Limiting liability

Prohibition on exclusions and limitations

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

While limitations of liability are common in US contracts, as a general matter these limitations cannot extend to intentional misconduct or gross negligence. The Uniform Commercial Code (UCC) also has relevant limitations because it allows terms that limit or exclude consequential damages ‘unless the limitation or exclusion is unconscionable’. And, in the case of a lawyer’s engagement letter with a client, limitations of liability are unenforceable because they are seen as unethical.

Here, it is important to stress that the permissible scope of limitations of liability vary by state, so care needs to be taken when relying on a limitation of liability to understand what is and is not permissible under a specific state’s law. 

Financial caps

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

No. Commercial parties are free to include financial caps for breach of contract and frequently do so. With that said, limitations of liability do not typically apply to gross negligence or wilful misconduct.

Caps on liability may not be enforceable in certain consumer contracts when they are deemed to be unconscionable.

Indemnities

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

For the most part, no. Courts interpret indemnification provisions just as they would any other contractual provision. Like limitations of liability, courts will often read public policy limitations into indemnification provisions and may not permit, for instance, indemnification for intentional wrongdoing. Some states have other relevant statutes that either limit or define the scope of permission indemnification. Delaware, for instance, has a detailed body of law concerning the indemnification of officers and directors of companies. When handling indemnification clauses, therefore, one must be sure to understand the state rules that may apply.

Liquidated damages

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

Generally speaking, liquidated damages clauses are permissible in the US. They are common in commercial contracts and will be enforced where seen as fair and reasonable in light of anticipated losses from a breach of the relevant contract. Liquidated damages that are well in excess of actual damages might be seen as an impermissible penalty and, therefore, void. As with other topics, the law concerning liquidated damages varies from state to state, so considering the specific state law that applies is critical.