LIMITATION OF LIABILITY CLAUSES

Limitation of liability (“LOL”) clauses have become standard in most contracts, but they can be one of most controversial aspects of the negotiation process and one of the more hotly contested issues when a dispute progresses into litigation.

What is a Limitation of Liability (“LOL”) Clause?

LOL clauses are contractual clauses that limit the amount or type of damages that may be recovered in the event of a claim, lawsuit, or breach. The clauses set the maximum for exposure on the part of one or more of the contracting parties. LOL provisions have been routinely upheld by California courts in a variety of contexts,[1] so it is important to carefully assess their potential impacts before signing on the dotted line.

Key Considerations

Who Is Covered:
One of the primary considerations when reviewing or drafting a LOL clause is determining who is covered. Does the provision cover just the contracting parties, and how are they defined? Are any additional parties or affiliates included? Careful consideration should be paid to any introductory language and defined terms as they may provide additional details on the parties covered under the provision. Likewise, is the limitation mutual? Oftentimes, LOL provisions are not phrased to apply to both sides.

What is Covered vs Excluded:
The scope of the LOL provision is critical. Look at whether there is a cap on damages and how it is calculated. Is the cap mutual or one-sided? Pay attention to whether third-party claims are covered.

Exclusions are another critical aspect of the scope of the LOL provision. It is important to look at whether certain categories of damages are excluded (e.g., special, or consequential damages).  California law prohibits any provision where one seeks to avoid responsibility for fraud, willful injury to a person or property of another, or the violation of law, whether or not intentional.[2]  To avoid enforceability issues some LOL clauses may include a preamble requesting that they be applied to the fullest extent of the law, but in these circumstances, parties may end up with an interpretation from the court that is different than they intended.[3]

When to Negotiate:
Oftentimes, a contracting party’s negotiating leverage is the greatest before the parties have agreed to do business, so it is wise to obtain all necessary protections from the get-go. Don’t assume that the negotiations of a LOL clause will become easier once the business relationship is established. Additionally, from a risk management standpoint, it is wise to know the potential exposure before engaging in any business transaction.

When dealing with larger companies one may find that there is very little, if any, ability to negotiate the term of a LOL provision. Even mid-size companies may not negotiate unless your contract amount exceeds a certain threshold level. Others may allow you to negotiate some of the carve-outs to the LOL but will not negotiate the cap on damages.  

Other Considerations:
Insurance coverage is another component to liability analysis and risk management, and it is important to consider how the LOL clause will interplay with your insurance coverage and any insurance requirements contained in the contract.

Contracting parties may also agree to set their own deadlines for filing. If they are in writing, reasonable, and the result of a bargained agreement between sophisticated parties, they may supersede the statutory timelines for filing a lawsuit. 

Depending on the circumstances LOL clauses can act as a big advantage or a huge detriment. Carefully reviewing, crafting, and negotiating these provisions will avoid surprises and minimize losses.

The information above is by no means exhaustive, and does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only and do not create an attorney-client relationship. The experienced and knowledgeable attorneys at Blake Law Firm are available to help you navigate your legal matters.

[1] Markborough California, Inc. v. Sup. Ct. (1991) 227 Cal. App. 3d 705, 714.

[2] Civil Code § 1668.

[3] See e.g., Oltmans Construction Co. v. Bayside Interiors, Inc. (2017) 10 Cal.App.5th 355.

Liability clauses are a complex and detailed statutory structure. The information above is by no means exhaustive, and does not, and is not intended to, constitute legal advice. All information, content, and materials are for general informational purposes only and do not create an attorney-client relationship. The experienced and knowledgeable attorneys at Blake Law Firm are available to help you navigate liability clauses, foreclosures, and other real property concerns.