Legal, Management

Product liability and start-ups: How to protect yourself

StartupSmart /

Earlier this year, the team at LegalVision gave us some helpful tips on the legal basics of starting a new business.

 

Since then we’ve been looking at legal matters that can arise for a new business once it’s up and running.

 

Here, Lachlan McKnight, chief executive of LegalVision, offers some advice on product liability and how to protect yourself.

 

If you’re a start-up or small business that sells products to the public, you need to make sure you comply with the law relating to product liability.

 

Product liability is an area of the law that covers manufacturers, distributors and retailers, so it’s likely that you’ll have to deal with it at some point.

 

This article gives an overview of the issue and provides some ideas on how to protect your business. It’s important that you work with a lawyer to protect yourself to the fullest extent possible under the law.

 

How does the law work?

 

Australian consumers are protected by the Competition and Consumer Act 2010 (formerly the Trade Practices Act 1974). Parts 3 to 5 of the Australian Consumer Law provide particular protection in relation to product liability.

 

Without going into too much detail, the provisions set out in this legislation allow consumers who have been adversely affected by poor products which they’ve purchased to seek either compensation or damages from a range of parties. These parties include distributors, manufacturers and retailers.

 

Consumers can generally only claim damages or compensation for personal injury or losses caused by a product.

 

If your business is manufacturing or distributing unsafe products, it will be liable, in particular if the products in question are unsafe or do not comply with Australian safety standards.

 

If you’re selling goods which have been manufactured overseas (for instance in China), and it’s unlikely that any enforcement action against the manufacturer will be enforceable, then your business can be held liable for any personal loss or injury caused by the product.

 

Tips on protecting your business

 

Obviously the best way to protect your business is not to sell faulty products, but it’s not always easy to determine if the products are faulty, particularly if you’re just a distributor or retailer. Set out below are a number of tips that can help minimise your risk:

 

Keep Records: One of your customers could sustain an injury many years after the purchase of a product. It’s therefore vital that you keep clear and up-to-date records of every sale. You will therefore be in possession of the information needed to defend yourself if a claim is made.

 

Packaging: Make sure that your packaging clearly states who the product is designed for, and who it isn’t designed for. An example would be toys that state they should not be used by children under three years old. This will reduce your liability should the wrong individual injure him/herself using the product.

 

Act Quickly: If you find out a product you’re selling is unsafe, withdraw it immediately. Warn customers swiftly. This will reduce the number of customers who could be injured.

 

Insurance: It’s a no-brainer to purchase product and liability insurance if you’re selling goods to the public. It is, however, important that you read the policy detail clearly to make sure you’re fully covered. Speak to a lawyer if you need assistance in reviewing your insurance contract.

 

Finally, and most importantly, make sure that you pass on risk in your contracts. Regardless of where your business operates in the supply chain, it’s crucial that you reduce your risk exposure by entering into well drafted and favourable contracts.

 

This includes your distribution agreement, if you’re a manufacturer or distributor and your business terms and conditions if you’re a retailer (particularly online). The most important clause in relation to risk reduction is the indemnification clause. Make sure you work with a good lawyer to draft an indemnification clause that protects you and your business.

 

Conclusion

 

Product liability is an important issue for start-ups and small business. Protect yourself and minimise your risk where possible.  

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