How-to guide: How to draft and negotiate limitation of liability clauses (USA)

Updated as of: 18 September 2025

Introduction

This guide will assist in-house counsel and private practitioners in drafting and negotiating limitation of liability clauses. It sets out key issues to address and points to consider when preparing to draft and negotiate an agreement for the limitation of liability, including the enforceability of such agreements; considerations to remember when drafting the agreement; and issues that commonly arise in negotiating the agreement.

The validity and enforceability of limitation of liability clauses may vary between US jurisdictions. The discussion in this guide should be taken as a general statement of the laws applicable in most US jurisdictions. You are advised to consult local laws before beginning to negotiate or draft a limitation of liability clause.

The guide covers:

  1. Definition and types of limitation of liability clauses
  2. Enforcement requirements
  3. Negotiation and drafting of limitation of liability clauses

This guide can be read in conjunction with Checklist: International supply of goods contracts and Checklist: Supplier contracts and unforeseen events.

Section 1 – What is a limitation of liability clause?

A limitation of liability clause is a provision in a larger agreement that caps the potential liability of one or both parties to the agreement. It is a risk management tool that limits a party’s maximum exposure for damages to a certain amount or to a certain category of damages.

A limitation of liability clause is not an exculpatory clause; nor is it a release from liability. A limitation of liability clause does not say that a party is not liable or will not be liable for a certain injury. The clause merely states that if a party should be held liable for a given type of injury, the damages for which it is liable will be capped in some way.

1.1 What are the different types of limitation of liability clauses?

There are three essential types of limitation of liability clauses: a waiver of damages, a cap on damages and a hybrid of a waiver and a cap.

1.1.1 Waiver of damages

A waiver of damages clause provides that either or both parties waive the right to pursue certain types of damages from the other party. The most common type of damages waived will be consequential damages.

For example:

In the event of a breach of this contract, both parties hereto agree that, notwithstanding any agreement, contractual provision, or law to the contrary, neither party to this contract shall be liable to the other for any indirect, consequential, special, exemplary, or punitive damages whether the claim for such damages is based on contract or tort, or any other legal or equitable theory.


A clause that waives consequential damages will often set out specific types of consequential damages that are excluded. Although perhaps technically unnecessary, this listing emphasizes the exclusion of damages that are especially foreseeable at the time of contracting. The emphasis will make it more difficult for a party whose claim is excluded or limited to argue that it did not know what was being waived.

For example:

In no event will either party be liable under this agreement to the other party for any lost profits, loss of business opportunity, loss of data, equipment downtime, or for any special, indirect, consequential, or exemplary or punitive damages, however, caused and on any theory of contract or tort liability even if that party has been advised of the possibility of such damages.


A limitation clause may contain exclusions for damages due to certain types of acts. A clause that waives damages for breach of contract or tort may state that damages due to an intentional or grossly negligent act are not waived. The only damages that would be waived are damages for breach of contract, ordinary negligence or a strict liability tort. A waiver may also state that it does not apply to certain risks that are inherent in a specific type of contract. For example, assume a law firm has hired a third-party company to manage the documents produced in discovery in a significant lawsuit being handled by the firm. The contract between the company and the law firm states that all consequential damages are waived, ‘except for such damages as may arise out of a breach of confidentiality by F.O., or any of its employees or contractors.’

Non-economic damages are most commonly awarded in personal injury actions. The term includes damages for pain and suffering, emotional distress or loss of consortium. A waiver of non-economic damages is typically included in a pre-injury release or waiver, in which an individual agrees to give up the right to hold another party liable for injuries as a condition of participating in a particular event or activity. Many jurisdictions view pre-injury releases unfavorably and limit their enforceability. For example, in Virginia, pre-injury releases are void as against public policy and the courts will decline to enforce them. Hiett v Lake Barcroft Community Assn, 244 Va 191, 196, 418 S E 2d 894, 897 (1992). On the other hand, in Maryland, pre-injury releases are generally valid, but are construed strictly; and the language of such a clause must clearly and specifically indicate the intent to release the defendant from liability for personal injury caused by the defendant’s negligence. Furthermore, if one party is at such an obvious disadvantage in bargaining power that the effect of the contract is to put it at the mercy of the other’s negligence, the agreement is void as against public policy. B.J.’s Wholesale Club, Inc v Rosen, 435 Md 714, 724-725, 80 A 3d 345, 351 (2013).

