Protecting your company from boneheaded vendors

(Editor’s note: Curtis Smolar is a partner at Ropers Majeski Kohn & Bentley. He submitted this column to VentureBeat.)

Let’s say you start a web site that’s a portal for travelers.  After booking with you, your client is ripped off by one of the vendors you set them up with – taking their money, but not providing any service (be it a hotel room, SCUBA lessons or whatnot). When they get home, that client is going to want you to pay them back. What can you do to protect yourself – from a legal standpoint – from being liable for the vendors actions?

This is generally called vicarious liability in the legal world – meaning you’re responsible for the acts of someone else.

Through the use of carefully written terms of use, insurance and agreements with those vendors, you can potentially protect yourself from vicarious liability – though you’ll still have a PR disaster on your hands.  (Caveat: You’ll want a skilled attorney to draft these agreements in order to protect yourself in the best way possible.)

Terms of Use – There is an overarching argument that you cannot be liable for the intentional acts of third parties if you did not have reason to know of the danger.  That said, society in the United States is litigious and a skilled litigator may be able to get around that issue.

If you are being sued, it’s helpful if the consumer has agreed to terms of use that protect you from liability. Terms of use are a contract between you and your consumer.  Generally, they provide the material terms and expectations of the parties.  By having the users agree to them, you can potentially limit the liability from a third party vendor.

The terms of use should say specifically that your business disclaims any and all vicarious liability.  You should also add that:

• You have not independently verified any of the information provided from third parties;
• The company makes no representation and warranties as to the accuracy of the information of third parties;
• The company makes no representation and/or warranty as to the quality of the third party products and/or services;
• The consumer expressly releases the website from any damages that may result from the consumers reliance on the information on the website;
• Such release shall include claims of every kind, including, without limitation, contract and/or tort.

It should be noted that most courts will not release you from damages for gross-negligence or intentional acts.  So if you your company endorses something you know to be dangerous, you’re basically out of luck.

Terms of use are hardly a guarantee. Some attorneys would argue that these sorts of terms are onerous or a contact of adhesion.  In other words, person using your company may not anticipate they are giving up certain rights, so a court may not enforce the terms of use.

Agreements with vendors – Although an agreement with a consumer may not be enforceable, an agreement with a business entity is.  In the vendor agreement, you want the vendor to agree to indemnify you for any and all damages. Additionally they should defend and hold your company harmless.

Indemnification means that if there is any lawsuit against your company that results in a monetary award, the indemnifying company (your vendor) will either pay the money directly or reimburse you for the money that you end up paying.  This is often used interchangeably with a “hold-harmless” agreement.

It’s also wise to get the vendor to agree to pay for the defense of your company should a lawsuit involving them arise, given the increasing costs of litigation.

Of course, if the company you are contracting with goes out of business and/or has no money, you’re still on the hook. That’s where option three comes in…

Insurance – There are policies that protect you from the vicarious liability of other parties.  These types of policies get pretty specialized, so I won’t go into much detail about them. Check with an insurance broker and get their recommendation.

Obviously, the preferred course of action in this situation is to work things out with the consumer and the vendor amicably. But if the situation does result in a legal battle, these steps can offer you some air support.

Startup owners: Got a legal question about your business? Submit it in the comments below or email Curtis directly. It could end up in an upcoming “Ask the Attorney” column.

Disclaimer: This “Ask the Attorney” post discusses general legal issues, but it does not constitute legal advice in any respect.  No reader should act or refrain from acting on the basis of any information presented herein without seeking the advice of counsel in the relevant jurisdiction.  VentureBeat, the author and the author’s firm expressly disclaim all liability in respect of any actions taken or not taken based on any contents of this post.