By Janeia Brounson

Have you considered the importance of protecting yourself from potential risks and liabilities? If you are like most people, you have.

Companies typically ask themselves before starting a project: What are the potential risks? Is the juice really worth the squeeze? Given recent uncertainties over past years, as Julie Chen says, “expect the unexpected.”

Although you cannot anticipate every twist and turn, having a limitation of liability clause in place can help mitigate risks.

Limitation of Liability Clause

A limitation of liability clause is a contractual provision that limits a party’s potential liability in case of a dispute or breach. Such clauses can be found in various agreements but may be omitted or favor one party.  

Without a limitation of liability clause, or a one-sided clause, you may be liable for all reasonably foreseeable damages resulting from a dispute or breach, including both direct and indirect damages.

Direct damages are damages that flow directly from a breach (the cost of remediating the breach itself), whereas consequential damages are the indirect damages (such as lost revenues and profits) that can occur if a contract is breached. Given the potential risks, it’s important to try to limit these potential risks.

Limitation of liability clauses vary but there are a few items that you should consider when drafting or negotiating the provision:

• Cap on liability: The easiest way to limit your exposure to damages is to cap them at a number. A common cap is to limit your exposure to the contract price or some multiple of it.
• Waiver of consequential damages: You should include a waiver of consequential damages (indirect damages) as they are often much larger than direct damages and are typically outside of your control.
• Carveouts/exceptions: Look out for exceptions to the waiver of consequential damages and/or the cap on liability that may kill the waiver (e.g., there is an exception for indemnification and you are required to indemnify the client for breach of the contract—the exception swallowed the rule).

A limitation of liability clause is never a one-size-fits-all provision, but a well-crafted clause serves as a vital tool for managing risks.

By understanding and implementing this clause effectively, you can navigate uncertainties with confidence and peace of mind.

So, next time you enter into an agreement or transaction, remember the power of a well-crafted limitation of liability clause.

Janeia Brounson is an attorney with Faegre Drinker, counsel to the CSIA and many of its members. She can be reached at Janeia.Brounson@faegredrinker.com. For more information about the CSIA Legal Plan for members, see https://www.faegredrinker.com/en/areas/the-csia-legal-plan.