Note that many jurisdictions prohibit limitation of liability clauses that limit liability for harm from intentional misconduct. New England Country Foods v Vanlaw Food Prods, Inc, 17 Cal 5th 703, 331 Cal Rptr 3d 890, 567 P 3d 63 (2025)

1.1.2 Cap on damages

Another common type of limitation of liability clause caps the damages that may be recovered. The cap may set a certain amount as the maximum damages recoverable or limit the recovery to the price paid under the contract. Damages may be limited to an amount calculable at the time of a breach or may even be limited to the available insurance coverage. A limitation clause may also be a combination of limits.

Examples are set out below.

General

If either party shall be liable to the other party for any matter arising from this agreement, under any theory of law or cause of action, the amount of damages recoverable against the liable party may not exceed ten thousand dollars ($10,000).

Lease of personal property

Lessee’s damages for any breach, default, or failure of performance under this agreement shall be limited to the total amount of the lease payments made under this agreement as of the date of such breach, default, or failure of performance.

Royalty-free intellectual property license

Licensee’s damages for breach of this agreement are fixed at three times the amount of the license fee paid hereunder.

Transportation of goods

Carrier’s liability to the shipper is limited to the amount of the insurance coverage available as provided in this agreement.

1.1.3 Hybrid clause

A hybrid clause is a cap on damages that may be a sum fixed in the contract or a sum calculated in some other way, depending on the circumstances.

For example:

In the event of a breach or default under this agreement, the contractor’s damages shall be limited to $10,000 or the amounts paid towards completion of the contract at the time of the breach or default, whichever is less.

Section 2 – When are limitation of liability clauses enforceable?

While state laws vary, limitation of liability clauses are generally enforceable in business-to-business (B2B) transactions, subject to certain conditions. Some courts regard the clauses warily, holding that they are enforceable if the limitation was ‘negotiated.’ Markborough Cal, Inc v Superior Court of Riverside Cty., 227 Cal App 3d 705, 715, 277 Cal Rptr 919, 925 (App. 4th Dist. 1991).

Limitations of liability are even less likely to be enforced in business-to-consumer contracts. Many jurisdictions require that limitation of liability clauses be reasonable and not so broad as to absolve a party of all responsibility. Since there is a significant imbalance in bargaining power in business-to-consumer contracts, these clauses are heavily scrutinized for reasonableness and fairness. In a contract for the sale of goods to a consumer, the seller may ‘limit the buyer’s remedies to return of the goods and repayment of the price or to repair and replacement of non-conforming goods or parts.’ UCC sections 2-719(1)(b). That limitation will not be enforceable if the remedy is so limited that it ‘fail[s] of its essential purpose.’ For example, if a contract limits a consumer’s remedy to repair, but repeated repairs fail to solve the problem, then ‘the limited remedy failed of its essential purpose’ and will not be enforced. Razor v Hyundai Motor Am, 854 N.E.2d 607, 625 (Ill. 2006). Further, any limitations of liability are unenforceable unless they are ‘prominently, conspicuously, and clearly set forth.’ Gladden v Cadillac Motor Car Div, Gen Motors Corp, 83 N J 320, 336416 A 2d 394, 402 (1980).

In many industries, such as construction or software development, limitation of liability clauses are regarded as standard risk-shifting tools. A clause that purports to limit liability must contain a clear statement of the parties’ intent to limit liability. The clause will be strictly construed against the party that relies on it, especially if that party drafted the clause. Scott & Fetzer Co v Montgomery Ward & Co, 112 Ill 2d 378, 395, 98 Ill Dec 1, 8, 493 N E 2d 1022, 1029 (1986).

For example, in a case before the Supreme Court of Missouri, a limitation of liability clause in a contract between two ‘sophisticated businesses’ that negotiated their agreement at arm’s length was enforced because the limitation provision was clear, unambiguous, unmistakable, conspicuous, and it gave effective notice of the damage limitation. Purcell Tire & Rubber Co v Executive Beechcraft, Inc, 59 S W 3d 505, 509 (Mo. 2001).

