Drafting tip: Exclude amounts due under the contract from a cap on damages

In the IHR Security case, a customer of an accounting-software vendor stopped paying the vendor’s invoices because the software allegedly didn’t function as promised. The vendor sued for payment of some $52,000. The customer claimed that its liability was capped at $5,000, because that was the cap of a  limitation of liability clause that applied to each party: “Notwithstanding anything to the contrary, the total dollar liability of either party under this agreement or otherwise shall be limited to US $5,000.”

The good news for the vendor was that the court did some intellectual gymnastics, holding that the damages cap applied only to the parties’ liability for damages for improper functioning or failure of the software, not to the customer’s liability for nonpayment. See IHR Security, LLC v. Innovative Business Software, Inc., — S.W.3d —, 2014 WL 1057306, slip op. at 6 (Tex.App.– El Paso Mar. 19, 2014) (affirming summary judgment in relevant part, reversing and remanding as to other issues). (Hat tip: Chicago lawyer / blogger Evan Brown, via Brian Rogers aka The Contracts Guy.)

The bad news for the vendor was that it had to litigate the issue, which no doubt cost a fair amount of money.

Lesson: When drafting a damages cap, expressly exclude amounts due under the contract; see the Common Draft damages-cap clause for sample language.