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Drafting Enforceable Limitation of Liability Clauses in Business Contracts
Drafting Enforceable Limitation of Liability Clauses in Business Contracts
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DRAFTING ENFORCEABLE LIMITATION OF
LIABILITY CLAUSES IN BUSINESS
CONTRACTS
March 3, 2015
Leslie J. Weiss
312-214-4864
leslie.weiss@btlaw.com
Kenneth M. Gorenberg
312-214-5609
kgorenberg@btlaw.com
Steven M. Richman
856-874-4213
smrichman@duanemorris.com
6
• Q&A
7
Overriding Theme
Contract parties want to allocate risk.
8
• Provision of services
• Business to business – presumed to be more sophisticated than
consumer contracts
• Business to consumer – limitations of certain types of liability are
considered unconscionable when it comes to consumers
Challenges in negotiation
• Caps
• Security/Privacy Issues
Drafting tips
Sample 1
A. YOU AGREE THAT WE WILL NOT BE LIABLE FOR ANY DAMAGES WHATSOEVER, INCLUDING
DIRECT, INDIRECT, INCIDENTAL, SPECIAL, CONSEQUENTIAL OR EXEMPLARY DAMAGES (EVEN IF
WE HAVE BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES), ARISING FROM, RELATING
TO OR CONNECTED WITH: (A) THE USE OR INABILITY TO USE OUR SERVICE, (B) THE COST OF
REPLACEMENT OF ANY GOODS, SERVICES OR INFORMATION PURCHASED OR OBTAINED AS A
RESULT OF ANY INFORMATION OBTAINED FROM OR TRANSACTIONS ENTERED INTO THROUGH
OR FROM OUR SERVICE, (C) DISCLOSURE OF, UNAUTHORIZED ACCESS TO OR ALTERATION OF
YOUR CONTENT, (D) STATEMENTS, CONDUCT OR OMISSIONS OF ANY SERVICE PROVIDERS OR
OTHER THIRD PARTY ON OUR SERVICE, (E) ACTIONS OR INACTIONS OF OTHER USERS OF OUR
SITE OR OUR SERVICE OR ANY OTHER THIRD PARTIES FOR ANY REASON, OR (F) ANY OTHER
MATTER ARISING FROM, RELATING TO OR CONNECTED WITH OUR SERVICE OR THESE TERMS.
B. WE WILL NOT BE LIABLE FOR ANY FAILURE OR DELAY IN PERFORMING UNDER THESE TERMS
WHERE SUCH FAILURE OR DELAY IS DUE TO CAUSES BEYOND OUR REASONABLE CONTROL,
INCLUDING NATURAL CATASTROPHES, GOVERNMENTAL ACTS OR OMISSIONS, LAWS OR
REGULATIONS, TERRORISM, LABOR STRIKES OR DIFFICULTIES, COMMUNICATIONS SYSTEMS
BREAKDOWNS, HARDWARE OR SOFTWARE FAILURES, TRANSPORTATION STOPPAGES OR
SLOWDOWNS OR THE INABILITY TO PROCURE SUPPLIES OR MATERIALS.
C. IN NO EVENT WILL OUR AGGREGATE LIABILITY TO YOU OR ANY THIRD PARTY IN ANY MATTER
ARISING FROM, RELATING TO OR CONNECTED WITH OUR SERVICE OR THESE TERMS EXCEED
THE SUM OF ONE HUNDRED ($100) DOLLARS.
D. SOME JURISDICTIONS DO NOT ALLOW THE EXCLUSION OF CERTAIN WARRANTIES OR THE
LIMITATION OR EXCLUSION OF LIABILITY FOR INCIDENTAL OR CONSEQUENTIAL DAMAGES.
ACCORDINGLY, SOME OF THE LIMITATIONS OF THE FOREGOING SECTIONS MAY NOT APPLY TO
YOU.
17
Sample 2
D. Indirect and Consequential Damages:
i. Provider waives and releases all claims against Customer for
indirect, consequential or punitive damages directly or indirectly arising out of this
Agreement or the Work regardless whether caused or contributed to by the sole, joint
or concurrent negligence, strict liability, preexisting condition, or any other fault of
Customer. As used in this Agreement, “indirect damages” or “consequential damages”
includes, without limitation, loss of revenue, profit or use of capital, production delays,
loss of product, reservoir loss or damage, losses resulting from failure to meet
deadlines and downtime of facilities, vessels or aircraft.
ii. Customer waives and releases all claims against Provider for
indirect, consequential or punitive damages directly or indirectly arising out of this
Agreement or the Work regardless whether caused or contributed to by the sole, joint
or concurrent negligence, strict liability, preexisting condition, or any other fault of
Provider. As used in this Agreement, “indirect damages” or “consequential damages”
includes, without limitation, loss of revenue, profit or use of capital, production delays,
loss of product, reservoir loss or damage, losses resulting from failure to meet
deadlines and downtime of facilities, vessels or aircraft.
E. PROVIDER’S AGGREGATE LIABILITY UNDER THIS AGREEMENT OR
OTHERWISE IS LIMITED TO THE COVERAGE ACTUALLY AFFORDED
BY PROVIDER’S INSURANCE POLICY, SUMMARY OF WHICH IS
ATTACHED HERETO AS APPENDIX A.
18
Sample 3
EXCEPT FOR THIRD PARTY CLAIMS COVERED UNDER THE
INDEMNIFICATION PROVISIONS OF THIS AGREEMENT, TO THE
FULLEST EXTENT PERMITTED BY LAW, NEITHER CUSTOMER
NOR PROVIDER SHALL BE LIABLE TO THE OTHER OR ANY
OTHER PERSON FOR ANY INJURY TO OR LOSS OF GOODWILL,
REPUTATION, BUSINESS, PRODUCTION, REVENUES, PROFITS,
ANTICIPATED PROFITS, CONTRACTS OR OPPORTUNITIES
(REGARDLESS OF HOW THESE ARE CLASSIFIED AS DAMAGES),
OR FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT,
EXEMPLARY, SPECIAL, PUNITIVE OR ENHANCED DAMAGES
WHETHER ARISING OUT OF BREACH OF CONTRACT, TORT
(INCLUDING NEGLIGENCE), STRICT LIABILITY, PRODUCT
LIABILITY OR OTHERWISE (INCLUDING THE ENTRY INTO,
PERFORMANCE OR BREACH OF THIS AGREEMENT),
REGARDLESS OF WHETHER SUCH LOSS OR DAMAGE WAS
FORESEEABLE OR THE PARTY SUFFERING THE LOSS OR
DAMAGE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
LOSS OR DAMAGE, AND NOTWITHSTANDING THE FAILURE OF
ANY AGREED OR OTHER REMEDY OF ITS ESSENTIAL PURPOSE.
19
Sample 4
15. Limitation of Liability
15.1. EXCEPT FOR BREACHES OF CONFIDENTIALITY,
NEITHER PARTY WILL BE LIABLE TO THE OTHER PARTY FOR
ANY SPECIAL, INDIRECT, CONSEQUENTIAL OR INCIDENTAL
DAMAGES OF ANY KIND, INCLUDING, WITHOUT LIMITATION,
ANY LOSS OF PROFIT, LOSS OF USE, OR BUSINESS
INTERRUPTION, BASED ON ANY CLAIM UNDER THIS
AGREEMENT, EVEN IF SUCH PARTY HAS BEEN ADVISED OF
THE POSSIBILITY OF SUCH DAMAGES.
15.2. TO THE EXTENT PERMITTED BY APPLICABLE
LAW, IN NO EVENT SHALL THE LIABILITY FOR DAMAGES
HEREUNDER OF PROVIDER OR ANY MEMBER OF THE
PROVIDER GROUP OR ITS EMPLOYEES OR AGENTS EXCEED
THE AMOUNTS ACTUALLY PAID TO PROVIDER BY CUSTOMER.