In another case, the Supreme Court of Alaska stated an exception to the general rule of the enforceability of limitation of liability clauses by holding that an Alaska statute prohibiting clauses in construction contracts that ‘indemnify the promisee against liability for damages’ (Alaska Stat. sections 45.45.900) made a limitation of damages clause void and unenforceable. City of Dillingham v CH2M Hill Northwest, Inc, 873 P2d 1271, 1278 (Alaska 1994).

In most states, limitation of liability clauses pertaining to intentional torts or willful and wanton conduct are unenforceable. D.L. Lee & Sons, Inc v ADT Sec Sys, Mid-South, Inc, 916 F Supp 1571, 1583 (S.D. Ga. 1995). For example, if a rental car company were to attempt to include a clause in an agreement with a consumer limiting its liability when a vehicle is not inspected and then provided to the consumer in an unsafe condition, it would likely be held to be against public policy interests and encouraging willfully and wantonly dangerous conduct.

A lack of clarity or an ambiguity in a term will not necessarily result in a limitation of liability clause being unenforceable, but will result in the clause being interpreted strictly against the party that relies on it. Additionally, such clauses are frequently alleged to be unenforceable because of unconscionability. This is rarely a concern in B2B contracts. When ‘a negotiated commercial agreement [is] between sophisticated parties and the exclusion provision is clear and conspicuous,’ a limitation of liability ’is not unconscionable and is therefore enforceable.’ Biotronik A G v Conor Medsystems Ireland, Ltd, 95 A D 3d 724, 726, 945 N Y S 2d 258, 261 (App. Div., 1st Dept 2012). Unconscionability is based in large part on unequal bargaining power between the parties, and claims of unconscionability are much more likely to succeed in the context of a consumer contract. A limitation of liability clause will be unenforceable as unconscionable if it is a contract of adhesion (ie, a party had no meaningful choice but to enter into the contract), and the terms are grossly unfair and one-sided.

For example, the Sixth Circuit Court of Appeals found that a farmer who bought seed from a large national producer and distributor of seed did not have equal bargaining power with the seed producer. This permitted the court to find that the limitation of liability in the purchase contract for the seed was unconscionable. Martin v Joseph Harris Co, 767 F 2d 296 (6th Cir. 1985).

Furthermore, if a limitation of liability clause violates public policy, a court may also prevent enforcement of it. One such example would be a medical supply company attempting to limit its liability for personal protective equipment necessary to the business operations of a hospital, which would be against the common interest or the public health.

In Tunkl v Regents of the University of California, 60 Cal 2d 92 (Cal. 1963), the plaintiff, Julius Tunkl, was admitted to a charitable research hospital operated by the Regents of the University of California. Before admission, Tunkl was required to sign a release form that exempted the hospital from liability for any damage or injury to the patient caused by the negligence of the hospital's employees. Tunkl signed the release but later suffered injuries due to alleged negligence, leading to his lawsuit against the hospital.

The Supreme Court of California ultimately held that the liability waiver Tunkl signed was unenforceable because it violated public policy. Through this case, the court established a set of criteria to determine when an agreement affects the public interest negatively, and therefore should not be enforced. According to the Tunkl criteria, a contract or clause is unenforceable on policy grounds if it:

  • Concerns a business of a type generally thought suitable for public regulation.
  • Involves a service of great importance to the public, which is often a matter of practical necessity for some members of the public.
  • Offers the service to any member of the public who seeks it, or at least any member coming within certain established standards.
  • Possesses a decisive advantage of bargaining strength against any member of the public who seeks its services.
  • Imposes a condition of waiver of liability for negligence, effectively excluding an action for negligence.
  • Places the person or property of the purchaser under the control of the seller, subject to the risk of carelessness by the seller or its agents.

Finally, professional ethics rules may prohibit a professional from including a limitation of liability clause in a contract to provide services. Attorneys in most states are prohibited from prospectively limiting their liability in their retainer agreements ‘unless the client is independently represented in making the agreement.’ American Bar Ass’n Model Rules of Professional Conduct 1.8.

Section 3 – Negotiation and drafting of the limitation of liability clause

Limitation of liability clauses are generally matters of state common law. While some states may have legislation relating to specific aspects of limiting liability—such as the Uniform Commercial Code provisions relating to limitations of liability in consumer contracts or the Alaska statute referenced above relating to limitations of liability in construction contracts—limitations of liability are matters for the common law.

