Limitations of Liability Thomas J. Hall, JD It’s a provision present in virtually each business contract: “Vendor shall be liable only for direct damages, in an amount not to exceed $X. In no event will vendor be liable for indirect, special, consequential, exemplary, or punitive damages or for lost profits.” Although the precise phrases could differ, the which means is identical:
o The most vendor pays is $X;
o For sure claims, vendor has NO legal responsibility.
Such provisions increase numerous points:
o They are unfair. Vendor’s legal responsibility is capped, however buyer’s will not be. In different phrases, vendor is aware of his or her personal most legal responsibility underneath the contract, whereas buyer’s legal responsibility is limitless.
o Vendor’s most legal responsibility – $X – could also be insufficient. For instance, “X” could also be “no more than customer paid under this contract” or “no more than customer paid in the xyz months preceding the event giving rise to the claim for damages.” If we assume buyer is paying 10 grand a month, and “xyz” is 12 months, then vendor’s legal responsibility is capped at $120,000. While that’s not pocket change, is it satisfactory to cowl injury that vendor might trigger? How a lot injury can a vendor trigger?
o How a lot is the contract price?
o How a lot is the over-all venture price?
o Will the seller have entry to delicate/helpful data?
o Will the seller have entry to delicate methods or amenities?
Being good enterprise individuals, distributors will resist increasing their potential legal responsibility, and they’ll provide a wide range of arguments in opposition. Some of those arguments carry extra weight than others:
o “We cannot accept unlimited liability.”
Customer will not be asking for limitless legal responsibility, simply duty. Customer mustn’t bear a loss ensuing from errors or omissions of vendor. Curiously, normal language routinely exposes prospects to limitless legal responsibility.
o “Our pricing tied to the amount of liability we can accept.” Again, buyer is solely searching for duty. In addition, an awesome value mixed with an unacceptable stage of danger will not be a superb deal. A buyer who is anxious solely with value could also be persuaded by this argument. Customers prepared to evaluate the venture as an entire could resolve that the “great price” will not be a superb deal in any case. There is nothing flawed with telling a vendor “No.”
o “We need a sum certain, so we can manage our risk and buy our insurance, etc.” Customer has the identical issues, so it is just honest to make the limitation mutual. Also, buyer has no objection to a sum sure; buyer merely desires an ADEQUATE sum. Which is likely one of the questions we started with.
It will not be doable to find out with certainty how a lot safety is sufficient; during which case it’s higher to ask for an excessive amount of fairly than too little. A lot of instruments are price consideration:
o X instances the charges paid and payable underneath the contract. Three instances is an efficient start line. Vendor can’t object that they can’t quantify the chance. But, is it satisfactory to cowl the publicity?
o Vendor can be answerable for direct damages incurred. Vendor will object that “direct damages” can’t be quantified. But:
– “Direct damages”- damages which are foreseeable and which circulate instantly from the breach or motion – are the normal measure of damages underneath contract regulation. This is the quantity vendor, and buyer, could be chargeable for if the contract didn’t include a limitation of legal responsibility;
– Presumably vendor carries insurance coverage. (If they don’t, why are you doing enterprise with them?)
– Is it unfair to ask the seller to make good any hurt that it causes?
– One caveat. As with any authorized time period, the which means of “direct damages” is open to interpretation, and debate, and debate.
o Vendor can be answerable for as much as $X. We started with this method, which is completely cheap, supplied X is sufficiently massive. A $500,000 cap is very inadequate if the publicity is $2 or three million. In addition, with a specified cap, vendor can’t declare unknown and doubtlessly limitless publicity, AND Vendor can acquire the essentially insurance coverage extra simply.
o Vendor can be answerable for as much as the bounds of its insurance coverage. This method removes the objection that the chance can’t be quantified and that it can’t be insured towards. BUT:
– The insurance coverage limits have to be adequate to cowl the doable danger; – Customer should require certificates of insurance coverage, evidencing the existence of insurance coverage (to not point out that the insurance coverage have to be from respected corporations, licensed to do enterprise in your state); – Customer should monitor Vendor’s compliance.
All in all, specializing in the bounds of vendor’s insurance coverage could also be the best method. It overcomes most traditional vendor objections AND it helps make sure that adequate property can be found if issues to flawed. Without insurance coverage, vendor could not have adequate liquid property to cowl the damages. A judgment towards a vendor is of little worth if it can’t be enforced. A phrase in regards to the varieties of damages to be lined. Contract regulation conventional protects towards direct, foreseeable damages, not these which are so distant that they can’t be fairly foreseen. The take a look at of “reasonably foreseeable damages” is probably deceptive. If vendor is aware of that dropping the ball will interrupt buyer’s core enterprise processes, vendor ought to fairly count on that buyer endure misplaced income.
But what would these income have been had the seller delivered as promised? Would buyer have earned the tens of millions it anticipated, or would errors by buyer, or adjustments available in the market, have produced considerably much less income? Better to exclude particular, exemplary and punitive damages – that are awarded by the court docket (or jury) and have little direct relation to the worth of the contract or the hurt completed, and specify a cushty restrict on damages – all damages, nevertheless described or characterised. Too a lot safety prices vendor little or nothing. Too little might value buyer dearly.
Copyright 2006, Thomas J. Hall. All rights reserved tom@tomhalllaw.com
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