20
Sample 5
15. Exclusion of Consequential and Other Indirect Damages. EXCEPT FOR THIRD PARTY
CLAIMS COVERED UNDER THE INDEMNIFICATION PROVISIONS OF THIS AGREEMENT, TO THE
FULLEST EXTENT PERMITTED BY LAW, NEITHER PROVIDER NOR GUARANTOR, ON THE ONE HAND,
NOR CUSTOMER ON THE OTHER HAND SHALL BE LIABLE TO THE OTHER OR ANY OTHER PERSON
FOR ANY INJURY TO OR LOSS OF GOODWILL, REPUTATION, BUSINESS, PRODUCTION, REVENUES,
PROFITS, ANTICIPATED PROFITS, CONTRACTS OR OPPORTUNITIES (REGARDLESS OF HOW THESE
ARE CLASSIFIED AS DAMAGES), OR FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT,
EXEMPLARY, SPECIAL, PUNITIVE OR ENHANCED DAMAGES WHETHER ARISING OUT OF BREACH OF
CONTRACT, TORT (INCLUDING NEGLIGENCE), STRICT LIABILITY, PRODUCT LIABILITY OR
OTHERWISE (INCLUDING THE ENTRY INTO, PERFORMANCE OR BREACH OF THIS AGREEMENT),
REGARDLESS OF WHETHER SUCH LOSS OR DAMAGE WAS FORESEEABLE OR THE PARTY
SUFFERING THE LOSS HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH LOSS OR DAMAGE, AND
NOTWITHSTANDING THE FAILURE OF ANY AGREED OR OTHER REMEDY OF ITS ESSENTIAL
PURPOSE.
16.7 CAP on Liability. Provider’s liability under this Agreement as a whole for any and all Losses of
Ibex and the Indemnitees under this Agreement, including without limitation, claims for indemnification under
this Section 16, will not exceed fifty percent (50%) of the amount of the Up-Front Fee and any Earned
Royalties Provider has received under this Agreement, with the exception of Losses of Customer or any
Affiliate of Customer due to Provider losing ownership of any Original Licensed Patents due to the situations
described in Section 11.1 11.2, or 16.1, wherein Provider’s aggregate liability for Losses under this Agreement
will be limited to one hundred percent 100% of the Up-Front Fee and any Earned Royalties Provider has
received under this Agreement.
21
Sample 6
E. Disclaimer of Damages. EXCEPT FOR LIABILITY OF THE
PARTIES UNDER THE CONFIDENTIALITY AND INDEMNIFICATION
SECTIONS OF THIS AGREEMENT, IN NO EVENT WILL EITHER
PARTY BE LIABLE TO THE OTHER PARTY FOR ANY PUNITIVE,
INCIDENTAL, INDIRECT OR CONSEQUENTIAL DAMAGES OF ANY
KIND IN CONNECTION WITH THIS AGREEMENT, EVEN IF THE
PARTY WHO IS LIABLE HAS BEEN INFORMED IN ADVANCE OF
THE POSSIBILITY OF SUCH DAMAGES, EXCEPT WHEN SUCH
DAMAGES ARE CAUSED BY THE GROSS NEGLIGENCE OR
WILLFUL MISCONDUCT OF THE PARTY, ITS EMPLOYEES,
AGENTS, OR SUBCONTRACTORS. EXCEPT FOR LIABILITY OF
THE PARTIES UNDER THE CONFIDENTIALITY AND
INDEMNIFICATION SECTIONS OF THIS AGREEMENT NEITHER
PARTY SHALL BE LIABLE TO THE OTHER FOR DAMAGES OF ANY
KIND IN AN AMOUNT IN EXCESS OF THE AMOUNTS PAID TO
PROVIDER BY CUSTOMER DURING THE THEN PRIOR TWELVE
MONTHS FOR THE PROVISION OF THE CONTENT AND THE
SERVICES PROVIDED HEREUNDER.
22
Sample 7
14. LIMITATION OF LIABILITY
Except for claims pertaining to Confidential Information,
third-party claims under the indemnification provisions of
this Agreement, or damages resulting from a party’s gross
negligence or willful misconduct, neither party will be liable
to the other for any indirect, special, punitive, exemplary or
consequential damages, or incidental losses or damages of
any kind, including, but not limited to, lost profits, lost
savings or loss of use of facilities or equipment, regardless
of whether arising from breach of contract, warranty, tort,
strict liability or otherwise, even if advised of the possibility
of such loss or damage, or if such loss or damage could
have been reasonably foreseen.
