Limitation Clause: Everything You Need to Know
A limitation clause is a stipulation in an agreement that helps ensure that a company is not held liable for more than they agreed to be responsible for.3 min read
A limitation clause, also called a limitation of liability clause, is a stipulation in an agreement that helps ensure that a company is not held liable for more than they agreed to be responsible for.
What Is a Limitation Clause?
Limitation clauses are an important part of contracts. They are where the contract spells out what each side will be held responsible for under the specific terms and conditions also outlined. Contracts are formed surrounding general stipulations, basically what is being sold or agreed to, and the limitation clause covers what a party will owe to the other if they don't hold up their end of the agreement. This consequence is also called a liability.
Most businesses and contractors will want to include limitation clauses in all of their contracts because they are always taking a risk when entering into an agreement. Rather than allowing the risks in an agreement to have the potential to wipe out their company, business owners can use the limitation clause to make a cap or limit to what they can be forced to pay in damages. Sometimes this limit will work for any claims that might come up throughout the period of the agreement, other times it will only cover particular types of legal issues.
If a company with a limitation clause in their contract is sued by a contractor, their clause might limit the contractor to only taking the amount for payment they originally agreed upon, rather than additional damages. This means businesses are able to enter into contracts without worrying about massive risks with each one. If every contractor agreement could put you out of business, it would be hard to weigh those risks.
Likewise, independent contractors can benefit from limitation clauses. Design and IT contracts frequently use limitation clauses.
Say an architect built a skyscraper under a design contract with a global manufacturing company, and five years later, a design flaw pops up in the build. If that architect included a limitation clause in their contract, the manufacturing company could only hold the architect liable for the amount they agreed on for the project. So, if the architect charged an $80,000 fee to design the building, that's all the company could sue them for.
IT contracts like distribution, service-level, and software license agreements use limitation clauses to keep the IT creator protected from massive damages. So if their software design fails and costs the company they designed it for money, the limitation clause will likely cap the damages owed to the company by the software developer to whatever they were originally paid for their work as stipulated in their software agreement.
Whether you find yourself as the person drafting the agreement or signing it, you should always be sure to carefully review and possibly negotiate the limitation clause. The clauses only apply to the parties legally included in the agreement, so they don't protect others who may be involved in a project, but not in the contract.
How Are Limitation Clauses Enforced?
Some argue about the enforceability of limitation clauses. Certain states do not enforce such clauses because they view them as a non-negotiable part of the contract, also called adhesive. If a contract is adhesive or an adhesion contract, this means that the party who drafts the contract holds all of the cards and the other party has little opportunity to negotiate.
Many states do enforce limitation clauses in contracts because they see them as an attempt to avoid risks. Usually, limitation clauses are enforced unless:
- Provisions were unclear or ambiguous
- Intentions of either of the parties entering the contract were not obviously stated
- One of the parties used unfair bargaining abilities or were much more sophisticated than the other
- The provision was prohibited by a statute or public policy
How to Limit the Liability of a Business
If you want to limit your company's risks by using a limitation clause, you'll need to draft your contracts carefully.
When forming a business contract, be sure to help make it enforceable by:
- Making sure the limitation clause is clear and obvious
- Using concise and easily-understood language
- Discussing the limitation clause to be sure that there is a chance for negotiation
- Holding onto all drafts of the contract to show any revisions for proof of negotiation
If you need help with a limitation clause, you can post your legal need on UpCounsel's marketplace. UpCounsel accepts only the top 5 percent of lawyers to its site. Lawyers on UpCounsel come from law schools such as Harvard Law and Yale Law and average 14 years of legal experience, including work with or on behalf of companies like Google, Menlo Ventures, and Airbnb.