Introduction: Why Legal Risk Matters for Businesses?
In a world where everyone is looking to get rich by suing businesses, it is no surprise that you often wonder how to protect your business from lawsuits. Ideally, you need to be very diligent in building the legal foundations of your vision. Lawsuits can cripple a business by draining resources in fighting them and also damaging reputations since the public always sides with the individual rather than a business.
But the Good News? Majority of legal risks can easily be mitigated with proactive planning.
Key Takeaways from this Article:
- Lawsuits can arise from contract breaches, employment disputes, negligence on the part of the business and any regulatory compliance failures.
- Strong contracts, robust employment and data-privacy policies, and a good understanding of compliance measures can greatly minimize legal exposure.
- You have to be “Proactive” rather than being “Reactive”; regular audits of legal and business alongwith proactive risk management are essential.
Why This Topic Matters?
Many small business owners think that they are “too small” to have a case against them. This is a big mistake. As per Coalition’s 2022 executive risks report, upto 37% of small business faced some or the other form of litigation in any given year in North America. And this number has risen significantly in the past few years as well, specially in the cybersecurity and data privacy sphere. The costs of legal defence can often reach tens or hundreds of thousands of dollars.
If you are a small business, will you be able to handle such costs and resource depletion?
Enough history. Let’s break down the issues.
Breaking Down the Key Risks (And How to Avoid Them)
1. Contracts and Agreements: Perhaps the biggest source of litigation for any form of business are poorly drafted Contracts & Agreements.
Risks: Unclear contracts or poorly drafted agreements that are vague and do not provide enough protections, which can lead to major oversights.
Solution: You are focused on building and scaling your business, and clearly do not have the time to become a contracts expert. So, you must ensure that whatever contracts you do draft are legally sound, are reviewed by someone who is an expert in contracts, contain clearly drafted clauses that precisely outline obligations and terms, and has a prudent dispute resolution mechanisms so as to avoid heft litigation costs.
People have also started using a Smart Contract to ensure automatic obligations.
Checklist:
- Use written agreements for all business dealings.
- Include dispute resolution clauses to avoid outright litigation.
- Update contracts regularly in light of current laws.
- Ensure the obligations are precisely outlined, without any vagueness.
2. Employment and HR Policies: While employees can be the backbone of your businesses, lawsuits by employees can also result in massive reputational damage and hefty litigation costs.
Risks: Wrongful termination, discrimination on various grounds, or simply a wage dispute can result in employee lawsuits. And remember, courts prefer to view an employee in a brighter light as compared to a business.
Solution: Ensure that you have clear employment policies for every little thing, employment contracts are well drafted and follow the above checklist, and ensure that all of your policies are compliant with the current labor laws. Make sure everything regarding employment in your business is clearly written down, so no employee, during a dispute, can come back and point out faults in your contracts or policies.
Checklist:
- Provide employees with a handbook outlining policies, and take steps to ensure they are aware of them. This can be done by taking their acknowledgment that they have read and understood the handbook.
- Conduct regular HR training on workplace rights – you do not want to be accused of not informing your employees of their rights and taking advantage of them.
- As an employer and a business owner, you should ensure that you implement fair hiring, termination and anti – discrimination practices.
3. Regulatory and Compliance Issues: Litigation is not the only risk you are facing. Not complying with the laws laid down by regulatory bodies can lead to big fines and penalties and can even result in legal action against you by the government.
Risk: Failing to comply with various industry regulations can result in fines and legal action or both. For eg, if you are a business in the food industry, you have to comply with various food regulations.
Solution: No other solution but stay updated on various regulatory changes and ensure you are complying.
Checklist:
- Conduct regular legal and compliance audits.
- Constantly train employees on industry-specific regulations.
- Keep proper records of all the compliance measures. Detail everything.
Summary
- Maintain strong HR policies and provide training.
- Conduct regular compliance audits.
- Protec
- your intellectual property.
- Ensure accurate advertising and product safety measures.
- Carry business liability insurance.
- Consult with a legal expert regularly.
So, What Should You Do Now?
The biggest threat to a business are lawsuits, but all these legal risks are quite preventable as long as you have the right stratergic approach. Being proactive in revieweing contracts, ensuring complaince and essentially staying legally informed as it pertains to your industry, you can easily protect your business from costly fines, penalties and litigation.
Following is a great introduction video: