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.