Product Update

Limitation of Liability Clauses in Contractual Risk Transfer

This release of Contractual Risk Transfer (CRT) contains an updated discussion of limitation of liability clauses.

Limitation of liability clauses are risk transfer devices used by contracting parties to limit or manage the risk to which they may become exposed when providing their products or services. To that end, limitation of liability clauses typically define the amount and the type of damages that one party to the contract can recover from the other party and, consequently, limit the amount of exposure that a contracting party might face if a dispute arises. These clauses are especially useful under certain circumstances because a risk of liability exists in every business transaction, and the monetary amount of such liability could be grossly disproportionate to the amount of money or fees that a party is being paid under the contract. As such, use of limitation of liability clauses is a way to equalize the imbalance between the potentially enormous risks assumed in performing a contract compared to the relatively small profit or fee received for such performance. This CRT release contains an updated discussion of limitation of liability clauses, with an emphasis on the factors affecting the validity of such clauses as well as court interpretation of limitation of liability clauses. Other topics discussed include how limitation of liability clauses differ from exculpatory clauses and indemnity provisions, the different types of limitation of liability clauses that are commonly used by contracting parties, and considerations to keep in mind when negotiating, drafting, and reviewing limitation of liability clauses.