Everyone enters into agreements– not just entrepreneurs and people who own businesses. Therefore, everyone has contractual (and non-contractual) liability of some sort. But when you’re at the point of drafting or signing a contract, it is your chance to double-check exactly what you’re getting into and ask yourself what kind of exposure or other liability you may be subjecting yourself to after you sign.
If you’re like most small businesses or entrepreneurs, you don’t have the time or resources to call an attorney every time you’re executing a contract to provide or buy your goods or services.
While we would recommend that you always seek legal advice on the practical and legal effects of the terms of your contracts, there are things you can do on your own to help you limit your contractual liability and we’ll talk about one of those ways today:
1) Limitation of Liability Provision:
A limitation of liability provision often includes language that states the maximum amount of damages a party may be liable for under certain circumstances. For example, a limitation of liability provision may state that under no circumstances shall a party’s liability exceed the value of the contract (or the amount of compensation paid under the agreement).
While there are many ways to tweak this concept (including addressing different types of damages, like direct and indirect damages), this type of limitation of liability provision is very common and often very heavily negotiated. Liability can be limited to 100% of the contract value, 200% of the contract value or some pre-set amount of money (like $1 million). There are many ways to craft a limitation of liability scenario.
So, pay attention when you’re buying something from someone who wants to limit his or her liability to the amount of money you’re paying, especially if you think your damages may exceed what you’ve paid them. If you sign off on this, you may make it harder on yourself later to claim (or completely prevent yourself from claiming altogether) damages in excess of that amount.
Likewise, you may want to include limitation of liability language if you’re selling goods or services and you want to be able to limit your exposure to a pre-determined amount that you can predict. While there may be ways to argue around limitation of liability provisions, it can’t hurt to include one if your bargaining position allows you to limit your liability.
Again, if you’re dealing with a sophisticated buyer or seller, they are going to zero-in on any limitation of liability provision, so be prepared to negotiate your position.
Also– it never hurts to send an attorney a contract and just ask them to at least review the damages and liability provisions and explain the scope to you. At least that way you won’t be surprised.