3.1 Preliminary considerations

Prior to beginning negotiations on or the drafting of a limitation of liability agreement, there are several preliminary matters to be considered.

3.1.1 Timing – early negotiations for small companies  

Small companies often find themselves at a disadvantage when negotiating contracts with large enterprises, particularly regarding limitation of liability clauses. However, small companies are not entirely powerless. To level the playing field, small businesses should prioritize early negotiation, especially for software as a service (SaaS) products, as leverage diminishes once implementation is complete. Larger companies are more receptive to negotiation for high-value deals or with strategically important clients, and contracts below a certain threshold may not warrant extensive negotiation. Instead of solely focusing on risk allocation, small companies should concentrate on practical terms that directly impact the working relationship, such as flexible termination rights, fee control, and service level agreements that offer remedies for performance issues. Building a successful partnership should be prioritized over dwelling on potential problems.

Streamlining the contract process is also crucial. While using their own template is ideal, small companies can offer incentives like faster closing times to encourage adoption. A hybrid approach, using the larger company's master service agreement with their own service level agreement or data processing addendum, can be effective, particularly for critical areas like data protection. Emphasizing their role as the data owner and the importance of using their own data processing addendum can also strengthen their position. Ultimately, small companies can navigate contracts with large enterprises more effectively by leveraging timing, focusing on practical terms, and streamlining the process. 

3.1.2 Context

The first consideration is the context of the agreement. There is no such thing as a ‘one size fits all’ limitation of liability agreement. Each limitation of liability clause should be tailored to the individual client’s needs and should reflect the particular risks faced by that client. Like any other sample document, sample clauses supplied by industry groups should be used only as guides or as starting points. Similarly, do not rely on boilerplate clauses or on clauses you may have seen in another contract. It is best to draft your own clause, even if it borrows from other sources, to make sure that your client’s needs are met and, just as importantly, that the operation of the clause is well understood in advance.

Many aspects of the surrounding contract may shape how a limitation of liability clause is drafted.

Type of contract

A limitation of liability clause in a consumer contract presents different issues than a B2B contract. In fact, in some instances, a limitation of liability clause in a consumer contract may be unenforceable.

Some industry-standard contracts may be so entrenched in practice that it will be difficult to reach an agreement on modifying a clause. The entrenched contract may also be so firmly in place that no one has given any thought to changing it. This does not mean that the contractual provision cannot be renegotiated or changed. An agreement among industry participants requiring a particular type of limitation of liability clause could pose antitrust and unfair competition issues. If a limitation provision is common and well entrenched, however, a party that wants a particular contractor to waive or renegotiate the term may find that its bargaining power is limited, since ‘everyone is doing it.’

Amount of money involved

Clients may question the cost effectiveness of drafting an elaborate new agreement when their potential exposure for damages is minimal. Care should be taken before advising whether a limitation of liability agreement is necessary. For example, if a business client is considering a limitation of liability agreement solely for use in consumer-related transactions, it may not be cost effective to draft an agreement as it may be held to be an unenforceable and adhesive contract, if brought before a court. 

Likelihood of breach

Further, if the possibility of a breach of contract is unlikely, it may be pointless to limit liability for breach. Consideration should also be given to limiting liability for tort claims, which limitation may be deemed unlawful pursuant to state law, especially insofar as the clause may be read as an attempt to limit liability for intentional torts.

Scenario 1
Photograph license agreement:
Licensor’s liability for any tortious use of the photograph licensed hereunder, including claims for defamation, misappropriation of likeness, intrusion upon seclusion, publication of a private fact, or false light, is limited to the license fee paid by the licensee hereunder.

