Limiting Liability in Business Agreements: Contract Clauses, Financial Caps, Indemnities, Liquidated Damages

When business counsel begins working on a new agreement and assessing the risk, using a limitation of liability clause can be an effective tool to limit direct, indirect, consequential, special, and incidental damages in the event of a breach of contract claim. Establishing the restrictions on a limitation of liability provision may include terms that limit or exclude consequential damages unless the limitation or exclusion is unconscionable. For example, when contracts fall under the UCC, the limitation of consequential damages for a consumer's personal injury is subject to prima facie unconscionability.

Limitation of liability provisions generally cap damages at an amount agreed by the parties, the contract amount, or the parties' insurance limits. The clauses may exclude certain types of damages; the enforceability of exclusions may depend on the state law that governs that contract.

Courts routinely scrutinize limitation of liability provisions to ensure that they are not ambiguous, unconscionable, unfairly bargained for, or in violation of a state statute or public policy. Many courts disfavor contract provisions that limit a party's liability for gross negligence, fraud, intentional torts, or if the party seeking protection acted in bad faith.

Listen as our authoritative panel explains best practices for drafting and negotiating limitation of liability provisions in business agreements. The panel will provide strategies for avoiding common negotiation pitfalls, anticipating and overcoming enforcement hurdles, and reconciling limitation of liability provisions with indemnification clauses.