The cost of bringing or defending a legal action can put serious financial pressure on your business, whether you eventually win the case or not. You might face legal action from an employee, customer, supplier or member of the public, or need legal help to resolve a dispute with a body such as HM Revenue & Customs (HMRC).
Simple steps can reduce the likelihood that you will get involved in legal action. The right insurance can help protect you if you do need to bring or defend a claim.
1. When your business is sued
If your business does anything that causes loss or damage to someone, it can be sued.
Contractual disputes are the main cause of legal action
- You may refuse to pay for goods or services, perhaps because they were faulty, but the supplier sues for payment. For example, a tenant might withhold rent (eg until the premises have been properly maintained) and the landlord sues.
- You may breach a contract by failing to supply goods or services as agreed, and the customer sues. A business may be able to sue you for its loss of profits, as well as for the cost of correcting the original problem.
Employment disputes are another major cause of litigation
- Wrongful and unfair dismissal are the most common types of claim, followed by discrimination.
- Injury claims can vary from broken bones caused by an accident to issues such as repetitive strain injury.
You may face public liability or product liability claims
These are most likely to arise when:
- A member of the public suffers an injury while on your premises, an injury caused by goods you have supplied, or financial loss as a result of advice you have given. 'The public' includes everybody except your employees.
- You supply faulty goods or a poor service.
Shareholders and investors can sue you for breach of fiduciary duty
- The Companies Acts put a wide range of responsibilities on directors. They include more than 200 offences for which a director can be held personally liable.
- The personal liabilities of a director are unlimited, whereas your company has limited liability.
- Typically, directors are jointly liable, so you could be sued personally for the losses resulting from the actions of another director.
Insolvency can lead to litigation
- The Official Receiver and liquidators may review all the transactions of a business that has ceased to trade (on behalf of the creditors).
- If there is evidence of wrongdoing, you, as a company director, could be sued personally.
If your business is sued, you may face significant costs
- Although the majority of cases are dropped or settled out of court, you will have to pay for ongoing legal advice until the dispute is settled.
- In some cases, costs can turn out to be substantial. And even if you win a case, there is no guarantee that your costs will be paid. The judge may order both parties (the claimant and the defendant) to pay their own costs.
2. Legal action by official bodies against businesses
Some government organisations have a duty to bring cases against businesses that break the law.
HMRC is particularly active
- The average settlement of a business tax investigation is about £5,000 (including tax, interest and penalties). Accountancy and legal fees can add significantly to these costs.
The Health & Safety Executive makes more than 1,000 successful prosecutions a year
- About 5,500 businesses are served improvement notices or prevented from operating by prohibition notices.
Trading Standards prosecutes several thousand businesses each year
- The most common prosecution is for false descriptions. For example, when a business misleads a customer about the quantity, quality or price of a product.
Companies House prosecutes more than 1,600 directors each year
- Directors can be prosecuted for failing to submit accounts and returns on time.
Various environmental authorities prosecute businesses that pollute
- This can include noise pollution.
If your business suffers loss or damage as a result of somebody else's actions, you may need to consider legal action. If you are considering this, seek legal advice immediately.
Debt recovery is the most common reason for suing
- Often there is no contractual dispute. The customer simply refuses to pay or is unable to pay.
- If you sue and in the meantime the debtor goes bankrupt or into liquidation, you will probably end up paying your own legal costs, adding to what you have lost.
Contractual disputes can become extremely complicated
- When they refuse to pay, some customers may claim that you have not fulfilled the contract in some way.
- If your business suffers as a result of the failure of another company to meet its contractual obligations, taking legal action may be the only option.
You may need to appeal against your local authority or other regulatory bodies
- Trade licensing and property regulations are common problem areas. For example, a nightclub could be closed down for breaking any one of dozens of regulations, or a business could be crippled by something as simple as new parking restrictions.
The list of possible problems which could end up in litigation is endless
- It could be something as mundane as trying to stop a neighbour dumping rubbish outside your premises.
4. Reducing the risks of legal action against your business
Even if you win, the time, stress and disruption involved in litigation can outweigh any financial gains. So a key objective for most businesses is to avoid being drawn into litigation in the first place.
