Understanding the Limitation of Liability Clause in a Contract

The limitation of liability clause appears in most service and software contracts. Most limitation of liability clauses consist of three parts or conditions. If you're negotiating a contract you must pay particular attention to this clause to make sure that you're not spending millions of dollars and the other party is only liable for a lower dollar amount or just the amount that you paid for the service or software.

The first part of a limitation of liability clause is dollar cap where a party will limit the liability for a specific amount or for what the other party paid for the service, product or software. You need to make sure that an amount is not established in the contract that will put you out a lot of money if something should occur. Always make sure you at least negotiate for the amount of money you have spent on the service, product or software.

Two examples of the first part of a limitation of liability clause:

"Company's liability arising out of or related to this agreement, including without limitation liability for negligence, will not exceed $100,000."

"Neither party's liability to the other arising out of or related to this agreement will exceed the total cost of the software, service or product. Liabilities limited by the preceding sentence include, without limitations, or liability for negligence."

The second part of a limitation of liability clause is the exclusion of consequential damages that focuses on a type of liability. Consequential damages are unlimited and very unpredictable and that's why contract parties try to limit them because otherwise they would be held accountable for everything.

An example of the limitation of liability clause is "In no event will either party be liable to the other for any consequential, indirect, special, incidental or punitive damages, regardless of the form of action, whether in an agreement, tort, strict product liability or otherwise, even if advised of the possibility of such damages and even if the damages were foreseeable. "

Some states will not allow exclusion of consequential damages in a contract and may state that the company's liability is limited to maximum extent permissible by a court of law. If you're the receiver of the service, product or service make sure that the consequential damage section of the limitation of liability clause is not set with a dollar amount.

The third part of a limitation of liability clause is the exceptions to liability that is not limited to a particular dollar amount. Basically, this section is complete liability for things that are not excluded or capped in the previous two parts. For example, this section might read like " The limitations in this section do not apply to: (a) claims arising out of a breach of warranty; (b) any infringements of third-party intellectual property; (c) negligence or (d) any claims for attorney's fees and other litigation costs either party becomes entitled to recover.

As you can see the limitation of liability is quite complex so when you're negotiating the clause take it section by section to make sure everything is included and that you're not left liable for anything that the company should be liable for. The first part of the limitation of liability clause should protect you for the full amount that you have paid for a particular product, service or software. Don't spend millions of dollars and allow the company to be liable for only $50,000. The third part of the limitation of liability clause make sure that the other party doesn't put "willful " in front of negligence because you want any negligence covered because willful is hard to prove in a court of law.