is its own legal entity. Therefore, the company’s debts, legal proceedings and even profits all belong to the company.
This does not mean the owners of the company are free from any responsibility of the company. Rather, it simply restricts how much responsibility they have over what.
Instead of being completely liable, their liability is determined by what they have invested into the company. Therefore, an owner that holds 20% of the company will only be considered liable to that extent.
Can I Limit My Liability?
Yes, liability can be limited in some circumstances. This is usually done through clauses and agreements.
However, it’s important to note that limiting liability does not completely diminish one’s legal responsibility. Furthermore, limitation of liability generally cannot be used when the act in question was illegal or one of total negligence.
In other words, you can limit your liability to a certain extent, but if it is considered illegal or negligent, it will not be upheld under the law and you will still be liable.
What Is A Disclaimer?
Disclaimers are a type of ‘written warning’ to consumers, informing them about what the business can and cannot be responsible for.
A disclaimer should be clear and easy to read, and placed where consumers can locate it without strain. For example, a company that sells skateboards can place a disclaimer stating they are not responsible for any injuries that result from skating.
It’s important to remember that disclaimers have to be within reason. If the same company that sells skateboards manufactured and sold a faulty skateboard that resulted in a customer injuring themselves, it is unlikely their disclaimer would hold up.
This is because selling faulty items is a direct breach of the Australian Consumer Law. The consumer is entitled to request a refund or exchange of that item.
Are Email Disclaimers Legally Binding?
Disclaimers aren’t limited to physical products, though. Businesses who send out emails with important information may attach email disclaimers to those emails to limit their liability in case someone else uses that information for another purpose.
In other words, an email disclaimer informs the reader that the content of that email is intended for the recipient only. So, the business claims they will not be liable if that information is given to an unauthorised third party or used incorrectly for another purpose.
How To Write Terms And Conditions
Terms and conditions can also aid in limiting liability.
Terms and conditions can give your business control over how the site operates, what is allowed and what is not acceptable. For example, terms and conditions can prevent others from posting certain types of content on the website, giving you the power to remove certain content or users that could be upsetting the community.
Otherwise, you may find yourself answering for what is on your website and potentially liable for the aftermath.
So, your terms and conditions can explicitly limit your liability or responsibility for anything that might go wrong when users visit your site and engage with your business using that platform.
Do I Need A Limitation Of Liability Clause?
Like we mentioned before, you can insert certain clauses in your business contracts which limit your business’ liability or legal responsibility for certain activities.
A limitation of liability clause places a cap on the amount of damages that can result from a liability claim. Therefore, if your business is found to have caused harm to a consumer, there’s only so much damage the consumer can claim.
A limitation of liability clause can ensure your business doesn’t shut down completely after one claim. For extra protection, you can also look into Exclusion Clauses.
What Is Employers’ Liability?
As an employer, if one of your employees does something wrong and it leads to the harm of another, then you could be held liable for it. This is known as vicarious liability or employer’s liability.
Vicarious liability does not apply automatically in all situations. Instead, courts will generally assess whether an employee acted of their own accord or whether they were following orders.
Therefore, while you may not be held personally responsible for every mistake your employees make, it’s better to avoid such situations altogether. Ensure your workplace policies reflect the roles and responsibilities of each employee and you have the right legal agreements (such as a Confidentiality Agreement) to ensure further protection.
Essentially, while you cannot directly control the actions of your employees, you can still take steps to regulate their conduct in the workplace and monitor their behaviour so that it is compliant with the relevant laws.
At times, despite your best efforts, things can still go wrong. In this case, it can help to have insurance coverage. There are multiple types of insurance coverage you could look into as a business owner, however, public liability insurance is common for employers
Insurance can be a useful safety net when your business is found to be liable for damages.
Will Liability Make My Contracts Unfair?
Liability clauses should always be within reason. The purpose of liability is not to put anyone at a disadvantage. Rather, its aim is to ensure that if something goes wrong, there is a remedy to rectify the situation.
While liability clauses work to protect businesses in high-risk activities, it’s important to balance this with the consumer’s interests, too. So, it should not breach any unfair contract term laws.
Unfair Contract Terms
If a liability clause is not reasonable and disadvantages a party in any way, it is likely to be considered an unfair contract term.
A contractual term is likely to be considered unfair where:
- It causes a significant imbalance in the rights and obligations of both parties to the contract
- It is reasonably considered unnecessary to protect the interests of the party that is receiving the advantage
- It causes detriment
The Australian Competition and Consumer Commission (ACCC) clearly states that unfair contract terms are a breach of Australian regulations. So, in such a case, the clause (and perhaps the entire contract) could be rendered invalid.
It’s always worth consulting a professional contract lawyer when drafting these types of clauses so that you can rest assured that they will stand in court and your contracts remain valid.
Key Takeaways
As a business owner, you’ll be engaging in various tasks and activities for your business venture. As such, you want to ensure your contracts protect you from any key risks.
Liability clauses are a great and effective way to do this, but only where they’re done right and legally.
To summarise what we’ve discussed:
- Liability is the legal responsibility on party has towards another
- Product liability is mostly for manufacturers that need to ensure their products don’t cause consumers harm
- Unlimited liability is where a person has full responsibility if something goes wrong
- Limited liability restricts how much someone can be liable
- A limited liability company is a legal entity on its own, where the owners are only responsible for what they have invested into the company
- Liability can be limited through legal documents such as disclaimers, terms and conditions or a limitation of liability clause
- Employer’s liability is the responsibility employers may have on behalf of their employees’ conduct
- Liability must always be fair and reasonable or else and it can constitute an unfair contract term
If you would like a consultation on liability, you can reach us at 1800 730 617 or team@sprintlaw.com.au for a free, no-obligations chat.
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