Obtain legal advice before signing or issuing contracts
- Draw up a standard set of terms and conditions for sales contracts, and another set for purchase contracts. Any sale or purchase should be made "subject to terms and conditions".
- This avoids the need to seek legal advice on everyday transactions.
Communicate to all employees what your key policies are
- For example, train all employees who manage, recruit, assess, discipline or dismiss other employees. They need to understand the basic dos and don'ts of employment law.
Be aware of any legislation which specifically affects your business
- The authorities concerned can tell you what the common problem areas are and how to stay within the law.
- Your trade organisation can usually tell you about new legislation affecting your industry.
5. Buying legal insurance for your business
You can protect against specific types of legal action by buying the right insurance. For example, public liability insurance covers not only the legal expenses of a public liability case, but also any damages awarded against you.
More general cover can be obtained through legal expenses insurance
- This may be included as part of a business insurance package.
- The scope of cover offered by legal expenses policies varies.
The policy will set out which types of legal action are covered
Most policies include cover for:
- Employment claims.
- Disputes with HMRC (including appeals). The accountancy costs you incur may also be covered.
- Claims made against a director for failing in his or her duties. Most policies cover a broad range of legal actions, subject to certain conditions and exclusions.
Legal expenses insurance is designed to protect your business should a dispute arise
- Typically this means defending against a legal action and any related costs - such as court fees and legal advice.
Many policies also cover the costs if you instigate legal action
- claims made against suppliers or customers for breach of contract
- claims made against former employees for breach of a restrictive covenant (eg to prevent them poaching your clients)
- prosecution of vandals who damage your property
Standard cover usually includes most costs
- For example, the costs, within limits, of employing solicitors (usually appointed by the insurer), barristers and expert witnesses, plus court costs and related professional fees.
- In civil cases, your policy should also cover your opponent's legal costs if they are awarded against you.
- Some awards made against you may also be covered (eg awards made by an employment tribunal).
Most policies offer extras
- Helplines, for free initial advice on legal problems. The helpline may or may not be restricted to the types of legal action covered by the policy.
- Free documents and reports. For example, manuals to help you draw up employment contracts and avoid common employment law pitfalls.
Check the policy details
- How much excess you must pay towards each claim.
- The limit on the amount of cover. The legal costs for an expensive legal liability claim (or series of claims arising from a single incident) can exceed £1 million.
Seek advice from an insurance professional, such as a broker
- find you the right cover for the lowest price
- explain the extent of the cover and the terms and conditions that apply
Check if there are any special insurance packages on offer
- For example, through your trade association.
6. Legal policy exclusions
Most legal expenses policies impose conditions and exclusions. Check the wording of your policy carefully to make sure you have the cover you need.
You may be unable to make any claims during an initial period
- For example, no claims within the first 30 days of the policy, or 180 days if the case covers an employee who was already subject to disciplinary proceedings when the policy was taken out.
You might be required to call the helpline in some circumstances
- For example, before pursuing any action that could be subject to a claim. This is particularly important before dismissing employees.
There may be an excess for disputes covering the sale or purchase of goods or services
- You will not be covered for claims below the excess amount.
You may not be covered in certain situations
- where there is no reasonable prospect of success
- where the action does not relate to normal business activities
- for fines or other penalties you are ordered to pay by a criminal court
- for any prosecution alleging dishonesty or intentional violence
- for motoring prosecutions
- for the defence of professional negligence claims (see Failing in your duty)
Failing in your duty
Anyone who gives professional advice should consider insurance to protect against legal action.
Almost half of all small businesses have professional indemnity insurance
- Professional indemnity insurance protects you from claims that you have not taken reasonable care when advising someone, who then suffers a loss as a result.
- Typically the third party is a client or customer, to whom you have a duty of care.
- Many types of professional adviser (eg accountants) cannot be members of their professional bodies without this cover.
- The insurance covers legal costs and any damages awarded against you.
Limited companies should consider purchasing directors' and officers' liability insurance
- This provides cover for those running the company, if they are sued.
- Directors, or others who control a company, can be held personally liable for losses suffered as a result of insufficient skill and care in managing the company.