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Benefits of Contracts in Managing Your Liability and the Liability of Subcontractors

Benefits of Contracts in Managing Your Liability and the Liability of Subcontractors

Joint Efforts Can Lead to Joint Liability

In our interconnected world, companies work with other companies to receive and deliver products and services. Such relationships are generally productive and mutually beneficial. However, in the unfortunate event a third party suffers harm or losses associated with these collaborative efforts, liability issues can become complicated. In such cases, the legal system supports recovery from all parties deemed responsible to compensate the plaintiff.

While legal arguments and theories vary, two common threads exist:

1. If you can be connected to damage or injury, you may be held legally accountable. You would therefore need to defend yourself, oftentimes at great expense in time, money, and reputational harm.

2. If you can be connected to damage or injury and you are found partially or fully liable, you will pay damages. You may be forced to pay based upon either the amount you should pay or the amount you can pay.

Once you are subject to a claim or lawsuit, all you can do is fight to limit your level of involvement in the matter.

The Price of Legal Disputes

Fighting to protect your reputation is costly, and it can take years to recover from the harm that often results from such conflicts. With the global reach and the viral spread of messaging by social media, negative exposure can run deep and wide. The financial toll quickly escalates and drains money that you could otherwise invest into new equipment, employee training, hiring, and rewarding the people that make your business great. Last, but certainly not least, litigation is a distraction from the very activities and decisions that move your company forward operationally and strategically.

The old adage “pennywise and pound foolish” is applicable when it comes to managing and controlling your risk of liability. By implementing a contractual strategy to govern relationships with third-party subcontractors, businesses take meaningful steps to safeguard against the potentially devastating expenses associated with lawsuits.

How a Contract Can Help

It is common in the forest products industry—as in many industries—to engage subcontractors, vendors, and suppliers in the course of business. These external resources provide skills, products, or services ranging from procuring hard materials and drying timber to day-to-day tasks such as welding, electrical work, sprinkler system management, cleaning services, and construction.

Most often, you rely upon them to approach their work in a professional, timely, and cost-effective way. You do not expect to control the who, what, when, where, why, and how of their service delivery. Yet, without a written agreement, you can be held legally responsible for their activities. Implementing contracts with entities outside of your company is an easy way to safeguard against being legally pursued for the acts of a subcontractor, vendor, supplier, or buyer.

A contract lets you define certain responsibilities and assign them to specific parties. As such, businesses and individuals with whom your company works commit—by the terms of the contract—to protect you from liability for any damages that may result from their business practices. In addition to formally agreeing to be held accountable, they warrant that they have the capital (insurance, bond, etc.) to back up that promise.

One of the easiest things you can do to protect your company, owners, and employees is to implement and strictly adhere to a strong contractual strategy governing your business’ relationships with other entities. Simply put, you take responsibility for what you can control and require they do the same.

How Your Business Can Benefit from Contracts

There are several ways in which contracts can serve your company’s interests, such as:

1. Protecting your assets. The more you have, the more plaintiffs and their counsel will target you to contribute to a plaintiff’s compensation for total monetary damages.

2. Protecting your business. Lawsuits can bankrupt your company coffers, damage your professional reputation, and interfere with your day-to-day operations.

3. Saving you money. Claims and litigation are not cheap. They can be costly to you in the form of out-of-pocket expenses, insurance deductibles, interruptions in time and production, lost sales, lost employees, lost suppliers, and lost customers. In the longer term, they negatively impact your profits and growth potential. Claims and litigation will drive up your insurance costs and may even limit your access to attractive insurance options.

Investment in Minimizing Your Liability

Making operational changes to limit your business’ legal vulnerabilities can be simple. However, these measures may require you to spend money and effort up front, as is the case when hiring consultants, lawyers, or advisors. You can look upon these expenses as investments in your company’s strategy to reduce or eliminate the catastrophic effects of the unthinkable. Consider the costs to manage now versus the money you may be legally mandated to pay later.

As with any business decision, you should always perform a cost-benefit analysis that considers the factors of money, time, and impact on business operations. Determining how you will interact with subcontractors and vendors is certainly no exception.

There are also some accessible and low/no cost resources that can help you navigate this process. Lawyers are always an option along the way and certainly offer expertise in reviewing and writing contracts and procedures that can be implemented specifically for your needs. However, you can also take some easy steps that do not cost money and take very little time. Consider asking questions of your peers at trade shows and industry events or discussing the topic with your insurance agent, insurance broker, and insurance company. All these resources will have experience and advice on relevant trends and patterns that are emerging in the areas of contract language and broader legal liabilities.

The bottom line is, when you implement procedures—such as contracts—to diminish the likelihood your business will be sued, it is important to seek consultation from professionals with suitable expertise. The counsel of an attorney, for example, is advisable when you draft contracts that govern your relationships with outside entities.

Other Key Resources for Avoiding or Limiting the Impact of Litigation

In addition to securing appropriate contracts, three resources can be most effective in helping your business manage the threat of lawsuits.

● Risk Management is your first line of defense against exposure to liability. Skillful monitoring of safety practices, regulatory compliance standards, and delivery of contracted goods and services can help. By identifying and addressing such areas of concern, you reduce the likelihood that your business will face the woes of the courtroom, not to mention the tragedy of harm befalling an employee or client.

While many business risks are common across industries, mitigating risks that are specific to wood products enterprises may require guidance by Risk Management experts familiar with the field.

● Trade Associations, or any individuals or organizations that specialize in supporting the unique needs of your industry, can also offer helpful guidance. Your trade association(s) exist to further the interests of the industry and its members. They will offer a broader view on the legal issues at stake and on common practices throughout the industry.

● Insurance may offer protection when Risk Management is not enough or didn’t work as planned. Having adequate and appropriate coverage is critical in the event you are ultimately held responsible for compensating a plaintiff.

Empowering Wood Products Businesses with Industry Insights

Finally, there are specialists that are immersed every day in the forest products world and have valuable perspectives on developments in the industry, adoption of new technologies, legal cases in the field, and the consequences of having contracts, or not having contracts, in forest products businesses.

Immersed every day in the forest products world, Continental Underwriters, Inc., is a specialist providing risk assessment advice and insurance solutions nationally for the forest products industry. We guide our clients as they make choices about safety issues, procedures, equipment modifications, and insurance options. Our approach is to develop well-rounded and practical solutions to help our clients manage the risks their businesses face.

It is with our clients’ interests in mind that we encourage them to use written agreements in their relationships with subcontractors. For all businesses, the best time to put contracts into effect is before the dreaded specter of a lawsuit becomes a reality.

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