The fundamental purpose of drafting and negotiating a contract between parties is to allocate risk in a manner that allows each contracting party to preserve its commercial expectations. To effectively allocate such risk, each contracting party must ensure that its exposure for loss under the contract is adequately limited. This risk allocation is generally implemented in contracts through the inclusion of, among others, limitations of liability and indemnification provisions.
A limitation of liability provision typically limits a contracting party's risks by capping the amount of damages for which the contracting party is liable, restricting the types of such damages recoverable and imposing a time period during which such damages are recoverable.1 In addition, an indemnification provision limits a contracting party's risk by creating an obligation of the other party to defend and compensate the contracting party from any losses that result from the acts or omissions of the other party.2 A majority of jurisdictions in Latin America permit such risk allocation by allowing contracting parties to freely negotiate the terms of their contract, including provisions regarding limitations of liability and indemnification provisions.
The first component of a limitation of liability provision is a monetary cap on the amount of damages recoverable against a contracting party. Typically, these values are often tied to the contract price. Limitations of liability provisions in Latin America are generally enforceable.3 However, such limitations are subject to jurisdiction-specific exclusions, many of which are often tied to protecting certain public policy interests.4 For example, in Brazil, limitations of liability are not enforceable in public administration contracts.5 In Chile and Peru, a contracting party cannot limit its liability arising from its own willful misconduct or gross negligence.6 As a result, although a contracting party may freely negotiate limitations of liability in Latin America, care should be exercised to ensure that any such limitation does not run afoul of any applicable jurisdiction-specific exclusions.
A typical limitation of liability provision also limits the types of damages recoverable by including a provision waiving the contracting parties' ability to claim consequential or punitive damages. Without such a waiver, a contracting party may be exposed to significant damages, such as lost profits, which could be awarded as consequential damages. Traditionally, most jurisdictions in Latin America have prohibited recovery of consequential damages and have limited claims to only direct damages. 7 As a result, a contracting party may be tempted to avoid negotiating a provision waiving consequential damages. However, courts in Latin America have, on occasion, broadly interpreted damages statutes to provide for recovery of consequential or punitive damages.8 Given the potential for such broad interpretation and for the occurrence of a change in law, contracting parties should use caution and continue to negotiate and include in their contracts waivers of consequential damages to adequately reduce the risk of exposure to such damages.
The third typical component of a limitation of liability provision is a time-bar provision, which limits the period of time during which a claim under the contract may be brought against a contracting party. Generally, most Latin American jurisdictions have already provided for a form of this protection by codifying statutes of limitations that vary based on the nature of the claim.9 However, these statutes can vary in length based on the subject matter and the jurisdiction. Therefore, a contracting party should negotiate its own time-bar provision to ensure that its exposure to risks is adequately limited. Although most Latin American jurisdictions provide that contracting parties are generally free to agree to their own time-bar provisions, such provisions may be unenforceable if they are ambiguously drafted or contradict public policy.10 As a result, any time-bar provision included in a contract should be clearly drafted and steps should be taken to ensure that such provision does not contradict any public policy concerns of the applicable jurisdictions.
Lastly, indemnifications provisions are enforceable in most jurisdictions in Latin America.11 However, as with limitations of liability provisions, Latin American courts often balance the preference for enforceability of these provisions against public policy concerns and, therefore, in instances of willful misconduct or gross negligence, will not enforce these provisions.12
In drafting and negotiating contracts in Latin America, contracting parties are generally free to negotiate and allocate risk, including by incorporating limitations of liability and indemnification provisions in their contract. However, contracting parties should exercise caution and ensure that such provisions are drafted to comply with applicable jurisdiction-specific requirements.