Nobody goes into business expecting things to go wrong, but every business owner knows, sometimes, they will. When mistakes happen, and a client is involved, the hope would be that any issues could be resolved amicably. Unfortunately, this isn’t always the case, and businesses find themselves being sued.
This is a situation no business owner wants to find themselves in. Being sued is time-consuming, expensive, and stressful. It can lead to financial losses for your company that means it’s no longer able to operate or reputational damage that significantly impacts your chances of success.
While no business can completely avoid the risks of being sued, because no business can ever completely avoid things going wrong, there are steps you can take to protect yourself and your company.
Many first-time business owners set themselves up as sole traders because it’s the simplest and quickest way to start trading. As a sole trader, however, you have unlimited liability which means if your business has debts, they become your debts, and if your business gets sued, you get sued, putting your personal assets at risk.
You can protect yourself by setting up as a limited company or limited liability partnership (LLP). Both of these offer legal protection as they separate your personal assets from those of your business. With a limited company or LLP, you will need to register with Companies House, have named directors, and put in place legally binding agreements with shareholders.
Not only are your assets protected through a limited company, but there are also financial benefits as you would be eligible for a wider range of tax allowances and deductions, which can be claimed against any profits.
Taking out business insurance is one of the best ways to protect your business if you are sued. Every company with at least one employee is required by law to take out Employers’ Liabilities insurance, which you can claim against if staff are ill or injured at work. You might also want to consider:
- Public liability insurance: Covers you for accidental injury to members of the public or clients and damage to their property which happens as a result of your work.
- Professional indemnity insurance: Covers you for claims made by clients for mistakes made during the course of your work which results in financial loss, data loss, confidentiality breaches, personal injury, property damage and reputational damage.
- Product Liability insurance: Covers you for accidental injury or property damage as a result of products you have manufactured, sold, installed or maintained.
- Directors and Officers insurance: Covers you for decisions and actions taken during the course of your work.
Other insurance is available depending on your business and the level of risk. You might want to take out tax investigation insurance, for example, which will cover the costs of an audit by HMRC or intellectual property insurance if you are creating new products and services. Not all of these, however, will protect you if you are sued.
You can protect yourself and your business by putting in place clearly written contracts of employment and contracts of work. Contracts of employment should state the rights of each employee and your responsibilities as an employer. Contracts of work should state what work will be carried out when it will be completed, and the standard to which it will be done.
Make sure all parties sign and agree to the contract. It is no good sending a contract of work to a client, for example, if they don’t return it saying they agree.
Every business needs to operate in line with government legislation. Depending on your business this may include health and safety, consumer safety and the companies and insolvency acts. If you don’t abide by regulations as laid down by the UK government, you could be liable for legal action or find yourself being sued by clients or employees.
The UK government website and Companies Act outlines the legislation you must follow as a business owner. If you are unsure about any element, it is a good idea to take legal advice rather than risking breaking legislation.
What to do if you are sued
If you are unable to come to a resolution with a customer or client and find you are being sued, you need to act quickly. As soon as you are served papers, you should:
1. Seek legal advice
Depending on the size of your company, you may have an in house legal team, or you may need to find a solicitor to advise you on what you need to do next.
If you have directors and officers who are named as defendants separately, you may each have to get your own legal advice. If you can’t afford a solicitor, Citizens Advice may be able to help you.
2. Decide how to respond
Your solicitor will advise you on how to respond to the claim. This may include making an offer to settle, admitting liability or defending the claim. Your offer could be what is known as a Part 36 or compromise offer, where you pay a percentage of the total claim.
It may be worth considering this even if the claimant has a weak case because of the time, potential costs and reputational damage defending the claim might lead to.
If you decide to defend your claim and win, you will probably be able to recoup all your court costs. However, if you lose, you will likely be liable for yours and the claimant’s court costs.