How to Make Your Contract’s Limitation of Liability Clause Enforceable

When you’re drafting a business contract, one of the smartest tools at your disposal is a limitation of liability clause. This provision can help you cap your financial exposure by setting limits on your damages exposure in case things don’t go as planned. The ultimate goal is controlling risk and keeping potential losses predictable. These clauses are often forcefully negotiated during contract formation.

Without a limitation of liability clause, a party to a contract can be held liable for all of the reasonably foreseeable damages that it causes the other party, either through a breach or other misconduct. These include compensation for any harm that the parties might reasonably expect. Typically, these clauses limit liability to the amount paid under the contract over a period of time or exclude certain types of damages, like lost profits or claims from third parties. 

However, limitation of liability clauses are not off-the-shelf items. They need to be tailored to your particular transaction and to your needs. To be enforceable, these clauses need to be fair, reasonable and well-defined. Courts will take a hard look at them to ensure they don’t lead to unconscionable outcomes or go against public policy. For instance, trying to dodge liability for something like gross negligence or intentional misconduct would be highly disfavored by the courts.

How can you make sure your limitation of liability clause is effective? Here are some positive steps:

• Make the language clear and explanative — The clause should be a fair reflection of the deal’s overall nature and the parties’ expectations.
• Don’t make the terms onerous — Caps on damages should be related the possible harm a party might suffer for a breach or other specified event. Damages exclusions must likewise be rational and justifiable. 
• Avoid ambiguity — The clause should be susceptible of only one meaning. Keep the clause short and concise and remove any equivocal language. 
• Give the clause prominence — Make the clause a separate paragraph with a bold section heading so that it is conspicuous. 

All of these actions can underscore that the clause was freely negotiated and formed a material part of the overall bargain. 

A seasoned business contracts attorney can be invaluable in drafting an enforceable limitation of liability clause. An attorney can create a clause that’s right for your situation, balancing risks effectively and improving the odds that the clause will be enforceable. An attorney also can advocate for your interests, helping you negotiate language that safeguards your business without scaring away potential partners.

Law Offices of Donald W. Hudspeth P.C. in Phoenix, Arizona takes a plain-English approach to contracts, dedicated to producing agreements that accomplish our clients’ business objectives and are enforceable. Call us today at 866-696-2033 or contact us online to set up a consultation.