What Are Limitation of Liability Clauses in Contracts?
Limitation of liability clauses in contracts are provisions that limit how much exposure a business faces if a lawsuit is ever filed against it.3 min read
Limitation of liability clauses in contracts are provisions that limit how much exposure a business faces if a lawsuit is ever filed against it. If enforceable, the limitation of liability clause can limit the amount of potential damages when a business is exposed.
What Is a Limitation of Liability Clause?
Limitation of liability clauses usually limit a company's liability to one of the following:
- The fees and compensation paid under the contract
- Available insurance coverage
- An agreed upon amount
- A combination of any of the above
Liability limited may apply to every claim that comes up during the contract's timeframe, or it may only apply to certain types of legal action against the company. Limitations on liability can also be used to limit damages stemming from a breach of contract.
Under common law, all parties involved in a contract are only responsible for foreseeable damages, not unforeseeable ones. In many cases, the liability limitations clause restates the common law principle to reaffirm that neither party is responsible for the unforeseeable damages or losses the other suffers.
More specific limitations can go a step further and limit not only foreseeable losses but also the disclosure of confidential information or infringement. There may also be a limit on the total amount of losses one party is responsible for.
Although the simplest version of the limitation of liability clause merely restates common law and is thereby considered redundant, it's still a common feature to include in contracts. Business owners and lawyers are so used to seeing the clause and including it in their agreements that most feel comfortable signing a contract featuring a limitation of liability clause.
Unlike an exclusion of liability clause, a limitation of liability limits your responsibility for certain types of breaches. As such, it might state specifically the monetary amount that the liability is limited to. The court system views these clauses as acceptable while exclusion clauses are not acceptable.
Are Limitation of Liability Clauses Enforceable?
There's been much debate about whether limitation of liability clauses are enforceable or not. Some states have posited that these clauses are not legally enforceable because neither party has an opportunity to negotiate them, which makes them void in terms of public policy.
Commercially, some states merely enforce limitation of liability clauses as they are written. In most cases, the law allows each party to discuss and negotiate contract clauses, but courts have decided not to enforce provisions where:
- The provision is unconscionable or ambiguous
- One or both party's intentions are not clearly stated or expressed
- One party has a greater level of sophistication or unequal bargaining power
- A statute or public policy exists that prohibits the provision's enforcement
When the parties involved in a contract are business entities that don't deal with each other directly, the limitation is reasonable as it relates to the design professional's fee. In this case, damages are solely economic, and most states enforce the clause. Others might hold the limitation of liability in varying degrees of unenforceability.
Certain states find these clauses unenforceable unless they are explicitly worded. Depending on the state, the clause might be unenforceable due to a variety of violations ranging from public policy concerns to anti-indemnity statutes. Some states are just more protective and will hold clauses void even if they don't go against public policy.
In order for a contract to limit damages and avoid a party's future negligence, the language must be:
Having clear, unambiguous language in the contract also makes it easier for states to enforce. Since many courts heavily scrutinize limitation of liability clauses, it's best to err on the side of caution and make the clause unmistakable and conspicuous in the contract. You might consider using a different typeface or highlight the clause in the text to make it stand out.
Remember, limiting your business's potential liability is key, which is why you should carefully draft every contract. Retain all revision drafts made to the limitation of liability clause so you have proof of negotiations. Potential claimholders that pursue you for breach of contract can only go as far as the limitation of liability clause as it's explicitly stated, so be sure the other parties involved in the contracts understand the clause's existence.
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