2 Types of Liability That Every Business Owner Should Know

Risk is just part of the game.

Whether you’re signing contracts, selling products, or dealing with customers, liability is always lurking in the background. But not all liability is the same. Understanding the difference between contract liability and tort liability is crucial for protecting your business and ensuring you’re prepared for basically anything.

Contract Liability: A Deal is a Deal

Contract liability arises from agreements between parties. When you sign a contract—whether it’s with a supplier, client, landlord, or employee—you’re legally bound to uphold your end of the bargain. If you fail to meet the terms of a contract, your business can be held liable for breach of contract, which could lead to lawsuits, financial damages, or even termination of the agreement.

One key principle of contract liability is privity of contract. This means that only the parties involved in the contract have the right to enforce its terms. For example, if you hire a contractor to build an office space and they fail to complete the job, you can take legal action against them because you have a direct contractual relationship. However, a third party who is not part of the contract cannot typically sue for damages related to that contract.

To protect your business from contract liability, always:

• Ensure contracts are well-drafted and reviewed by an attorney.
• Clearly define all terms, obligations, and penalties for non-performance.
• Keep detailed records of agreements and communications.
• Fulfill contractual obligations on time and in full.

Tort Liability: When Actions (or Inactions) Cause Harm

Unlike contract liability, tort liability doesn’t require an agreement between parties. Instead, it arises when one party’s actions—or failure to act—cause harm to another. Tort liability is based on civil law and covers a wide range of issues, including personal injury, property damage, and even defamation.

There are three main types of tort liability:

• Intentional Torts – These occur when someone deliberately causes harm. Examples include fraud, defamation, or wrongful interference with another business.
• Negligence – This is the most common type of tort liability for businesses. It happens when a business fails to exercise reasonable care, resulting in harm. For example, if a customer slips and falls in your store because of a wet floor with no warning sign, your business could be held liable for negligence.
• Strict Liability – This applies in cases where liability is assigned regardless of intent or negligence. A common example is product liability, where a company is held responsible for defective products that cause harm to consumers.

To reduce your risk of tort liability, consider the following precautions:

• Maintain a safe and hazard-free business environment.
• Carry adequate business liability insurance.
• Train employees on safety and compliance procedures.
• Address customer complaints and potential hazards promptly.

Final Thoughts

Understanding liability isn’t just a legal necessity—it’s a business survival skill. Contract liability ensures you honor your agreements, while tort liability keeps you accountable for your actions (or inactions). By proactively managing both, you can better protect your business. The best approach? Stay informed, stay compliant, and when in doubt, consult a legal professional. Running a business comes with risks, but with the right preparation, you can keep liability from becoming a major setback.