Here, consider what is the worst-case scenario for damages from a breach of contract and the potential liability the licensor or licensee realistically faces. Also consider whether the photograph is likely to be used in a commercial or consumer context, and the expected price of the photograph.
Scenario 2
A grain shipper could be liable for contractual damages due to its delays in shipping grain. It is conceivable, but unlikely, that it could also be liable for negligence if an improperly mounted tire on its truck exploded while it was collecting grain, injuring a customer. It probably is not necessary to disclaim liability for the tire explosion. In this scenario, do not ignore the potential impact that claims—even small ones relating to a tire explosion—might have on the value of a business or its goodwill. The potential impact may be severe, but the probability of the event is low.
Scenario 3
ABC Real Estate Company is known for paying premises liability claims quickly, with little dispute. As such, ABC has a reputation in the local real estate industry and the community at large for slipshod business practices. This will impact the value of the goodwill of ABC, and the ability of ABC to enter into limitation of liability agreements. Depending on the reputation of your client, other businesses may be unwilling to enter into a limitation of liability agreement.
Available insurance coverage
Scenario 4
Ride-sharing service clause:
Passenger agrees that the Driver’s liability to the passenger will be limited to the amount of motor vehicle liability insurance and personal injury protection insurance coverage carried by the Driver, which shall in no case be less than the minimum amount of liability coverage required by the laws of the state of Illinois.

Here, consider whether there is sufficient insurance coverage to cover potential claims. Will repeated damage claims for the limits of available coverage drive up the premiums?
History

A party that is being asked to limit its claims against another party should look at the history of the party requesting the limitation of liability agreement. Try to learn about claims that have been made against the requesting party. A pattern of claims, especially successful ones, could be a legitimate warning about contracting with the business. Some businesses, such as retail conglomerates or those that deal with consumer negligence claims like slip-and-falls or automobile collisions, may have a number of claims on file against them that are unfounded. While a pattern of claims does not necessarily prove anything negative about the party requesting the limitation of liability agreement, the pattern may still be an indication of the claims the party wishes to be guarded against.

Consider also claims that are being or have been made against others in the same industry or line of business. Even if no claims have been asserted against the other party in your transaction, it is helpful to have a working knowledge of the common risks posed in the industry or business as well as the estimated damage awards should a problem arise.

Existing/pre-existing business relationship between parties

Consider any pre-existing business relationship between the parties to the limitation of liability agreement. If the parties have prior experience with one another, they may be better able to assess the risks of contracting with each other.

The interplay between limited liability clauses and other contracts

A limitation of liability clause is just one part of the overall contract. It may also be just one part of a relationship defined by many other contracts or agreements. Other agreements that may affect a limitation of liability clause include:

  • third-party indemnification agreements;
  • subcontractor/supplier agreements;
  • insurance policies; and
  • employment agreements.
Possibility for negative publicity and reputational damage

A limitation of liability clause that is overly broad, and that may be applied in widely varying scenarios to different types of claims, may result in negative publicity. If an organization is active in a wide range of industries or business activities, especially those involving consumers, it is often wise to decline to enforce an agreement that might otherwise be applicable.

Example

A free trial of the streaming service Disney+ is offered to customers with a proviso that any disputes with the Disney Company would be submitted to arbitration. A customer who signed up for a free trial was a guest at a Disney theme park. While there, his wife consumed food that contained allergens that a server had assured her were not present in the meal being served. The woman died after an allergic reaction, and the customer sued for wrongful death. Disney raised the arbitration clause as a defense, but after receiving harsh public backlash, withdrew the request for arbitration. See Disney Backs Down From Effort to Use Disney+ Agreement to Block Lawsuit, NY Times, Aug. 20, 2024.

3.1.3 What type of clause to use?

It would be very rare to draft a limitation of liability clause that insulates a party against all liability for any claim. As noted above, such an exculpatory clause will be effective only in limited circumstances, such as a business-to-business relationship not involving the public interest and where both corporate entities have equal bargaining power. For example, a canning company and its long-time supplier of aluminum may have universal limitation of liability clauses with each other so that they may ensure the continued preservation of a mutually beneficial relationship.

A common type of limitation of liability is the cap on the amount of damages that may be recovered. Such a clause imposes a limit on a party’s liability. A cap on damages is often considered the same as a liquidated damages clause, but the key distinction is that liquidated damages are a fixed amount. Liquidated damages are used when the damages are difficult to ascertain or predict when the contract is entered into. They must be reasonable and not punitive. Am Consulting, Inc v Hannum Wagle & Cline Eng’g, Inc, 136 N E 3d 208, 211 (Ind. 2019). A cap on damages, however, allows a claim for any type of damages, but places a ceiling on the amount of those damages. These damages are not a fixed sum, but are subject to an explicit maximum.

