Contract provisions can limit liability for damages, if properly drafted

For many companies, contracts are a daily part of doing business. In today’s increasingly litigious environment, a clause containing a limitation on liability can reduce exposure in the event of a lawsuit. However, a company seeking to add a limitations clause to standard contracts must proceed carefully in order to ensure the provision is enforceable.

What is the benefit of a limitation of liability clause?

By including a limited liability clause, a company seeks to cap the amount of damages that may be recovered in any subsequent claim based on the subject of the contract. One of the more common damage-limiting clauses involves a limitation of liability equal to the fee charged by the company for providing the underlying service. For example, a home inspection company may limit its liability by including a clause stating, “Liability arising from [the company’s] professional acts, errors or omissions shall not exceed the total fees paid for services rendered on the project.” Parties to a contract may also agree to limit liability to a fixed dollar amount, or to the limits of available insurance coverage. These contractual limits generally apply to any claims that arise from the contract, even if those claims are pleaded as negligence claims.

How do the Texas Courts view these clauses?

Texas law generally allows parties negotiating a contract to include a provision limiting damage liability. In reviewing such clauses, the courts will ask whether the provision is unconscionable. In conducting this analysis, courts will often focus on whether the contract provision was unfair or grossly one-sided. Some of the factors to be considered are:

• the relationship between the parties (when there is a special or
  fiduciary relationship between the parties, such as an attorney-client relationship a Court is unlikely to enforce the provision);
• whether there was a large disparity in bargaining power;
• the legitimate business reasons that support including the provision in the contract;
• whether the limitation fairly anticipates future losses attributable to the released parties’ conduct (e.g. – limiting liability to $1,000 on a million dollar contract would probably be unenforceable);
• whether the clause is ambiguous (i.e. – whether it has more than one reasonable interpretation).

Courts have upheld limits on liability in the areas of home inspections, architectural design and security system providers.

Drafting tips

To improve the likelihood of enforcement, damage limitation clauses should be drafted in clear, concise language, so that the parties’ intent is clear as to the limit on future liability. Including subtitles, bold or underlined font, or a space for the parties’ initials may also avoid a fair notice argument that the provision was not conspicuous.

Before signing an agreement containing a damage limitation clause, it is best to discuss the clause and negotiate the language and amount of the limitation. Any revisions made to drafts of the contract should be maintained to prove that the clause was negotiated and intended to be binding.

In certain circumstances, limitation of liability clauses can offer effective protection from liability. An attorney should be consulted, whether drafting such a provision or deciding whether such a provision in an executed contract might be difficult to enforce and open to attack. In either scenario, it should be noted that limitation of liability clauses have the potential to drastically alter the parties’ relative contractual rights and remedies.