Limiting Liability and Damages in a Contract
Certain contract terms can limit liability exposure from potential lawsuits and other claims that may arise. These terms are generally found in limited liability clauses. Certain contractual terms can also limit damages, such as a liquidated damages clause. For these terms to protect contracting parties from liability, they have to be properly drafted and in line with California law.
Limited Liability
Limited liability clauses are permitted by California law, but courts will strictly construe such contract terms. There are certain acts that parties cannot limit liability for, such as instances of gross negligence, fraud, willful injury to persons or property, or violations of law whether the violations of law were intentional or not.Cal. Civ. Code § 1668.
LimitingDamages
In addition to limiting liability in a contract, parties may also agree to exclude or limit damages consistent withCal. Com. Code §2719(3). For example, parties may limit consequential damages of a commercial loss, so long as the limitation is not unconscionable.
However, if a limited remedy clause fails, a plaintiff will be able to pursue all the remedies available for a breach of contract. To determine the validity of a contract term limiting damages, California courts weigh factors such as the type of goods involved, the parties, the allocation of risk, and the precise nature and purpose of the contract. To help ensure that a limiting clause will be enforced, the parties should make clear and explicit statements regarding the intent of the contract.
Liquidated Damages
Sometimes, it is difficult to determine the damages that will result from certain breaches of a contract. To help mitigate against the difficulty of ascertaining the scope of the damages suffered, the parties will include a liquidated damages clause. In this clause, the parties agree to a specified amount of compensation if one of parties to the contract fails to adhere to its terms. Liquidated damages clauses are frequently found in contracts where a specific dollar amount of damages can be hard to determine because of changing circ*mstances, such as in real estate transactions.
Liquidated damages clauses are enforceable under California law as long as they are reasonable and consistent withCal. Civ. Code. § 1671. For such a clause to be “reasonable,” it must be shown that at the time of contracting, damages would have been difficult to calculate, so the parties agreed upon an amount that was a reasonable estimate of any potential damage a breach of contract might cause. The stated amount has to be reasonable to both parties. In the event of a breach, liquidated damages will not necessarily be the only remedy unless the parties expressly so state in the contract.
Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and contract claims.Contact usat (310) 277-7747 to see how we can help you with your business law concerns.
FAQs
A limitation of liability clause limits the amount and/or types of damages that may be attributable to a particular party under the contract for that party's future breach, misconduct while performing under the contract, or indemnification liability.
What is the limitation of liability in the contract act? ›
What is a limitation of liability? A limitation of liability clause in a contract limits the amount of money or damages that one party can recover from another party for breaches or performance failures.
What is the liquidated damages and limitation of liability clause? ›
Limitation of Liability focuses on capping overall financial liability for specified events or breaches. Indemnity deals with the obligation to compensate for losses, damages, or liabilities incurred. Liquidated Damages address specific monetary penalties for delays or other breaches.
Can you limit liability for violation of law? ›
Limited Liability
There are certain acts that parties cannot limit liability for, such as instances of gross negligence, fraud, willful injury to persons or property, or violations of law whether the violations of law were intentional or not.
What are the exceptions to the limitations of liability? ›
Examples of exclusions from limitations of liability include but aren't limited to losses and damages resulting from breaches of confidentiality, refusal of services, willful misconduct, bodily injury, death, damage to physical property, violations of applicable laws and gross negligence.
How to cap limitation of liability? ›
It's common for the cap to be expressed as “100% of the Contract Sum.” Sometimes, it's another multiple, like “5 times the fee”. Whatever the amount, it should be proportionate to the supplier's commercial return on the project and the practical risk.
What is enforceable limitation of liability? ›
An exclusion or limitation clause is only enforceable if it has been incorporated into the relevant contract. A party's standard terms are incorporated if they have been reasonably and fairly brought to the other party's attention.
What is liability limited to direct damages? ›
Types of Damages Liability Limitation
Direct damages may include payments for unpaid fees under an agreement, medical expenses (if a party is injured), monetary payments to replace damaged property, or similar direct results of a legal claim.
What is the limitation clause in a contract law? ›
What is a limitation of liability clause in a contract? A limitation of liability clause in a business-to-business (B2B) contract is a clause that limits the amount of damages a business must pay if a legal claim is brought.
Is there a cap on liability and liquidated damages? ›
Liquidated damages clauses are a common feature of construction contracts. They typically provide a fixed amount per day as the amount that can be claimed due to a delay. However, liquidated damages clauses are often just the beginning and do not provide a cap on liability in many construction contracts.
The Limitation Act was enacted in 1851 to promote the development of the American merchant marine and to put American shipowners on a footing equal to shipowners hailing from other commercial seafaring nations, particularly Great Britain.
What is the maximum liquidated damages? ›
A normal figure used for assessing liquidated damages is 0.5% per week of delay with a maximum of 2.5%. This means that the vendor's maximum liability becomes operative after a 5 weeks' delay and is limited to 2.5% of the contract value.
Do limitations of liability hold up in court? ›
The Court acknowledged that, while a limitation of liability is generally enforceable, such language is voided when the result is a violation of California public policy.
What is the maximum limit of liability? ›
Liability limits are the maximum dollar amount of damages (“indemnity”) an insurance carrier will pay on your behalf. Limits are broken down into two categories: the per claim limit and the aggregate limit.
What is the indemnification clause for limitation of liability? ›
An indemnification clause allows the contracting parties to reduce uncertainty and efficiently manage liability risk. Without an indemnification clause: The indemnified party may not be able to recover certain types of damages, such as attorney's fees.
What is the cap on damages clause? ›
A liability cap clause limits the maximum monetary damages or compensation one party can recover from the other party for claims arising under the contract, irrespective of the actual damages suffered, to an agreed-upon predetermined amount or calculation methodology.
What is the liability damage clause? ›
Each party shall be liable to the other for all damage to the property of the other negligently, recklessly or intentionally caused by that party (or their agents, employees or invitees), except to the extent the loss is insured and subrogation is waived under the owner's policy.
What is an example of a limitation of liability carve out? ›
As the examples below illustrate, carve outs may include those for liability arising from or out of (i) breach of confidentiality obligations, (ii) breach of statutory obligations, (iii) personal injury or death due to negligence or wilful misconduct, (iv) fraud, and (v) indemnification obligations.
What is the limitation of remedies clause? ›
A limitation-of-remedies clause is a part of a contract that limits the available remedies if one party fails to fulfill their obligations. This means that if one party breaches the contract, the other party may not have all the options available to them to seek compensation or other remedies.
