Limitation of liability clauses: where they fail

Every commercial contract has a limitation of liability clause, and almost every negotiation spends hours on it. Yet when a dispute reaches a lawyer, the clause often fails in ways that could have been avoided.

Four common failures

It is not part of the contract. The terms were sent after the order, or buried in a link nobody clicked. A clause only protects you if it was properly incorporated.

It says too much. A clause that attempts to exclude every kind of liability, including those the law will not allow to be excluded, can be struck out whole, taking the sensible parts with it.

It does not match the commercial deal. A cap at the annual fee makes sense for a low-value service. It makes none for a supplier whose failure can halt a customer’s factory. Customers who understand this ask for super-caps for specific risks.

It is out of step with insurance. A cap far higher than the supplier’s insurance cover is a promise it may not be able to keep. A cap far lower than a customer’s real exposure is a risk the customer may not have noticed.

Habits that make clauses hold

• Draft the clause last, once you know what each side is really buying.
• Separate the cap for ordinary breach from specific higher limits for data, confidentiality and indemnities.
• State what is not limited in plain words.
• Check the cap against insurance cover.
• Make sure the clause is in the document the other side actually signed.

A final test

Read the clause aloud to the person who will sign it. If they cannot say what it does in a sentence, rewrite it.

This note is general information for business readers, not legal advice. Enforceability varies by jurisdiction and facts.