Limitation of liability clauses have long been upheld as valid by courts in San Diego and elsewhere in California. However, serious caution is in order if your business is being asked to sign an agreement that contains a limitation of liability clause. You should seek have the clause reviewed by an experienced San Diego corporate attorney. Special attention should be paid to amount-of-contract limitation clauses. These are common in the marketplace, particularly with service contracts. These provisions are often presented as “reasonable,” but that characterization is far from accurate. Many businesses unthinkingly sign contracts containing such clauses and some suffer serious adverse financial consequences as a result if something “goes wrong.”

As an example, assume you hire a systems security contractor to update your cybersecurity to prevent hacking or some other sort of data breach or loss. The contractor has a clause like this in the proposed contract:

“Limitation of Liability — In no event shall CONTRACTOR, its officers, directors, employees or agents, be liable to COMPANY for any direct, indirect, incidental, special, punitive or consequential damages whatsoever resulting from provision of the SERVICES provided pursuant to this Agreement in any amount exceeding the amounts actually paid by the COMPANY to the CONTRACTOR pursuant to this Agreement.”

Often these clauses continue and provide a list of categories of legal causes of action that are excluded such as errors, omissions, negligence, mistakes, personal injury, accidents, etc.

The Problem

The problem with these types of liability limitation clauses is that there is no financial or logical relationship between the cost paid for the services and the potential damages from some mistake or negligence or accident. As a simple and well-known example, Equifax had a massive data breach a couple years ago that allowed unauthorized access to the personal information of 145.5 million U.S. consumers. Equifax has suffered massive financial losses since the breach, losing nearly $4 billion in market capitalization and spending — so far — over $240 million in litigation costs and expenses related to responding to governmental investigations. See report here. Without question, these costs far exceeded the amounts paid for their various systems security services.

Potential Solutions

There are several potential solutions. The first, of course, is to be aware of the financial dangers inherent in a value-of-contract limitation clause. Second, refuse to sign such a contract and seek another provider for the goods and/or services in question. In other words, ask for the clause to be removed entirely.

If that cannot be negotiated or is not practical, then consider negotiating a covered-by-insurance limitation clause. Under this type of clause, liability is limited not by the value of the contract, but by the limitations of the relevant insurance policy. Here, of course, it is necessary to have information on the coverage limits and exclusions in the policy. This is often an acceptable alternative. Another alternative is to specify a dollar amount limit. Another possible strategy is to carve out certain types of mistakes, omissions, negligence and/or accidents that will not be subject to the limitation of liability. Every contract is unique, so, as noted, an experienced San Diego corporate attorney can help you negotiate and draft (or re-draft) a limitations clause that protects your business.

San Diego Business Contracts: Contact San Diego Corporate Law Today

If you would like more information about business contracts, contact attorney Michael Leonard, Esq., of San Diego Corporate Law. Mr. Leonard can be reached at (858) 483-9200 or via email. Mr. Leonard’s law practice is focused on business, transactional, and corporate matters. Like us on Facebook.

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