While legal contracts can be intimidating, many of the provisions follow recognizable patterns that can be broken down into simple, comprehensible pieces. Our boilerplate series focuses on the standardized provisions that are typically found at the end of the contract.
Limitation of Liability Clause
When entering into a new business arrangement to provide services to a customer, major liabilities lurk in the background because customers can employ your company’s technology in unpredictable ways, causing data breaches, business interruption, and a host of other costly problems. To protect against this risk, companies often include a limitation of liability clause in their contracts in an attempt to contractually limit their potential exposure in the event of a lawsuit over events governed by the contract. Without such a limitation, companies could be subject to liability that far exceeds the fees they are receiving under the contract.
The limitation on liability clause can either be applied broadly to any claim arising from the contract or narrowly to certain types of claims arising from the contract. This often depends on the nature of the services being provided, the type of transaction, and the negotiating leverage of each of the parties.
For a real-world example of a limitation of liability clause, let’s look at the following clause from the Coinbase User Agreement:
IN NO EVENT SHALL COINBASE, ITS AFFILIATES AND SERVICE PROVIDERS, OR ANY OF THEIR RESPECTIVE OFFICERS, DIRECTORS, AGENTS, JOINT VENTURERS, EMPLOYEES OR REPRESENTATIVES, BE LIABLE (A) FOR ANY AMOUNT GREATER THAN THE VALUE OF THE SUPPORTED DIGITAL CURRENCY ON DEPOSIT IN YOUR COINBASE ACCOUNT OR (B) FOR ANY LOST PROFITS OR ANY SPECIAL, INCIDENTAL, INDIRECT, INTANGIBLE, OR CONSEQUENTIAL DAMAGES, WHETHER BASED IN CONTRACT, TORT, NEGLIGENCE, STRICT LIABILITY, OR OTHERWISE, ARISING OUT OF OR IN CONNECTION WITH AUTHORIZED OR UNAUTHORIZED USE OF THE COINBASE SITE OR THE COINBASE SERVICES, OR THIS AGREEMENT, EVEN IF AN AUTHORIZED REPRESENTATIVE OF COINBASE HAS BEEN ADVISED OF OR KNEW OR SHOULD HAVE KNOWN OF THE POSSIBILITY OF SUCH DAMAGES. THIS MEANS, BY WAY OF EXAMPLE ONLY (AND WITHOUT LIMITING THE SCOPE OF THE PRECEDING SENTENCE), THAT IF YOU CLAIM THAT COINBASE FAILED TO PROCESS A BUY OR SELL TRANSACTION PROPERLY, YOUR DAMAGES ARE LIMITED TO NO MORE THAN THE VALUE OF THE SUPPORTED DIGITAL CURRENCY AT ISSUE IN THE TRANSACTION, AND THAT YOU MAY NOT RECOVER FOR LOST PROFITS, LOST BUSINESS OPPORTUNITES, OR OTHER TYPES OF SPECIAL, INCIDENTIAL, INDIRECT, INTANGIBLE, OR CONSEQUENTIAL DAMAGES IN EXCESS OF THE VALUE OF THE SUPPORTED DIGITAL CURRENCY AT ISSUE IN THE TRANSACTION. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OR LIMITATION OF INCIDENTAL OR CONSEQUENTIAL DAMAGES SO THE ABOVE LIMITATION MAY NOT APPLY TO YOU.
A key aspect of the limitation of liability clause is the “cap” on liability. The amount of the cap can be calculated in various ways but is typically related to the total fees contemplated under the contract. The Coinbase example includes a variation where the liability is limited by the total amount deposited in the user’s Coinbase account.
When negotiating contracts that include automatic renewal terms, companies should strongly consider including a timing mechanism on the liability cap. For example, consider a provision that limits the liability to the amount of fees payable under the contract over the twelve-month period preceding the event giving rise to the claim. This could greatly reduce liability, as the total fees over the life of an automatically renewing contract could grow to a substantial sum over the full life of the contract.
Another typical feature of limitation of liability clauses is the exclusion of liability for certain types of damages (such as indirect, special, and consequential damages, as shown in the Coinbase example). This gets very technical, but the general idea is to limit liability to direct damages under the contract, in an effort to provide more certainty with respect to the extent of damages that might be awarded to a party by a court.
Parties to a contract should also be mindful that limitation of liability clauses are subject to public policy concerns. For example, if the limitations are unreasonably broad or the cap is unreasonably low, a court may not be willing to enforce the clause. The last sentence in the Coinbase example touches on this by stating that the limitation of liability may not be enforceable in some jurisdictions.
One other aspect to note is that the limitation of liability clause is often in all CAPS. The legal theory here is that because the provision has such significant consequences, the parties to the contract are less likely to miss the provision if it has specialized font characteristics.
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