Limiting Liability
I was texting with my long-time friend when she replied to my (rather lame) joke, with “LOL”. Of course, in this instance, “LOL” means Laughing Out Loud – as to say that my friend is laughing out loud about my joke. But this LOL brought up two images for me. The first is from that Curb Your Enthusiasm episode which dealt with saying LOL out loud instead of actually laughing at something funny. The second is the Limit of Liability in contracts (LoL).
While Curb Your Enthusiasm episode is funny, there’s nothing funny about liability in a contractual business setting.
What does “Liability” really mean when you’re talking about it in a contract? In a contract, liability means the obligation of a party under the contract. Most of the time that means how much money one party will pay to the other in case there is a lawsuit. Each party tries to limit the amount of its liability to the other and increase the amount of liability the other party has to them.
DEFINITION
Liability in a contract is the amount and type of monetary exposure a company faces in the event of a lawsuit or other claim. If found to be enforceable (by a court), a limitation of liability clause can limit (or “cap”) the amount of potential damages (monetary amount) to which a company is exposed.
What does the LoL look like? You may find it buried somewhere in your contract, but generally, it looks something like this:
“Limitation of Liability. In no event will either party be liable to the other for any lost revenues, lost profits, incidental, indirect, consequential, special or punitive damages.”
This sample looks pretty harmless and straight forward, doesn’t it?
But wait, there’s more to it than meets the eye. A simple explanation of the above states that if there is a lawsuit, no one will owe to the other any damages (money) that wasn’t paid out of pocket.
Higher Limit of Liability equals Lower Money out of your Pocket
The impact of having the above clause as the single limit of liability in your contract will depend on what the other sections of the contract say. For example, this simple LoL may be tied to other clauses like Indemnity, Insurance, Third Party Claims, etc. If your contract doesn’t contain other terms that limit your obligations, your business may be at greater risk of being liable beyond its means.
A lot of small businesses don’t know they can negotiate this clause, especially if dealing with a larger customer, or when feeling pressure to sign a deal. Sometimes, in business, you have to do what you can in order to sign a customer and that may require that you agree to some terms that are not entirely in your favour. We get that. But more often than not, you can negotiate these clauses to put your business in a better liability position.
Here’s a sample of a LoL clause which puts a cap (or limit) on the amount of liability a company may have to the other.
Limitation of Liability. No event shall [MY COMPANY] be liable to [OTHER PARTY] under or in connection with this agreement (including in negligence) for any consequential, indirect, incidental, special, exemplary or punitive damages, nor for loss of profits, loss of revenue, interruption of business, lost or damaged data, or costs of re-procurement of substitute services, even if [OTHER PARTY] has been advised of the possibility of the foregoing. [MY COMPANY]’s sole and exclusive direct liability to [OTHER PARTY] under and in connection with this Agreement or any Statement of Work shall not exceed the amount of fees paid by [MY COMPANY] to [OTHER PARTY] under the applicable (or most closely related) Statement of Work [or Order], whether such liability arises in contract, tort (including negligence), or otherwise.
This sample limits damages (money) to be paid by your business back to the other party, and itemizes and limits the types of money the other party can ask you to pay back.
For example, you sell widgets at $10 each, and your customer places 2 orders. The first order is for 10 widgets at $100, the second order is for 20 widgets at $200. The second $200 order is delayed and as a result your customer loses a business opportunity which is worth $5,000 to them. The customer only has a right to request that your business returns the $200 order which caused the loss of their business.
The best option to ensure your business is properly protected is to have your contract reviewed by a professional who understands the legal language, knows their way around a contract, and can help you negotiate the best terms.
NegotiateLife has over 20 years of contract and negotiation experience and we support businesses in navigating through their contracts and negotiation needs. If you would like a free ½ hour consultation on a contract or contract-related issue, please contact NegotiateLife and schedule a session at no obligation.
Happy Negotiating.