In a business contract, a limitation of liability clause limits the amount or type of damages that may be recovered in the event of a claim, breach, or lawsuit. It is typically designed as a risk management and allocation tool, contractually insulating one or both parties from excessive or unforeseen liability. Depending on the specific requirements of the business agreement, a limitation of liability clause may be tailored to contain different aspects, including the maximum liability that can be incurred, exclusion of incidental damages, consequential damages, and lost profits, time limitations for claims, and mutual limitations of liability.
Imagine you run a software development company and have an agreement with a client who needs a custom software solution for their business operations. During the development process, an unexpected problem occurs. After deployment, this results in a critical malfunction in the software. The clients’ operations are severely disrupted because of this problem, which causes them to incur financial losses, creates missed business opportunities, and damages their reputation.
In this case, if the parties’ agreement does not contain a limitation of liability clause, the client might hold your company liable for the full range of losses. This may lead to financial strain, potential bankruptcy, or a severe impact on your business operations.
Thus, the inclusion of a limitation of liability clause can preserve financial stability, create transparency and clarity between the parties, and discourage protracted legal disputes.
To be enforceable, the clause must be sufficiently disclosed. A dissatisfied client may decide to file a lawsuit on the grounds that they were not properly informed of the clause. They might assert that the limitation of liability clause was not sufficiently highlighted or explained, which ultimately limited their ability to make an informed decision about the risks and potential liabilities.
Tips for Drafting a Limitation of Liability Clause
Conspicuous placement of a limitation of liability clause is critical to avoid possible accusations that the language was hidden or inadequately communicated in the contract. Improper drafting could invalidate the clause or create interpretative questions regarding its enforceability. Here are five tips to strengthen the drafting of the clause:
- Create a separate provision within the agreement to ensure it stands out.
- Use clear, descriptive language for the section heading, such as “LIMITATION OF LIABILITY” Or “DAMAGES,” adding emphasis with typographic style(s).
- Format the entire provision to make it visually different from the rest of the agreement. Use techniques such as caps, bolding, italicizing, or underlining the text to draw attention to the clause.
- Increase the font size of the provision so it is larger than other sections in the agreement.
- Keep the language short, clear, and unambiguous.
Need Professional Assistance in Drafting a Limitation of Liability Provision? Contact an Experienced Business Lawyer in Los Angeles Today
When it comes to properly drafting and incorporating a limitation of liability clause into a business agreement, an experienced and highly reputable business lawyer in Los Angeles can provide counsel to ensure it aligns with your business needs and is enforceable and compliant with all applicable laws and jurisdictions. The Hakim Law Group is ready and able to assist. For further information or to schedule an appointment, please contact The Hakim Law Group at 310-993-2203 or visit www.HakimLawGroup.com to learn more.