Limitation on Liability Clause

A Limitation on Liability Clause is a liability and risk management clause that limits the total amount of liability or damages that a party can be responsible for under a contract.

• AKA: Cap on Liability.
• Context:
  • It can (often) be found in Commercial Contracts, such as software licensing agreements, service level agreements, purchase agreements, and construction contracts.
  • It can range from a Mutual Limitation of Liability Clause (limiting both parties' liability) to a Unilateral Limitation of Liability Clause (limiting only one party's liability).
  • It can range from an Absolute Limitation of Liability Clause (excluding all liability) to a Limited Limitation of Liability Clause (capping liability at a certain amount).
  • It can (typically) be part of a broader Limitation of Liability Clause that includes specific exclusions and carve-outs.
  • It can specify a maximum monetary amount or a percentage of the contract value as the cap on liability, managing risk and avoiding catastrophic financial losses.
  • It can exclude certain liabilities, such as those arising from gross negligence, willful misconduct, or intellectual property infringement, while including carve-outs for specific damages like consequential damages or third-party claims.
  • It can be enforced differently depending on jurisdiction, with some courts applying strict interpretations and others allowing exceptions.
  • It can be challenged or deemed unenforceable if considered unconscionable or against public policy.
  • It can include Liability Exclusion Provisions, such as:
    • Consequential Damages Exclusion Provision: Excludes indirect losses or consequential losses.
    • Lost Profits Exclusion Provision: Excludes liability for the other party's lost profits.
    • Property Damage Exclusion Provision: Excludes liability for damage to the other party's property.
    • Personal Injury Exclusion Provision: Excludes liability for personal injury or death.
    • Third-Party Claim Exclusion Provision: Excludes liability for claims brought by third parties.
    • Gross Negligence or Willful Misconduct Carve-Out Provision: Maintains liability for gross negligence or intentional wrongdoing.
    • Intellectual Property Infringement Carve-Out: Maintains liability for IP infringement.
    • Confidentiality Breach Carve-Out Provision: Maintains liability for breach of confidentiality obligations.
    • Statutory Liability Carve-Out Provision: Maintains liability that cannot be limited by law.
  • ...
• Example(s):
  • A Service Agreement Limitation of Liability Clause, such as:
    • “EXCEPT FOR PROVIDER'S INDEMNIFICATION OBLIGATIONS, IN NO EVENT SHALL EITHER PARTY'S AGGREGATE LIABILITY ARISING OUT OF OR RELATED TO THIS AGREEMENT EXCEED THE TOTAL AMOUNT PAID BY CLIENT HEREUNDER FOR THE SERVICES GIVING RISE TO THE LIABILITY IN THE TWELVE MONTHS PRECEDING THE FIRST INCIDENT OUT OF WHICH THE LIABILITY AROSE. THE FOREGOING LIMITATION WILL APPLY WHETHER AN ACTION IS IN CONTRACT OR TORT AND REGARDLESS OF THE THEORY OF LIABILITY, BUT WILL NOT LIMIT CLIENT'S PAYMENT OBLIGATIONS UNDER THE 'FEES AND PAYMENT' SECTION ABOVE."