A limitation of liability clause may also exclude certain types of damages, such as consequential damages or non-economic damages. They may also be limited to a party’s available insurance coverage.

The parties may agree to limit damages only for certain types of breaches, such as a breach of warranty. Any such limitation should explain clearly what remedy is allowed and the extent of that remedy.

3.2 Negotiating the limitation of liability clause

In many instances, a limitation of liability is boilerplate, with standard language ‘slipped into’ a standard or form contract. Although the clause may seem like an inconsequential filler, a limitation of liability clause will be given full effect, even if neither party notices it nor pays any attention to it. As with all clauses within the agreement, the limitation of liability clause should still be read and understood and, if necessary, negotiated by the contracting parties.

When negotiating a limitation of liability clause, there are several points to remember and that you should make certain your client understands.

First, the use of limitation of liability clauses is standard practice in many industries. They are a generally accepted and effective risk management tool. This does not mean that the party asking for the clause is untrustworthy or prone to litigation. A properly negotiated and drafted limitation of liability agreement can provide protection to all parties involved in a contract and may serve to expedite issues that may arise under its terms. Such a clause will tie the risk of a contract to the actual value received from it.

Second, be sure all the parties are aware of the clause during contract negotiations. Although it may be tempting to treat the limitation of liability clause as a formality, the clause serves the important function of allowing both parties to assess, in advance of executing the contract, what their potential exposure or recovery could be in the event of a breach.

Courts are also more likely to uphold a limitation of liability clause that is clear, apparent, and readily understandable. All the parties should understand the terms of the clause before allowing it to become a part of an agreement. It should be, at minimum, in standard typeface for the agreement and should not be hidden.

3.2.1 Common issues in negotiating a limitation of liability clause

While every limitation of liability clause is different and should be approached individually, some issues or concerns are common.

Reciprocity

It is typical for limitation of liability clauses to cap the liability of only one party while, in theory, allowing the other party to be exposed to unlimited liability. This may seem unfair at first glance, but a lack of reciprocity does not necessarily make a limitation of liability clause unconscionable or unenforceable. Such a clause may simply be a reflection of the relative risks to which each party to a transaction may be subjected.

For example, an internet service provider’s service agreement might state that in the event of a failure of service, the provider’s liability ‘shall be limited to the amount paid by the customer as of the date of the service failure.’ There is no corresponding limitation of the customer’s liability. This reflects the fact that the customer’s liability under the contract is most likely limited to the price it has agreed to pay for the service; whereas the service provider’s liability could extend to damages for business interruption, lost data, security breach, and so on.

Amount of the cap on damages

Although the principle of a limitation of damages clause may not be objectionable, a party to a contract may object to the amount of the cap. The party that seeks to hold the other liable may find a proposed limit too low, while the party whose liability is limited may believe it to be too high.

The amount of a cap on damages should be no more than could realistically be recoverable from the promising party. Consider the party’s assets and insurance coverage. Although it may be one consideration in evaluating the cap, do not limit your assessment to what damages you think a court would be most likely to award, given the party’s existing business. It is safest to consider what could be available for a potential creditor or litigant claiming under any theory of law. The exact amount can be adjusted in accordance with the actual risks either party might have, but a limitation is not reasonable if the promising party cannot pay even the limited damages amount.

Third-party liability claims

If third parties will be involved in or affected by the performance of a contract, consideration should be given to including a limitation of liability for the claims of those third parties. While such a limitation could be inferred from an agreement, it is best to make it obvious that a limitation on third party claims is included in the agreement.

Exceptions or carve-outs

A well-crafted limitation of liability clause will be explicit about the claims included or excluded from the scope of the clause. If there are types of claims that might otherwise be covered by a limitation clause, but that the parties intend to exclude, that exclusion must be stated clearly and without ambiguity.

For example, in the technology sector, limitation of liability clauses are standard. It is also common for these agreements to include an exception for intellectual property claims. In the technology industry, it is too easy to discover another creator’s intellectual property and make use of it, either inadvertently or intentionally. Therefore, it is generally accepted that all limitation of liability clauses exclude intellectual property disputes.

