Limitation of Liability Clause is Something You Cannot Ignore

Protecting your business requires clear language and explicit agreements regarding contractual obligations and liabilities. One of the best ways to ensure your financial and legal protection is to include a limitation of liability clause in contracts before proceeding with relationships.

Limitations of liability may or may not be enforceable depending on their clarity. In order to protect you from liability in certain situations and to cap the monetary amount of damages which can be claimed, the limitation of liability clause must be clearly and conspicuously written.

What is a limitation of liability clause?

Limitation of liability clause

A limitation of liability clause, or a liability clause, is defined as a disclaimer in an agreement that limits the conditions under which the disclaiming party may be held liable for loss or damages, and which further defines the limits of damages which may be claimed in certain instances.

It specifies the type and defines the boundaries of damages one party is obligated to provide under the given terms and conditions.

The limitation of liability clause is a qualifier to the idea of liability. Liability is the obligation to provide compensation for a given failure to perform according to negotiated or agreed-upon standards.

However, everyone faces an inherent risk, and there are types of loss and damages that are susceptible to external factors.

It is almost always impossible to fulfill obligations in a 100% capacity, as such, it is important to accept limits under contract law. This applies to any industry.

For example, pool installation may cost $10,000, but unintentional damages may run up to beyond that amount. If the limit has been reached, the pool installation company will have no obligation to pay any more for damages.

This clause is a written statement that is utilized in different industries, including small to large businesses engaging online or through website transactions. It limits the exposure any business may face in the event of a lawsuit filed against it.

For online businesses and websites, limitation of liability clauses may also include explicit fees and compensation and a notice of available insurance coverage.

Why do you need a limitation of liability clause?

There are several benefits to having a limitation of liability clause included in your website’s terms and conditions. The top two reasons are to provide legal protection from potential liability and other claims and to limit the amount of money you are liable to pay in the event of damages.

Protect your company from certain liability and other claims

Your online business may be held liable for unforeseeable damages and losses by your customers, suppliers, or other partners. However, there are obviously incidents when damages and losses are out of reasonable control. This includes events leading to indirect and incidental damages.

Under common law principles, parties of a contract are usually held responsible only for foreseeable damages. That is, you are only liable for the failure of action or misconduct given the events that you had the ability and expectation to predict and then manage.

The limitation of liability clause reaffirms that circumstances wherein neither party can be held responsible for losses. This, therefore, protects your company from the consequences of misdirected and expensive lawsuits.

Limit and cap the monetary amount of potential damages

As there are different types of transactions that your online business or website can engage in, there are also different types of breaches of contract. Different scenarios can bring forward valid claims made by wronged parties, such as vendors on your website or your customers.

If you face a valid claim which you must now pay damages for, you may think of relying on insurance to protect your interests. However, not all claims are insurable. Some may truly take a toll on your funds.

A limitation of liability clause can explicitly cap the number of potential damages which can be claimed and to which a company is exposed.

Typically, this amount is set within the limits of the compensation and fees paid under the contract. In other cases, it is measured against your company’s available insurance coverage, that is if you have it. It can also involve a negotiated or agreed-upon amount of money between you and the other party.

Is a limitation of liability clause enforceable?

The question of enforceability has been up for debate for a long time. As such, states have different approaches to the enforceability of the limitation of liability clauses.

In some countries, the limitation of liability clauses can be viewed as void as most agreements cannot be negotiated. For example, parties using most online platforms usually don’t have the opportunity to argue for a higher cap for potential damages.

However, many countries do enforce a limitation of liability clauses, especially in the commercial setting. In commercial transactions, limitation of liability clauses are seen as a necessary and valid transfer of risk.

Courts generally will refuse to enforce clauses which are:

  • Unclear in expressing intentions of one party or the other
  • Ambiguous or unconscionable
  • Against a public policy or stature

If enforceable, this liability limitation can cap the amount of potential damages a business is exposed to. It may apply to every claim arising during the contract’s duration, or apply only to certain types of legal action filed against your company.

Why is a limitation of liability clause important?

Why is a limitation of liability clause important

Every commercial transaction carries a risk of liability. Either party can commit a breach of the contract through misrepresentation, negligence, infringement of intellectual property rights, and breach of statutory duty, among other possible offenses.

Without a limitation of liability, parties seeking damages may recover any amount of money with potentially no financial limit.

This can obviously damage your company’s financial interests. It also has the consequence of possibly attracting more lawsuits against the company in hopes of successful claiming of damages.

Writing a limitation of liability clause that is unambiguous, clear as it relates to the contract, conspicuous, with unmistakable intent, can significantly help protect your company’s interests.

Limitation of liability clause examples

A limitation of liability clause can explicitly exclude certain forms of losses, cap the number of damages which can be claimed for certain types of loss, and finally state any risks which are accepted without limits.

For example, a limitation of liability clause can simply limit the liability of a company versus the liability of other parties.

In no event shall the Company be individually liable to the Buyer for any damages for breach of fiduciary duty by third-parties, unless the Company’s act or failure to act involves intentional misconduct, fraud, or a knowing violation of the law.

Incidental, special or consequential damages are typically written into the limitation of liability clauses as types of damages which parties cannot be held responsible for. In these types of contracts, your company will only be liable for direct actions.

Notwithstanding anything written herein to the contrary, the Buyer and the Company acknowledge and agree that the Company will not be liable for any losses or damages, whether indirect, incidental, special or consequential, in profits, goods or services, irrespective of whether or not the Buyer has been advised or otherwise might have anticipated the possibility of such loss or damage.

Finally, a limitation of liability clause can clarify the maximum amount of damages that may be claimed by any other party in the event of actual loss or damages. It is important to state the cap clearly in a provision.

In order for the Member to benefit from the membership fee, the Member agrees to limit the Organization’s liability arising from the Organization’s professional obligations, errors or omissions, such that the total liability of the Organization shall not exceed the Organization’s total fees for membership and services rendered for the duration of the Agreement.

Final words

Limitation of liability clause serves the purpose of protecting your company from potential lawsuits and from exorbitant damages. As not all types of damages can be covered by insurance, it is important to limit the types of claims and to cap the amount that can be recovered in instances of damage and loss.

In order to be effective, the limitation of liability clause needs to be written as valid and enforceable. Clauses must be written in a clear and unambiguous manner, placed in a conspicuous location within a contractual agreement, and unmistakeable in expressing intentions of either party.

With a well-written and clear limitation of liability clause, you can immediately benefit your company’s legal and financial interests.