Limitation-of-Liability Overkill

Wearing my LegalSifter-advisor hat, I’ve been looking at what people try to cover in limitation-of-liability provisions—in other words, what they won’t be responsible for. Here’s what I’ve come up with in half an hour of rooting around on EDGAR:

  1. Consequential damages
  2. Special damages
  3. Direct damages
  4. General damages
  5. Indirect damages
  6. Incidental damages
  7. Punitive damages
  8. Exemplary damages
  9. Loss of profits
  10. Collateral damages
  11. Delay damages
  12. Loss of anticipated revenues
  13. Loss of savings
  14. Loss of goodwill
  15. Loss of data
  16. Loss by reason of cost of capital
  17. Loss of use
  18. Loss of production
  19. Loss of contracts
  20. Increased operating costs
  21. Loss of business reputation
  22. Lost opportunities
  23. Loss of use of equipment
  24. Loss by reason of damage to equipment
  25. Loss by reason of personal injury
  26. Loss by reason of property damage
  27. Substitute goods
  28. Substitute service
  29. Substitute facilities
  30. Downtime costs
  31. Claims of customers

You can expect any given limitation-of-liability provision to contain a handful of items on this list. Usually it will be a mixed bag, containing items that refer to how the impact of losses can be characterized (for example, consequential damages) and items that refer to the cause of losses (for example, damage to equipment). (Beware the interplay between consequential damages and lost profits; see this 2014 blog post.)

One routinely finds glitches in such lists. For example, referring to both consequential damages and special damages: they’re synonyms. Or excluding both direct and indirect damages: that excludes everything.

And some of these items have to be made up. For example, collateral damages: someone’s been watching too many bad movies.

But beyond that, there’s the sheer number, obscurity, and apparent randomness of attempted exclusions you can expect to find in any given provision. It smacks of negotiation theater—lawyers dickering over largely meaningless distinctions so as to appear to add value. If you ask a given contracts person to explain why they’ve included an item in the litany and how they expect it to play out, expect a lot of hemming and hawing.

I say stop the BS. Accept that you’ll be on the hook for whatever damages you’re reasonably responsible for. Limit your risk by negotiating a cap. End of story. I discuss that in MSCD and in this 2010 blog post.

If anyone thinks some items on this list (aside from obvious ones like consequential damages) are worth paying attention to, I’d be happy to hear it.

About the author

Ken Adams is the leading authority on how to say clearly whatever you want to say in a contract. He’s author of A Manual of Style for Contract Drafting, and he offers online and in-person training around the world. He’s also chief content officer of LegalSifter, Inc., a company that combines artificial intelligence and expertise to assist with review of contracts.

9 thoughts on “Limitation-of-Liability Overkill”

  1. “Accept that you’ll be on the hook for whatever damages you’re reasonably responsible for. Limit your risk by negotiating a cap. End of story.”

    This. (And advise your client to review its insurance coverage.) (And consider different damages caps for different types of breach, different time periods, different circumstances, etc.)

  2. Ken:

    I think there’s a good case to exclude consequential damages, Especially as defined in the UCC, for software and similar deals. The customer tells the sales person all about how they want to use the software, which is a standard package. There’s a bug in the software, so it doesn’t do what it supposed to. Assume that’s breach. The consequences of which the customer gave the sales person special reason to know could be orders of magnitude more costly than the price of the software.

    Now, to your point, maybe the software provider can negotiate a limit of fees paid. But it might be that both parties would be happier with a higher cap combined with an exclusion of consequential damages.


    • But isn’t what you’re describing not consequential damages but damages for breach of the implied warranty of fitness for a particular purpose? If you’ve disclaimed that, what’s left of your scenario?

      • Vance, very interesting point. Both the second limb of Hadley v Baxendale and the concept of fitness for purpose focus on specially notified uses/potential losses. Someone (not me) could write a very interesting article about the potential overlap between these concepts.

  3. I fear that all you have done is to compile a list speculative types of damages that vendors will soon incorporate into and disclaim in their limitation of liability provisions.

  4. At the risk of being shamed, and as one whose near every (construction) contract contains a waiver of consequential damages, it is true that we/I use that clause to bar various damages that are in fact direct. If I have a client with a plant of some sort selling its an output product , the direct loss of a malfunctioning $100 circuit board could be thousands, or millions. For that reason, contractors want to exclude things such as loss of revenue, which would be a natural, direct (and even obvious) consequence of the defective board (i.e. first limb of Hadley and Baxendale).
    On the other hand, however, many other heads of direct losses are agreed to be recoverable, so we get into the weeds on just this issue. If we rely _only_ on a liability cap, that seems far too much a blunt instrument, which will inevitably lead to drastically lower caps in my corner of law. I submit that it’s not as easy as you write, at least when there are a lot of zeros involved. (FWIW, I use far less than the full 31!)


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