“LOL” stands out as a funny acronym. In this case not so much, Limitation of Liability Language can make or break a contract. As a service provider, one of the most important clauses that should never be forgotten when negotiating a contract is Limitation of Liability. That limitation should be based on many factors including, but not limited to, governing laws, insurance limits and contract value. There should never be an unlimited liability associated with any contract and the negotiator should always push to have liability limited to actual damages.
Considerations for Limitation of Liability Language
- Limit your liability to the value of the contract in the preceding 12 (or 24 or 36) months. The idea here is to know your maximum amount of exposure associated with any given agreement.
- Limit to the event which directly caused such liability claim (not just related to or in part caused by an event, but DIRECTLY caused by the event).
- Limit to ACTUAL damages and EXCLUDE indirect, consequential, special, incidental or punitive damages.
- The negotiator should also take into consideration the available insurance limits at the time the contract is negotiated. Available limits could vary each renewal year and therefore the limitation of liability should never exceed your policy limits or the company could end up paying out of pocket instead of through insurance funds.
- Ensure the same limitation of liability language is contained in the contracts you have in place with any subcontractor.
- If damages are caused by your subcontractor, there should be language in place which makes them responsible for the costs associated with those damages.
Overall, the Limitation of Liability language should be reasonable, fair, equitable and in line with the services to be performed. See sample language below which is often acceptable to all parties involved.
In no event shall EITHER PARTY be liable for indirect, incidental, special, consequential, or punitive damages, or for direct damages in excess of the amounts paid by CLIENT for the services that gave rise to the liability, whether foreseeable or unforeseeable, of any kind whatsoever including, without limitation, loss of income, data or goodwill, information, downtime or costs, whether based on warranty, contract, tort (including negligence), product liability or otherwise, even if the OTHER PARTY has been advised of the possibility of such damage.
Disclaimer: This article provides general information and materials related to contract management. This article does not provide legal advice. VPS is not a law firm nor does it provide legal advice. You should contact an attorney to obtain advice with respect to any particular legal issues or questions.