Limiting liability

Prohibition on exclusions and limitations

What liabilities cannot be excluded or limited by a supplier in a contract?

There is a trend in favour of limitation of liability clauses in contracts subject to certain exceptions. For example, a contract governed by the Uniform Commercial Code (UCC) may include terms that limit or exclude consequential damages ‘unless the limitation or exclusion is unconscionable’. Under the UCC, the limitation of consequential damages for injury to the person in the case of consumer goods is prima facie unconscionable, but the limitation of damages where the loss is commercial is not.

The ability to limit liability in a contract may also vary depending upon the state law that governs that contract. Most courts disfavour contract provisions that limit a party’s liability for gross negligence, fraud or intentional torts. Some states also refuse to enforce these clauses if the party seeking protection acted in bad faith.

Financial caps

Are there any statutory controls on using financial caps to limit liability for breach of contract?

No, there are no statutes that enforce financial caps on contracts to limit liabilities, but contracting parties are free to include financial caps within their contract. Also, most jurisdictions in the United States adhere to the traditional common law rule against punitive damages for breach of contract, if there is no tortious conduct. In the consumer setting, financial caps can be set aside if found to be unconscionable. While commercial parties are generally free to contract as they see fit, parties seeking to take advantage of such provisions would be wise to include such financial caps in clear, conspicuous language and also include representation and warranties about the provision, providing further additional evidence as to their reasonableness for the situation at hand.

Indemnities

Are there any statutory controls on indemnities used to cover liability risks in contracts?

Indemnification provisions are interpreted under the same rules that govern other provisions in contracts, including the general rule that contracts are interpreted to give effect to the intent of the parties. Most states do not permit indemnification clauses for intentional wrongful acts or punitive damages, as they are deemed against public policy. Also, many states restrict businesses that provide essential services to the public from being indemnified for their own negligence, due to public policy considerations.

Liquidated damages

Are liquidated damages clauses enforceable and commonly used in your jurisdiction?

Liquidated damages clauses are generally enforceable in the United States and commonly used, especially in the commercial setting. Courts have upheld such damages where ‘they are a fair and reasonable attempt to provide just compensation for an anticipated loss resulting from a breach of contract’. Under the UCC, liquidated damage provisions will be enforced unless they are considered ‘excessive’ and, if deemed to be so, are ‘considered unenforceable as a penalty on the grounds of public policy’. Disproportionate liquidated damages may be declared a penalty, which will void the clause and limit recovery to the actual damages resulting from the breach.

As a general matter, courts consider two things in determining whether a liquidated damages clause is enforceable: whether the injury caused by the breach is difficult to calculate, and whether the amount of the liquidated damages is reasonable in proportion to the anticipated injury.

Law stated date

Correct on

Give the date on which the information above is accurate.

15 June 2020.