Limitation on Liability Provisions

A client comes to you with an already-executed contract. It is months or years later and something has gone awry. Your client says the other side has breached the agreement and they ask you for your advice. What do you do?

First (obviously), I read the contract. Among other things, I am looking for any provision that limits either party's liability or the types of claims the potential client can bring.

These "limitation of liability provisions" limit the amount of damages or compensation that a party can he held liable for when or if a breach occurs.

They typically cover:

💲types of damages excluded (consequential, indirect, special, or punitive damages);

💲a cap on damages--a maximum dollar amount or other quantifiable limit on the total liability a party can incur, regardless of the nature of the claim or damages;

💲exceptions, meaning specific situations or types of claims that are exempt from the liability limitation (gross negligence, willful misconduct, or breaking the law).

These provisions are common because they manage and mitigate risk (and financial exposure)--especially for the party rendering the contracted-for services.

When entering a contract, beware of these provisions and their impact. Of course, when entering an agreement, it is not fun to think about what could go wrong or what claims you might bring if things go sideways, but the time upfront can save money and headaches down the line.

So, consider:

🧠 are limitation of liability provisions enforceable in your jurisdiction;

🧠 is the liability cap reasonable--does it provide adequate protection based on the potential risks and/or potential exposure;

🧠 what damages are excluded and what categories should be excluded or included based on your interests (for example, the performing party may push to exclude liability for lost profits or consequential damages, but the receiving party may want to leave those types of damages available);

🧠 whether the provision protects against IP infringement (and other carveouts). The protected party will want fewer exceptions, but expanding carve-outs should be part of the negotiation;

🧠 how are liquidated damages treated--should you included pre-agreed damages for certain breaches rather than a broad liability cap;

🧠 is the provision reciprocal (or should it be);

🧠 is the provision conspicuous and subject to arms' length negotiation.

Allocation of risk and liability is extremely important. It can also hinder a client's ability to bring claims later, when or if something goes awry in the relationship.

A lot of clients do not want to involve attorneys on the front in--another cost-saving measure (and a reasonable thought). But, having an attorney review contracts, before executing them, will cost much less upfront than later.

❤️🔥✌️