Parties covered by the agreement

The acts of agents and employees of a party will be included in the limitation of liability clause by operation of the doctrine of respondeat superior. A limitation clause should also cover independent contractors—at least insofar as they are the agents of the promising party. It should be made clear in any final agreement that the limitation applies only to the party’s liability for the actions of third parties done on the party’s behalf. Any limitation of the direct liability of the third party could violate a state law prohibition against indemnity contracts.

For example, Expert Delivery Service’s contract with R.G. Engineering states that Expert’s liability ‘for the negligence of Expert or its employees’ is limited to $50,000. Expert uses the services of Dave, an independent contractor, to take an expensive piece of machinery from R.G.’s factory to a buyer. While making the delivery, Dave is involved in a traffic accident and the machinery is destroyed. Expert’s liability to R.G. may be greater than $50,000, since the limitation of liability agreement did not cap the liability for independent contractors.

3.3 Drafting the agreement

When drafting the clause, remember that a limitation of liability clause is seldom a standalone contract. It is a part of an entire agreement and will not be read by a court in isolation from the other terms of that contract. The clause should be integrated with the other terms of the contract.

Always refer to the ‘Definitions’ section of a contract when drafting a limitation of liability clause. If a key term is not defined, you may want to have it added to the definitions.

3.3.1 Make it conspicuous

Your drafting should draw attention to the limitation of liability clause. This is required in many consumer contracts by state law (eg, Ind. Code section 26-1-2-316). Even in B2B contract cases, courts are more willing to enforce a limitation of liability clause that is obvious in the agreement. A conspicuous clause will eliminate the need to dispute the existence of such a clause and will also emphasize its importance and that the parties had an opportunity to negotiate the clause before executing the contract. Furthermore, making the clause conspicuous may also allow for discussion during contract negotiations regarding the clause.

To emphasize that the clause is conspicuous, consider having the parties to the agreement initial it separately from the rest of the contract. Alternatively, initialing each page of the agreement is another method of ensuring that all clauses have been conspicuously disclosed to the parties.

3.3.2 Make it unambiguous

A limitation of liability clause is an agreement to waive rights that a party might otherwise have. As such, the extent of the exclusion should be defined as clearly as possible. Set out what types of damages may be paid and the amount of those damages, if applicable. Ambiguous clauses will not be enforced or will be construed against the party drafting or relying on the clause. Make the clause a clear statement of the intentions of the parties.

Any exceptions or carve-outs must be clearly stated, to avoid future disputes. The most common exceptions are for intentional acts or gross negligence. There are also often exceptions for claims arising from certain types of acts, such as breach of confidentiality, data privacy violations or willful intellectual property violations.

3.3.3 Applicable law

The main agreement that includes the limitation of liability will likely have a choice of law provision identifying the governing law of the agreement. This provision will also influence the enforceability of the limitation of liability clause. Likewise, a particular state’s law may affect how certain terms not defined in the contract are construed. For example, an exclusion for gross negligence may exclude different acts depending on which state’s definition is used. State law should be carefully considered when drafting, considering, or choosing to rely upon a limitation of liability clause.

Additional resources

South Carolina State Fiscal Accountability Authority, Basic Guideline for Using Limitation of Liability Clauses in Complex Information Technology Contracts, January 2020

Related Lexology Pro Content

How-to guides:

How to effectively incorporate standard terms and conditions in a commercial agreement or transaction 
How to manage the risk of contracting with a company in financial difficulty 
Maximizing the use of boilerplate clauses to limit the risk of unforeseen events 
How to draft a confidentiality agreement and confidentiality clauses

Checklists:

International supply of goods contracts 
Reviewing a confidentiality agreement (receiving party) 
What to consider when terminating a contract 
What to consider to ensure a contract is valid

Clauses:

Limitation of liability

Reliance on information posted:

While we use reasonable endeavours to provide up to date and relevant materials, the materials posted on our site are not intended to amount to advice on which reliance should be placed. They may not reflect recent changes in the law and are not intended to constitute a definitive or complete statement of the law. You may use them to stay up to date with legal developments but you should not use them for transactions or legal advice and you should carry out your own research. We therefore disclaim all liability and responsibility arising from any reliance placed on such materials by any visitor to our site, or by anyone who may be informed of any of its contents.