The Ripple Effect: How Cyberattacks on Small Businesses Can Impact Clients and Third Parties
The Australian Signals Directorate’s (ASD) Annual Cyber Threat Report for 2023-24 paints a stark picture: calls to the Australian Cyber Security Hotline are steadily rising year on year, and the average cost of cybercrime for small businesses has alarmingly increased. While the direct financial impact on businesses is significant, the ripple effect of a cyberattack can extend far beyond the targeted organisation, causing substantial losses for its clients and third parties. In today’s interconnected business environment, a cyber vulnerability in one organisation can create a cascade of risks for others.
Cybercriminals often target small businesses believing they lack robust security, but the consequences of a successful attack can impact everyone in their network. Imagine a small accounting firm that suffers a data breach. This not only compromises the firm’s own data but also the sensitive financial information of its clients. These clients could experience financial losses, identity theft, or reputational damage as a result of the breach. Similarly, a small business that provides IT services to other companies could inadvertently expose its clients’ systems to malware or ransomware through a compromised connection.
This article focuses on how a cybersecurity attack on a small business can cause its clients or third parties to incur a loss, and what legal actions businesses should take to mitigate these risks and protect themselves from related claims.
The Chain of Vulnerability:
Cyberattacks on your business can impact your clients and third parties in various ways, including:
- Data breaches:
Compromised personal or financial information can lead to identity theft, financial fraud, and reputational damage for clients.
2. Disruption of services:
If a small business’s systems are disrupted by ransomware or a denial-of-service attack, its clients may be unable to access essential services, leading to business interruption and financial losses.
3. Supply chain vulnerabilities:
Cyberattacks on small businesses within a supply chain can disrupt the flow of goods and services, affecting larger organisations and potentially causing significant delays and financial losses.
4. Loss of confidential information:
Trade secrets, intellectual property, or other confidential information shared with a small business could be compromised, leading to competitive disadvantages and financial harm for clients.
Protecting Your Business and Managing Risk:
While you can’t entirely eliminate the risk of a cyberattack, you can take proactive steps to minimise the potential impact on your clients and third parties, and protect your business from potential legal claims:
- Implement robust cybersecurity measures:
Engage a cybersecurity expert to carry out a risk assessment and ensure that your business is adequately protected with data encryption, firewall and antivirus software, multifactor authentication, training your employees, and implementing an incident response plan. Cyber insurance may also be an option.
- Transparency and Communication:
Maintain open communication with your clients about your cybersecurity practices, be transparent about security incidents which may affect them and provide timely updates on your response efforts. This may help maintain trust and potentially mitigate legal risk.
- Contractual Protection is Key:
Perhaps, most importantly, ensure that your agreements with clients adequately manage your business’ liability in the event of a cyberattack. These agreements should:
a. clearly define responsibilities;
b. explicitly limits your business’ liability in relation to a cybersecurity incident;
c. include an indemnification clause which requires that your clients indemnify you for certain losses arising from their own systems or actions;
d. outlines procedures for notifying clients in the event of a data breach; and
e. specifies the minimum security standards that clients must adhere to when sharing data with you.
If you’re a business owner dealing with the challenges of cybersecurity law, or if your business has experienced a cyber incident that has affected your clients, don’t hesitate to contact our skilled IT lawyers at Quest Legal. We’re here to help you navigate these complexities and protect your interests.
– written by Luke Francis –
