How to Exclude Anything From a Liability Cap

Avoiding Hidden Liability in Limit of Liability Clauses

I'm sharing this drafting tactic so you don't unknowingly approve an exclusion without realizing it.

A typical limit of liability provision states that neither party is liable for damages in excess of a set amount. Many provisions exclude indemnification and breach of confidentiality obligations from the cap, and most lawyers are okay with those exclusions.

So when we see the limit excludes indemnification obligations in this agreement and breach of Section X (Confidentiality), we approve and keep reading.

Don't do that. Instead, stop and check these things right away before you move on.

How to Review Indemnities and Exclusions Effectively

First, check the indemnities. Search your document for indemnities. Check each place where an indemnity appears. They may be in places other than the indemnification section. Make sure each indemnity should be excluded and only applies to third-party claims. If they apply to direct claims, you may have unlimited liability for claims by your counterparty.

Second, read through the sections excluded from the cap. Are they limited to just obligations that should be uncapped? For example, sometimes I see sections labeled confidentiality, which include other things like data security and IP terms.

By putting a concept in a section and then excluding breaches of that section from the cap, you may agree to uncapped liability and consequential damages for an unintended type of claim.

Get in the habit of checking these things as you review the limit of liability.