23
Sample 8
6. Limitation of Liability. Except for claims pertaining
to Confidential Information, Licensor Trademarks, Return of
Materials, Non-Solicitation, third-party claims under the
indemnification provisions of this Agreement, or damages
resulting from a party’s gross negligence or willful
misconduct, neither party will be liable to the other for any
indirect, special, punitive, exemplary or consequential
damages, or incidental losses or damages of any kind,
including, but not limited to, lost profits, lost savings or loss
of use of facilities or equipment, regardless of whether
arising from breach of contract, warranty, tort, strict liability
or otherwise, even if advised of the possibility of such loss
or damage, or if such loss or damage could have been
reasonably foreseen.
24
Sample 9
(c) EXCEPT FOR THIRD PARTY CLAIMS COVERED UNDER THE
INDEMNIFICATION PROVISIONS OF THIS AGREEMENT, TO THE
FULLEST EXTENT PERMITTED BY LAW, NONE OF COMPANY ON THE
ONE HAND, NOR SERVICE PROVIDER NOR GUEST CONTRIBUTOR
ON THE OTHER HAND WILL BE LIABLE TO THE OTHER OR ANY
OTHER PERSON FOR ANY INJURY TO OR LOSS OF GOODWILL,
REPUTATION, BUSINESS, PRODUCTION, REVENUES, PROFITS,
ANTICIPATED PROFITS, CONTRACTS OR OPPORTUNITIES
(REGARDLESS OF HOW THESE ARE CLASSIFIED AS DAMAGES), OR
FOR ANY CONSEQUENTIAL, INCIDENTAL, INDIRECT, EXEMPLARY,
SPECIAL, PUNITIVE OR ENHANCED DAMAGES WHETHER ARISING
OUT OF BREACH OF CONTRACT, TORT (INCLUDING NEGLIGENCE),
STRICT LIABILITY, PRODUCT LIABILITY OR OTHERWISE (INCLUDING
THE ENTRY INTO, PERFORMANCE OR BREACH OF THIS
AGREEMENT), REGARDLESS OF WHETHER SUCH LOSS OR
DAMAGE WAS FORESEEABLE OR THE PARTY SUFFERING THE LOSS
OR DAMAGE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
LOSS OR DAMAGE, AND NOTWITHSTANDING THE FAILURE OF ANY
AGREED OR OTHER REMEDY OF ITS ESSENTIAL PURPOSE.
25
Sample 10
8.2 EXCEPT FOR LIABILITY OF THE PARTIES FOR
BREACH OF CONFIDENTIALITY AND CLAIMS UNDER
THE INDEMNIFICATION SECTION OF THIS
AGREEMENT, NEITHER PARTY SHALL BE LIABLE TO
THE OTHER FOR SPECIAL, INCIDENTAL OR
CONSEQUENTIAL DAMAGES BY REASON OF A
BREACH OF THIS AGREEMENT OR ANY WARRANTY
OR OBLIGATION HEREUNDER, EVEN IF SUCH PARTY
KNOWS OR SHOULD HAVE KNOWN OF THE
POSSIBILITY OF ANY SUCH LIABILITY.
26
ENFORCEABILITY CHALLENGES
27
LOL not enforced: “It is the public policy of this State … that a party
may not insulate itself from damages caused by grossly negligent
conduct. (Citation omitted.) This applies equally to contract clauses
purporting to exonerate a party from liability and clauses limiting
damages to a nominal sum.”
30
LOL not enforced: “Such clauses are not favored and are to be strictly construed
against the party they benefit, especially when that party was also the draftsman.
Such clauses must spell out the intention of the parties with great particularity and
will not be construed to defeat a claim which is not explicitly covered by their terms.”
(Citations omitted.)
31
• Sonitrol detected burglary six times over seven hours and never called police
• Sonitrol called fire department 19 minutes after fire alarm and 12 minutes after fire
department arrived
• LOL in burglar alarm installation and service contracts are routinely upheld, BUT
• LOL not enforced as to willful and wanton conduct
“Because of the egregiously wrongful nature of the conduct, enforcing a limitation of liability
provision to shield a party from the consequences of such conduct is deemed to be contrary to
public policy. [Citations.] Moreover, limiting liability for ‘[a] willful failure to monitor th[e] system
or a deliberate disregard of a contractual duty would not be consistent with the intended
protection service set forth in the contract.’”
