Everyone wants their business journey to be seamless, but the threat of lawsuits always lingers.
Whether the lawsuit has any substantial ground or not, your brand name stands to be tarnished if instant damage control is not put in place. To protect yourself and your business from potential damages, you should make use of every clause that you can.
One such clause is the limitation of liability. It will not absolve you of total accountability, but it will lessen the blow as much as legally possible.
What Is Limitation of Liability?
As explained by the name itself, limitation of liability is a clause that will allow you to limit the amount of liability you are accountable for. Essentially, it caps the number of damages a party will be required to pay if terms are breached or something goes wrong.
For example, if a certain software claims to do a certain thing, but it doesn’t work the way it claims to, the company may suffer a loss.
However, the extent of this loss in case a lawsuit is filed can be capped using a limitation of liability clause, meaning a “maximum value” will be assigned for liability and the company will not be liable to bear any amount beyond the one specified.
The Difference Between Limitation of Liability and Indemnity
There’s a major difference between liability and indemnity, and while both are similar in the way they can protect businesses, they are not the same thing.
Indemnity means protection, but in contract law, it dictates which party will be responsible for bearing a loss.
An indemnity in a contract is essentially a promise from one party to accept the risk of certain losses or damage that the other party may suffer.
On the other hand, limitation of liability does not exempt one from liability itself, but only dictates the extent to which they can be held accountable.
This means if someone sues a company and seeks damages, but the company has a limitation of liability provision in their contract (whether it is user agreement or terms and conditions), the company will only be liable up to a certain threshold and no more.
What Can Legal Liability Arise From?
Every single contract has liability attached to it. Commercial transactions in particular have a risk factor of liability, and this can arise from several different factors.
Negligence and Gross Negligence
The difference between negligence and gross negligence is that the latter is intentionally reckless disregard, while negligence is identified as inattention or careless mistakes that cause injuries or damages.
An example of liability arising from negligence can be a car company manufacturing a faulty car part that leads to an accident.
Breach of Contract
Simply put, a breach of contract happens when either party fails to meet the conditions and obligations stated in the contract.
This may be intentional or unintentional, but if Party A does not execute its obligation, Party B can claim damages. An example is a manufacturer promising to supply X number of goods to a distributor, but failing to meet that number within the specified timeframe.
Misrepresentation
Misrepresentation refers to when someone claims a false statement as a fact, which leads to a contract’s conclusion. An example of this is promising a certain quality standard and not meeting that standard or threshold.
Intellectual Property Infringement
Intellectual property refers to things such as trademarks, copyrights, design rights, patents, etc. Infringement is the non-consensual use of said property, whether it is a violation of said rights or a breach. An example of IP rights infringement can be when someone copies your design.
Why Should I Include a Limitation of Liability Clause?
Unless your business has all the money in the world, and you do not care about the exposure you’ll face in case of a lawsuit, a limitation of liability clause is incredibly important. You should include it in your contract in the event that you’re sued so you are not left bankrupt. Imagine being sued for 50 million, would your business be able to take the hit?
If a limitation of liability clause caps the liability at 5 million, the party suing you cannot ask for more. If there is no such cause, there will be no financial limit to the damages that a party can ask for! As such, if you would like to limit your exposure, and reduce liability, never forget to include this clause in your contracts.
Drafting Guidelines for Limitation of Liability Clauses
To make sure that your limitation of liability clause is foolproof, be sure to strictly follow drafting guidelines. Your lawyer will know these, but so should you.
- Use Clear Language: Do not use vague language or make the clause ambiguous. Make sure the clause is as concise as possible.
- Keep the Clause Conspicuous: Do not hide the clause in the fine print. Make sure your clause is bolded, underlined, or both. Either that or set it apart from the rest of the text in a manner that makes it easily visible.
- Negotiate and Discuss the Clause: Before signing the contract, discuss and negotiate the clause with the party that you are entering an agreement with.
- Keep Drafts of All Revisions: If the clause is negotiated and changed, make sure you keep every draft of the clause from the original to the final one that is included in the contract.
Key Takeaways
- Limitation of liability is a clause that caps the financial damages you may have to pay to another party in the event of a lawsuit.
- Indemnity decides who will be held liable, while limitation of liability dictates the extent of the liability.
- Legal liability can arise from negligence or gross negligence, breach of contract, misrepresentation, and intellectual property infringement.
- To limit exposure and avoid bankruptcy at the hands of financial liability, every contract should include a limitation of liability.
- When a limitation of liability clause is drafted, the language that is used must be clear and concise, and it must be placed in the contract in a visible position and/or be bolded/underlined.
- The limitation of liability clause must be extensively negotiated with the parties involved in the contract. All drafts of negotiations, in case the clause is changed, must be kept for proof as they may be required later.
Key Takeaways
- Non-compete clauses are the terms in an employee’s contract that have conditions that may inhibit them from starting a business that directly competes with your own.
- For the non-compete to be effective, certain conditions have to be met.
- If you can prove that your employee has breached confidentiality to gain a competitive advantage, you can pursue legal action.
- The rule of the implied duty of good faith strongly discourages an employee from doing something that goes against their current company’s best interests.
- If your employee encourages other employees to break their employment contracts and poaches them and their clients for their own business, then the employee may be held accountable.
Hire an Expert to Draft a Liability Clause
Based on all the information above, it’s obvious that every contract that you or your company engages in must have a limitation of liability clause. You can draft it yourself if you like, but hiring experts is always a better option, as they look into any loopholes that may be possible and put you at risk later on.
At Lazarus Legal, lawyers and attorneys with years and decades of experience can draft a solid limitation of liability clause for your business. Contact us today to get help with your contractual needs.
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Mark Lazarus
Mark Lazarus, the visionary behind the business and the fresh blood of the Lazarus Legal team, Mark (or Laz as he is often known) owes much of his success to his past experiences. And he’s made it his personal goal to bring that wisdom and formula to the firm.