Negotiating contractual limitations of liability: Do it risk by risk, not one-size-fits-all

A common complaint: Too much time spent negotiating liability limitations

Limitation-of-liability provisions usually rank at or near the top of the IACCM’s annual surveys of the most-frequently-negotiated contract terms.

Ironically, the same surveys indicate that contract professionals fervently wish they could spend their time negotiating collaborative provisions (to try to keep trouble from happening) instead of liability provisions (in case trouble does come to pass).

I’ve been curious why this is such a recurring problem — why it’s been talked about for several years but doesn’t seem to have been solved, at least not that I’ve heard.

The root of the complaint:  Boilerplate.

I think I know why many companies have to spend too much time nego­tia­ting limitations of liability: A lot of the limitation provisions I’ve read over the years have been long, boilerplate state­ments; they might be fine for a simple, low-stakes contract, but their lack of speci­fi­ci­ty can give a reviewer pause, and complicate the discussion, when more is at risk:

• Consequential-damages exclusions seldom spell out just what specific categories of damages can and cannot be recovered — it seems as though each party crosses its fingers and hope the courts will interpret the phrase ‘consequential damages’ in its favor. That, of course, makes negotiators nervous, because they don’t know wheth­er the particular type of damage they’re concerned about will qualify;
• Damages caps usually take the form of a single, one-size-fits-all number that applies to every conceivable form of liability. It’s true that negotiators do sometimes debate whether particular types of damage (e.g., damages covered by an indemnity obligation) should be carved out entirely from the damages cap. But that’s a false di­chot­o­my; it assumes, for no reason, that a given type of damages will be either subject to the ‘default’ cap, or not subject to any cap at all.

Instead of resenting the time it takes to negotiate limitations of liability, perhaps we should try doing things a little differently — not necessarily in every negotiation, but definitely in those in which the liability limitations are likely to be closely scrutinized.

Systematically list risks of specific concern, then address liability limits for each

Contract drafters can speed up discussions of liability limitations, I’ve found, by breaking up general boilerplate language into more-concrete statements of risks that are of particular concern, which the parties can focus on more readily.

One technique that works well is to provide a table, such as in the example below, that (i) lists specific risks, and (ii) states, for each specified risk, what if any liability limits are agreed.

Using that table, the parties can systematically work through the list of risks and, for each risk, negotiate the limitations they’re willing to accept.

The example below is adapted from a couple of different large-scale software license agreements I’ve helped negotiate in recent years; the specific entries have been generalized (because it’s a hypothetical example).

Using this kind of systematic approach, if the parties decided to address additional risks in the contract, they could just add rows to the table.

The parties could also add columns to the table: Instead of including a single column for “consequential damages, etc.,” they could add separate columns for consequential damages, incidental damages, punitive damages, lost profits, lost revenues, and so on.

To be sure, if the non-drafting party won’t care much about the limitation of liability anyway, then including such detailed limitation language could actually hinder the overall negotiations.

But remember, by hypothesis we’re talking about contract negotiations in which the limitation language is indeed going to be carefully negotiated — in which case this kind of systematic approach will almost always make sense.