32
33
LOL not enforced: “Applying these principles to the home inspection contract before
us, we find the limitation of liability provision unconscionable. We do not hesitate to
hold it unenforceable for the following reasons: (1) the contract, prepared by the
home inspector, is one of adhesion; (2) the parties, one a consumer and the other a
professional expert, have grossly unequal bargaining status; and (3) the substance
of the provision eviscerates the contract and its fundamental purpose because the
potential damage level is so nominal that it has the practical effect of avoiding
almost all responsibility for the professional's negligence. Additionally, the provision
is contrary to our state's public policy of effectuating the purpose of a home
inspection contract to render reliable evaluation of a home's fitness for purchase
and holding professionals to certain industry standards.”
34
• Eco Safe claims lost business because Food Safety’s test didn’t show that Eco
Safe’s ozone wash was better than chlorine rinse
• LOL upheld
“Eco Safe identified no evidence that the clause was the product of unequal
bargaining power, that it contravened public policy, or that it affected the public
interest.”
38
39
Statutory restrictions
44
INTERPLAY WITH
INDEMNIFICATION PROVISIONS
49
General Comments
• Several issues, but key aspect is the scope of the
indemnification and triggers; claims v. loss
• Courts generally enforce strictly against the indemnitee
• Indemnification against one’s own negligence allowed if
clear in document
• Duty to defend is broader than duty to indemnify but is a
function of the language of the indemnification
• Mutual indemnification: cross-defense
• Insurance issues: anti-subrogation rule
• Interplay with insurance requirements
53
Statutory Restrictions
• States may carve out exceptions:
• NY General Obligations Law Section 5-322.1 has certain
limitations on clauses that purport to force the other party
to indemnify for the party’s own negligence
• Relates generally to construction of a building; cannot
have an indemnification for your own negligence
regarding a construction contract
56
Scope is Key
• Do not rely on boilerplate
• Focus on the particulars of the industry, business
practices, and context
• Gauge the probabilities of occurences
• Anticipate problems: the “what ifs”
• Consistent with other documents
• Burden of proof as to liability on indemnitee
58
Construing Scope
• Courts will look to the specific language and, if it is
unambiguous, interpret it in accordance with its plain meaning.
Martinez v. City of New York, 73 A.D. 2d 993 (2nd Dep’t 2010)
(“The right to contractual indemnification depends upon the
specific language of the contract.”
• “The language of an indemnity agreement “should not be
extended to include damages which are neither expressly
within its terms nor of such character that it is reasonable to
infer that they were intended to be covered under the contract”)
Zanghi v. Laborer’s International Union of North America, 21
A.D. 3d 1370, 1372 (4th Dep’t 2005)
• “An indemnification agreement will not be read to impose
obligations upon the indemnitor which are neither disclosed at
the time of its execution nor reasonably within the scope of its
terms and the over-all intendment of the parties at the time of
its making.”). Tokyo Tanker Company Limited v. Etra Shipping
Corp., 142 A.D. 2d 377 (1st Dep’t 1989)
59
Enforceability
• A broad indemnification clause, even without mention of
the indemnitor’s fault or negligence, provided it is clear
and unambiguous, will be given effect. See, e.g., In re
New York City Asbestos Litigation, 41 A.D. 3d 299 (1st
Dep’t 2007) (indemnification "against any and all liability
for injury to person or property occasioned... wholly or in
part, by any act or omission of" supplier)
63
Indemnification of Settlement
• Should be addressed in the indemnification clause
• Business issues: do you want your indemnitor giving your
customers a hard time?
• Who controls the terms of the settlement?
• Who conducts negotiation? Who approves? What
criteria? Timing
66
Meaningful Opportunity
• If indemnitee fails to give indemnitor notice of proposed
settlement and meaningful opportunity to assume
defense, settling indemnitee not entitled to indemnification
unless establishes amount of indemnified liability.
Montauk Oil Transportation Corp. v. Tug “El Zorro
Grande,” 54 F. 3d 111 (2nd Cir. 1995).
• Notice need not be in writing.
