How to Decide the Contract's Liability Limits

I wish I had an easy rule for you about setting the maximum liability in a commercial contract. Industry standards provide a starting point, but I encourage you not to stop there. Always analyze to make sure the provision works for your deal. Here's the four-part framework I use: 1. I evaluate whether we are more or less likely to cause damages that may occur under this agreement. It can depend on the seller's scope, the buyer's involvement in the design, and how the end customer will use the product. 2. I consider the proportionality of potential damages. Are we both going to suffer if something goes wrong, or will one side bear the brunt? READ MORE

Proper Placement of Limitation of Liability Clauses

Did you know that where and how your limit of liability provision appears in a contract can make it unenforceable? There are two ways that happens. The first is not being conspicuous. Limits of liability must be conspicuous, which means easily visible to the reader. Some use all caps, but you don't have to. Just don't bury it. Don't stick it in the one-paragraph boilerplate provision between severability and waiver. Don't drop it casually as the last few sentences of a long audit clause. Give it a top level in your numbering scheme. So Section 7, not Section 7(a)(2)(i). Then make sure you label it as the limit of liability. Don't label it as "Risk Adjustments" or some other confusing heading. READ MORE

How to Exclude Anything from a Liability Cap

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

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Customers' Arguments for Limiting Their Liability 

There are some frequent arguments that customers use when negotiating limits of liability. Customers often buy from vendors that are the last in a long chain of vendors to the product. Customers must look to just the vendor for most of the liability shifting because it has no privity of contract with the other vendors. On top of that, some customers are the last in the line before a product reaches the consumer. The law limits how much a vendor to consumers can insulate itself from liability so that the last purchaser before the consumer sits with a lot of risk. It is no wonder that customers try to preserve as many remedies as possible in their contracts. They know otherwise, they may be left holding the proverbial bag. READ MORE