Introduction

Down toward the bottom of a Service Agreement, it is common to find a few provisions in ALL CAPS that reads like an excerpt from a legal dictionary. These clauses are as important as they can be impenetrable.

This section breaks through the jargon with the information you need to know and how to better negotiate these clauses.

Limitation of Liability

Limitations on the Types of Liability

One of the clauses you’ll want to keep an eye out for is a limitation on the types of liability the contract parties can be held responsible for. A typical clause reads something like this:

<aside> 📑 CLIENT IS NOT LIABLE FOR ANY INDIRECT, SPECIAL, INCIDENTAL, CONSEQUENTIAL, EXEMPLARY OR PUNITIVE DAMAGES, REGARDLESS OF THE FORM OF ACTION WHETHER IN CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, OR OTHERWISE, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES.

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It’s tough to parse, but this clause says that if there is a lawsuit, the Client cannot be liable for certain types of damages, namely, indirect, special, incidental, consequential, exemplary or punitive damages. Put another way, this clause ensures that liability is only determined with respect to the contractual bargain and not other business consequences (many of which may not be foreseeable).

By way of example, if you order a steak medium-rare and it arrives well done, a clause like this means your remedy is either to have the steak redone or taken off the bill (the bargain). You don’t get to sue the steakhouse for a weekend’s worth of lost enjoyment and punitive damages for over-cooking your steak.

Now let’s talk about a few negotiating points:

• Mutual. It is totally acceptable for this clause to apply to both Agency and Client. If it is one-sided favoring Client, you have an easy edit and a good argument to make this work both ways. This is a key issue and appears on our tl;dr Ten Key Issues.
• List of Damages. Look for the list of excluded damages to include indirect, special, incidental, consequential, exemplary, and punitive damages. The sample language above contains all of these types of damages. This is appropriate. Relatedly, make sure the list includes lost profits. The sample language above is missing this important limitation.
• Notice Ineffective. Ideally, you’d like to see a clause that states that the limitations apply even if the liable party has been advised that such damages are possible.
• Make Conspicuous. Finally, these provisions generally need to be “conspicuous” to be enforceable. To most lawyers, this means written in ALL CAPS. While this was the only way to do it when all we had were typewriters, we fortunately have choices now. Bold text, larger text, text in a shaded box are equally conspicuous. I’d avoid betting on just italics to make something conspicuous.

This clause serves the important purpose of limiting the scope of potential liability the contract bargain struck by the parties and not some other theory of liability.

Limitations on the Amount of Liability

With or near the clause limiting the types of liability is often a clause limiting the amount of liability. Like limitations on the types of liability, this important clause appears on our tl;dr Ten Key Issues list. A Client’s first draft of a Service Agreement will often contain a clause like the following:

<aside> 📑 EACH PARTY’S MAXIMUM AGGREGATE LIABILITY UNDER THIS AGREEMENT SHALL BE LIMITED TO THE GREATER OF THE TOTAL AMOUNTS PAID BY CLIENT TO AGENCY DURING THE TWELVE (12) MONTHS IMMEDIATELY PRECEDING THE CLAIM OR ONE MILLION DOLLARS ($1,000,000).

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Clauses limiting the amount of liability are important to ensure that the scale of responsibility under a contract isn’t out of whack. For example, it is entirely possible for a small, three-person Agency to do design work for a Client like Apple, Nike, or Facebook. The scale of the Client in these situations is completely out of proportion to that of the Agency. If something went haywire, the scope of damages for a company like Apple, Nike, or Facebook could be astronomical. A clause like this right-sizes potential liability to an amount appropriate for the scope and nature of the work.

The amount of the liability cap is the key negotiating point. The following are typical points along a range from most Agency favorable to least Agency favorable along with a couple general negotiation points.