Spotting Hidden Exclusions in Limitation of Liability Clauses: A Guide for Drafters

There's a drafting technique that allows a drafter to exclude things from the limitation of liability that many counterparties don't notice. I'm sharing this drafting tactic so you don't unknowingly approve an exclusion without realizing it.

Common Pitfalls in Limitation of Liability Provisions

A typical limit of liability provision says neither party is liable for damages more than a set amount. Many provisions exclude indemnification and breach of confidentiality obligations from the cap. And most lawyers are ok with those exclusions.

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

Steps to Avoid Unnoticed Exclusions

Don't do that. Instead, stop and check these things.

1. Check Indemnities Across the Document

First, check the indemnities. Search your document for indemnity. Check each place where an indemnity appears. They may be in places other than the indemnification section.

Then 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.

2. Review Sections Excluded from the Cap

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

Please be careful out there.

Other Resources on Limitation of Liability Clauses

How to Contract

• Limitation of Liability Training Hub, including our limitation of liability free checklist: www.howtocontract.com/limitation-of-liability
• Courses on limitation of liability agreement provisions: www.howtocontract.com/limitation-of-liability-courses

Other Resources on Liability Limits in Business Contracts

• Video: Limitations on Liability Exceptions – Interplay between Contract Terms and Legal Principles from Mayer Brown 
  
• Contract Corner: Limitations of Liability—Exceptions and Caps" URL: https://www.natlawreview.com/article/contract-corner-limitations-liability-exceptions-and-caps