MY QUICK TAKE

We use ‘derived’ thinking that the plain language meaning is good enough. But this imprecise phrase may prove to be the future battleground for AI contract disputes. 

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CONTRACT TIPS

This contract tip is about how we label limitation of liability provisions.

I have a bad habit of referring to them as the consequential damages waiver and the direct damages cap. A lot of other contract professionals do this too, but we need to stop.

The problem is that we intend for the direct damages cap to limit all liability not specifically excluded from it. So why do we keep labeling the cap after just one type of liability?

There are three big buckets of liability in a contract: direct damages, indirect or consequential damages, and other liability that isn't a damage at all, like indemnification and some warranty claims.

You may think, "We only need it to cap direct damages. We already waived all consequential damages." But there are usually exceptions to that waiver. Should the excluded indirect damages be capped? What about the other non-damage liability? If you aren't specific, a court, jury, or arbitrator may read it differently than you intended.

Limits of liability are one of the most important provisions and a pivotal concept in many contract disputes. Join me in trying to break this bad habit: stop calling it a direct damages cap. Call it a limit of liability or another phrase that doesn't include the word "direct."

Do you ever find yourself calling it a "cap on direct damages" like I do?

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