Building a limitation of liability clause

Most disputed terms WCC ranking: 

16

Most important terms WCC ranking: 

6

Most negotiated terms WCC ranking: 

1

Limitation of liability and exclusion of liability clauses are often intertwined.

This guide is focused on limitation of liability clauses.

What is the purpose of a limitation of liability clause?

There are certain risks that a party will not be willing and able to take. For example, a claim for unlimited consequential losses can mean the end of the business.

Can the governing law impact on limitation of liability clauses?


Certain liability cannot be limited under contract. For example, limiting liability relating to fraud or wilful misconduct will not be enforceable.

Public policy and legislation that protect consumer rights may also determine that certain liabilities cannot be limited.

Main components

Whose losses are limited?

Often you will see that the limitation of liability also applies to third parties—for example, the affiliates of the contracting party.

If you are the party in whose favour the limitation of liability is provided, you would want to include various third parties to benefit from the limitation of liability—for example, Affiliates, directors, shareholders, contractors, employees and the like.

TIP – make sure to include a definition for Affiliate in the Agreement.

The limited loss

It will mainly depend on the bargaining power and industry.

Claims relating to consequential losses are often limited, and incidental losses are sometimes limited.

A concept that is often confused is consequential losses. Consequential losses do not describe a particular kind of loss. For example, loss of profits can also be a direct loss where this loss was foreseeable when the agreement was concluded and such a loss would naturally arise from the breach of the agreement. 

To make sure that all losses that the parties intend to limit are being limited, a laundry list of losses that will be limited is included – for example, loss of profits, loss of business revenues, loss of anticipated savings, loss of goodwill, loss of data etc. Some of these losses may be direct losses and some of them may be consequential losses.

Something to remember, the remoteness of losses will come into play when a claim for damages is made. The limited losses should therefore not include losses that the party would have in any event not been able to recover due to the remoteness thereof.

Be careful limiting direct losses. Generally, you cannot exclude liability for breach of contractual obligations (the aggrieved party must have some form of meaningful recourse in the event of a breach of contract).

Examples of other losses that you will likely not be able to limit are losses that relate to:

  • your own fraud/dishonesty; and

  • negligence for death or personal injury.

Then there are certain jurisdictions where you cannot exclude liability for the supply of defective goods (there’s usually consumer protection legislation that regulates this).

The losses that can and can’t be limited may differ from one jurisdiction to another. Therefore, an approach that is adopted in practice is to insert the phrase “to the maximum extent permitted under law” before the rest of the sentence that limits the liability of a party. This phrase is inserted to avoid a possible situation where a court may severe the entire limitation of the liability clause from the Agreement and interpret the clause to the extent that the limitation of liability is allowed.

Other components

Exclusions

If there is an exclusion from the limitation of liability, the Exclusion of liability will not limit a claim for the listed Exclusion. These exclusions are referred to as carve-outs.

The type of claims carved out will depend on the circumstances. Examples of possible carve-outs:

  • breach of confidentiality provisions under the Agreement;
  • claims relating to any indemnity provided under the Agreement;
  • breach of the data protection provisions under this Agreement;
  • claims relating to any act or omission that is grossly negligent;
  • claims relating to any act or omission that causes personal injury or death of a third party;
  • claims relating to any act or omission that causes damage to property;
  • claims relating to wilful misconduct or fraud.

Type of cap

There are various ways that the liability cap can be structured. For example, does the cap apply per-incident or to claims over a period of time?

The cap can also be different for different types of claims. So, for example, you can attach a fixed aggregate amount to all claims relating to a breach of the data protection provisions and a percentage of the contract value to all claims relating to the breach of the confidentiality provisions.

Calculation of cap

Whether or not interest and costs are included with the cap calculation is also important. Generally, you would not want to include interest and costs in the cap calculation.

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