Drafting Strategies for Limitation of Liability Provisions

There are fundamental concepts for approaching the limit of liability provisions. Limits of liability set a maximum financial exposure for the deal. 

Before you launch into the language, make sure that you understand the risks of doing the deal and how those risks are allocated between the parties. Because there is no one-size-fits-all perfect limit of liability provision. We need the context to properly adjust and recalibrate for this client and this contract.

Here are three things I think about before I think about drafting a limit of liability provision:

1. What is the relative likelihood of each party's risk?

In a typical commercial contract, buyers pay money. The seller does a lot more and is more likely to cause damages. Also, consider how you expect to allocate that risk. Based on what you know upfront, is the seller-to-buyer risk ratio at 95%/5% or closer to 60%/40%?

2. What are the risk factors specific to this deal?

Evaluate the factors in your deal that may reduce or enhance the potential liability. What kind of good or service is provided? What types of things could go wrong?

3. What are the industry's standard approach?

Each industry has a different approach to limits of liability. In some, the norm caps the liability at a price paid under the agreement. In others, it is by purchase order value.

I'll add one other perspective that is a core part of how I approach liability limits. I believe that there is no morality in drafting limits of liability between two B2B companies.

Sure, I get worked up and frustrated when the other side's ask shifts all the risk to us or proposes an approach that conflicts with industry standards.

But in the end, each company is free to do the deal or walk away. That is your ultimate negotiating tool if you are willing to accept the risk allocation.

What other things do you think about with the limit of liability even before you start drafting?