  • A Sales Contract Limitation of Liability Clause, such as:
    • “SELLER'S LIABILITY FOR DAMAGES ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT SHALL BE LIMITED TO ACTUAL DIRECT DAMAGES AND SHALL NOT EXCEED THE PRICE PAID FOR THE GOODS. SELLER SHALL HAVE NO LIABILITY WHATSOEVER FOR ANY INCIDENTAL, CONSEQUENTIAL, INDIRECT, OR SPECIAL DAMAGES."
  • A Software License Limitation of Liability Clause, such as:
    • “IN NO EVENT SHALL LICENSOR BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL, EXEMPLARY, OR CONSEQUENTIAL DAMAGES (INCLUDING, BUT NOT LIMITED TO, PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES; LOSS OF USE, DATA, OR PROFITS; OR BUSINESS INTERRUPTION) HOWEVER CAUSED AND ON ANY THEORY OF LIABILITY, WHETHER IN CONTRACT, STRICT LIABILITY, OR TORT (INCLUDING NEGLIGENCE OR OTHERWISE) ARISING IN ANY WAY OUT OF THE USE OF THIS SOFTWARE, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGE."
  • A Consulting Agreement Limitation of Liability Clause, such as:
    • “CONSULTANT SHALL NOT BE LIABLE TO CLIENT FOR ANY SPECIAL, INDIRECT, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES, OR ANY LOSS OF PROFITS, REVENUE, DATA, OR DATA USE. CONSULTANT'S MAXIMUM LIABILITY FOR ANY DAMAGES ARISING OUT OF OR RELATED TO THIS AGREEMENT, WHETHER IN CONTRACT, TORT, OR OTHERWISE, SHALL BE LIMITED TO THE FEES PAID BY CLIENT TO CONSULTANT UNDER THIS AGREEMENT."
  • An End User License Agreement (EULA) Limitation of Liability Clause, such as:
    • “THE SOFTWARE IS PROVIDED 'AS IS'. IN NO EVENT SHALL THE AUTHORS OR COPYRIGHT HOLDERS BE LIABLE FOR ANY CLAIM, DAMAGES, OR OTHER LIABILITY, WHETHER IN AN ACTION OF CONTRACT, TORT, OR OTHERWISE, ARISING FROM, OUT OF, OR IN CONNECTION WITH THE SOFTWARE OR THE USE OR OTHER DEALINGS IN THE SOFTWARE."
  • A Construction Contract Limitation of Liability Clause, such as:
    • “TO THE FULLEST EXTENT PERMITTED BY LAW, CONTRACTOR'S TOTAL LIABILITY TO OWNER FOR ANY AND ALL INJURIES, CLAIMS, LOSSES, EXPENSES, OR DAMAGES WHATSOEVER ARISING OUT OF OR IN ANY WAY RELATED TO THIS AGREEMENT FROM ANY CAUSE OR CAUSES INCLUDING, BUT NOT LIMITED TO, CONTRACTOR'S NEGLIGENCE, ERRORS, OMISSIONS, STRICT LIABILITY, BREACH OF CONTRACT, OR BREACH OF WARRANTY SHALL NOT EXCEED THE TOTAL COMPENSATION RECEIVED BY CONTRACTOR UNDER THIS AGREEMENT."
  • One in a software development contract that limits the developer's liability to the total amount paid by the client under the contract.
  • One in a service level agreement (SLA) that caps the provider's liability to a specified amount per incident.
  • ...
• Counter-Example(s):
  • Indemnification Clause, which requires one party to compensate the other for certain damages or losses, often without a cap.
  • Warranty Clause, which provides guarantees regarding the condition or performance of products or services, often with distinct liability terms.
  • Unlimited Liability Clause, where no cap on liability is imposed, making the responsible party liable for all damages.
• See: Contract Law, Damages, Breach of Contract, Negligence, Gross Negligence, Willful Misconduct, Consequential Damages, Liquidated Damages, Indemnification, Warranty, Exclusion Clause.

