Limitation of liability clauses are standard in almost all contracts and are essential to help contracting parties limit their risks. These provisions generally contain a broad exclusion of liability for consequential damages and a ceiling for direct damages; however, it is common to exclude certain types of damages from these disclaimers and/or caps.
The reason certain exclusions are commonly accepted (as negotiated by the parties) is that if certain damages were not excluded or “removed” from standard disclaimers and liability limits, certain breaches of contract would not would either have no recourse or a substantially inadequate solution. remedy. For example, most liability provisions limit liability for incidental, punitive, indirect, special, exemplary, extraordinary, or consequential damages or lost profits, and cap liability at a fixed number, for example, the amount of fees paid under the contract (during an agreed period). depending on the period of time), or the amount of fees paid under the contract for the event giving rise to this liability (during an agreed period of time).
If a contract contains disclaimers and limitations similar to those set forth above, the parties should consider excluding or “deleting” the provisions below from such disclaimers and limitations for the reasons following:
- Confidential Information and Breach of Data Security Obligations: If Confidential Information is disclosed despite the confidentiality obligations and restrictions of an agreement, the Confidential Information may lose its inherent confidentiality and associated protections. For example, if proprietary information or trade secrets are leaked by one party, they are unlikely to be able to be put back in the proverbial “box” and retain those protections. In such a case, the damage could be significant. If a limitation of liability clause excludes the recovery of consequential damages (which is the most likely type of damage when disclosing confidential information), the disclosing party will not be able to recover damages if the other party breaches its confidentiality obligations under the agreement. If a party breaches its data security obligations and sensitive information is accessed or disclosed, the resulting damages could be considered consequential damages and could also be well in excess of the negotiated liability cap. Therefore, breach of these provisions should also be taken into account when negotiating waivers of liability limitations. The receiving party generally wishes to limit and/or cap its liability in the event of a data breach because the potential damages are so significant, but the standard limitations are often not rationally related to the potential damages from a data breach, so this point is often negotiated. Based on the foregoing, it is common for parties to exclude breaches of confidentiality obligations and data breach from limitation of liability provisions, although if the potential damages are significant, parties often agree to a ” supercap” or a higher cap on damages for such a breach, which provides a middle ground for parties somewhere between no damages and unlimited damages for such a breach.
- Intellectual property: As with confidential information, if a party does not share any intellectual property or grant any license to intellectual property under the agreement, it is not essential to exclude these provisions from the limitation of liability provisions. However, if a party provides a license to its intellectual property, violation of the intellectual property or license provisions could adversely affect the licensor and should be excluded from any limitation of liability. For example, if the licensee breaches the license restrictions, liability to the licensor could be extremely damaging and costly. Because the damages to a party in this case may be substantial, the exclusion of these provisions from the consequential damages disclaimer and/or damages cap may provide an adequate remedy for breach.
- Indemnity: Indemnification provisions act as a remedy for a non-offending party against claims by third parties brought against the non-offending party based on something for which the offending party is responsible. The slicing of indemnification provisions from a limitation of liability cap varies depending on what one party is indemnifying the other party for. For example, if one party indemnifies the other party for intellectual property infringement under the agreement, the party receiving the indemnification must exclude those provisions from the cap, since third-party claims are inherently consequential damages. Infringement cases can be extremely costly, and the parties do not want to be responsible for the costs of participating in litigation between the infringing party and a third party based on the use of that third party’s intellectual property if that party uses the intellectual property in accordance with the terms of the agreement it has entered into.