• Covenant of Good Faith and Fair Dealing
70
Sufficiency of Notice
• In Deutsch, notice had been served on the indemnitor
and, as the court observed it had been “well aware” of the
underlying action for two years and therefore had
sufficient notice.
• Even though the provision did not address notice, the
court held that if there is no notice given to the indemnitor
then in order to get reimbursement, the indemnitee must
establish (1) it would have been liable and (2) there was
no defense to the liability. Even where there is notice, and
the indemnitor is bound, it is bound only to reasonable
good faith settlements.
71
Reasonableness Matters
• See also Dunn v. Uvalde Asphalt Paving Co., 175 N.Y.
214, 218 (N.Y. 1903)(“loss or damage may be voluntarily
paid by the innocent party who is legally liable without
waiting for judgment . . . but, in that event, he
undoubtedly assumes the risk of being able to prove the
actionable facts upon which his liability depends as well
as the reasonableness of the amount which he pays.”)
72
Proofs
• Detailed submissions before pay 3P
• Level of investigation
• Can’t assume blank check
73
Example
• Contract has 2 year limitation
• Seller indemnifies Buyer
• Sale of goods Seller to Buyer: January 5,
2008
• Sale from Buyer to 3P on January 5, 2009
• Property damage to 3P occurs February 5,
2009
• 3P files claim December 5, 2009
• Buyer pays 3P February 5, 2010
• Buyer claims against seller March 5, 2011
76
Analysis
• If starts from date of payment, then accrues on February
5, 2010
• But if accrues from date of sale to buyer, accrues January
5, 2008 and out of time
• Not a question of 3P ability to sue directly against original
seller, or to assert other claims
• Issue is which limitations applies
77
Resolution
• Only one case found directly on point: Electric Insurance
Company v. Freudenberg-NOK, 487 F. Supp. 2d 894
(W.D. Ky. 2007)
• Held: UCC statute and accrual on date of original sale
applied for contractual indemnification claim, but common
law indemnification accrued on date paid
• Difference results in levels of proof as noted above
78
Mutual Indemnification
• It is not uncommon for parties to agree to mutual
indemnification to the extent that each agrees to
“indemnify and hold harmless” the other for the other’s
negligence. A mutual “duty to defend” clause raises the
tautological situation where two parties that each owe
each other a duty to defend, are both named in an action
and both alleged to have committed negligence.
Arguably, each owes the other a duty to defend.
82
Insurance Implications
• Anti-subrogation rule prevents insurer from suing its own
insured.
• Applies to preclude suits against additional insureds.
Pecker Iron Works of New York, Inc. v. Travelers Ins. Co.,
99 N.Y.2d 391 (2003).
• In the case of mutual indemnification clauses, the anti-
subrogation rule may be read to void a mutual
indemnification where the alleged indemnifying party is
also an additional insured under the indemnitee’s
insurance policy. See, .e.g, Pennsylvania General Ins.
Co. v. Austin Powder Co., 68 N.Y. 2d 465 (1986).
83
• Define scope
• “hold harmless”
• “loss and liabilities”
• “any and all”
• “arising out of or related to”
• “including own negligence”
• “whatever the cause”
85
Indemnification Issues
• The indemnification can provide specifically for damages
flowing from breach of representations, warranties and
covenants.
• If not referenced, litigatable issue as to scope:
• Should also specify point at which indemnification
obligation arises—at time of claim or actual loss
86
Example
• "9. INDEMNITY
• (A) AGS shall at all times indemnify and hold harmless HLTD
[Hooper], its successors and assigns and any of its officers,
directors, employees representatives, and/or agents, and
their heirs, executors, administrators, successors and
assigns or each of them against and from any and all claims,
damages, liabilities, costs and expenses, including
reasonable counsel fees arising out of:
• (i) Any breach by AGS of any express or implied warranty
hereunder and any express representation or provision
hereof . . .” Hooper v. AGS Computers, 74 NY 2d 487 (1989)
87
• To recap lessons:
• Narrow scope if indemnitor, broaden if indemnitee
• Address settlement, who controls litigation, chooses counsel, pays
for it, approves settlement
• Negotiate caps, tie to warranty provisions, use time limitations