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References

• https://www.lawinsider.com/clause/liability-cap

2024

• [to Law Insider Limitation of Liability Clause]
  • NOTES: Here are the seven bullet points about Limitation of Liability Clauses with sample language added where possible:
    • Limitation of Liability Clauses can often cap the maximum aggregate liability of one or both parties to a specific dollar amount or to the total amount paid under the contract. These clauses help parties manage their potential exposure in the event of a breach or claim.

      "IN NO EVENT SHALL EITHER PARTY'S AGGREGATE LIABILITY ARISING OUT OF OR RELATED TO THIS AGREEMENT, WHETHER IN CONTRACT, TORT OR UNDER ANY OTHER THEORY OF LIABILITY, EXCEED THE TOTAL AMOUNT PAID BY CUSTOMER HEREUNDER IN THE 12 MONTHS PRECEDING THE INCIDENT GIVING RISE TO THE CLAIM."

    • Limitation of Liability Clauses can exclude certain types of damages, such as indirect, incidental, consequential, special, or punitive damages. This narrows the scope of potential liability and focuses on direct damages that are more foreseeable.

      "IN NO EVENT SHALL EITHER PARTY HAVE ANY LIABILITY TO THE OTHER PARTY FOR ANY LOST PROFITS, LOSS OF USE, COSTS OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES, OR FOR ANY INDIRECT, SPECIAL, INCIDENTAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES HOWEVER CAUSED AND, WHETHER IN CONTRACT, TORT OR UNDER ANY OTHER THEORY OF LIABILITY."

    • Limitation of Liability Clauses can specifically disclaim liability for lost profits, revenues, data, or business opportunities, even if the party was advised of the possibility of such damages. This allocation of risk is often heavily negotiated between parties.

      "NEITHER PARTY SHALL BE LIABLE FOR ANY LOSS OF PROFITS, LOSS OF BUSINESS, LOSS OF DATA, INTERRUPTION OF BUSINESS, OR FOR INDIRECT, SPECIAL, INCIDENTAL, CONSEQUENTIAL, OR EXEMPLARY DAMAGES OF ANY KIND, EVEN IF ADVISED OF THE POSSIBILITY OF SUCH DAMAGES."

    • Limitation of Liability Clauses can carve out exceptions for certain types of claims, such as gross negligence, willful misconduct, breach of confidentiality, or intellectual property infringement. These exceptions ensure that parties remain liable for more egregious or intentional acts.

      "NOTHING IN THIS SECTION SHALL LIMIT OR EXCLUDE EITHER PARTY'S LIABILITY FOR (I) GROSS NEGLIGENCE OR INTENTIONAL MISCONDUCT, (II) BREACH OF ITS CONFIDENTIALITY OBLIGATIONS, OR (III) INFRINGEMENT OR MISAPPROPRIATION OF THE OTHER PARTY'S INTELLECTUAL PROPERTY RIGHTS."

    • Limitation of Liability Clauses can specify a time period for which the cap on liability applies, such as the preceding 12-month period. This helps to further limit potential exposure by focusing on recent activity.
    • Limitation of Liability Clauses can often disclaim any warranties, express or implied, regarding the subject matter of the contract, except as otherwise provided. This places the risk of quality and fitness for purpose on the recipient of goods or services.

      "EXCEPT AS EXPRESSLY PROVIDED HEREIN, NEITHER PARTY MAKES ANY WARRANTY OF ANY KIND, WHETHER EXPRESS, IMPLIED, STATUTORY OR OTHERWISE, AND EACH PARTY SPECIFICALLY DISCLAIMS ALL IMPLIED WARRANTIES, INCLUDING ANY IMPLIED WARRANTY OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE,

2024

• LLM
  1. Aggregate Liability Cap Clause:
     "The total liability of either party under this Agreement, regardless of the form of action, shall not exceed the total amount of fees paid by the Customer for the Services during the twelve (12) months preceding the date of the claim, excluding liabilities arising from willful misconduct or intellectual property infringement."
  2. Enhanced Cap for Specific Breaches Clause:
     "In the event of a breach related to data security, privacy, or confidentiality, the liability cap shall be increased to an amount equal to two (2) times the fees paid by the Customer during the twelve (12) months preceding the claim."
  3. Liability Period Cap Clause:
     "The liability of either party for claims arising within any given period shall be limited to the total charges paid during that period, provided that if the period is less than twelve (12) months, the liability shall be prorated accordingly."
  4. Model Contract Clauses Liability Cap:
     "The aggregate liability of the parties and their respective affiliates under this Agreement and any related model contract clauses shall not exceed [specified amount], inclusive of all claims under both the primary and related agreements."
  5. Exclusion of Certain Claims Clause:
     "The liability cap set forth herein shall not apply to claims arising from fraud, gross negligence, willful misconduct, or any claims related to death or personal injury caused by the parties' actions or omissions."

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