It is a contractual provision that caps or limits the extent of a party's financial liability for breaches, negligence, or other issues arising out of the performance or non-performance of the contract. It is designed to provide a degree of predictability and risk management for both parties involved.
Key elements of a Limitation of Liability clause typically include:
- Scope: The clause should clearly define the scope of liability that it covers, such as direct or indirect damages, consequential damages, lost profits, or other specific types of losses.
- Monetary cap: A specific monetary amount or formula may be set as a cap on the liable party's financial exposure. This can be expressed as a fixed sum, a percentage of the contract value, or a multiple of fees paid under the contract.
- Exceptions: The clause may outline certain exceptions or carve-outs where the limitation does not apply, such as instances of willful misconduct, gross negligence, indemnification obligations, or breaches of confidentiality or intellectual property rights.
An Unlimited Liability clause is different from a Limitation of Liability clause, as it does not impose any cap or restriction on the financial liability of a party. In essence, a party with unlimited liability would be responsible for any and all losses or damages arising out of the contract, regardless of the amount or nature of those losses.
Examples of Limitation of Liability (LoL) clause:
Example 1: In a software development contract, a Limitation of Liability clause may cap the developer's liability for any delays or defects in the software to the total amount of fees paid by the client under the contract. However, it may exclude cases where the developer has willfully or negligently breached the contract or infringed upon the client's intellectual property rights.
Example 2: In a professional services agreement, a Limitation of Liability clause may limit the consultant's liability for any errors or omissions in their work to a multiple (e.g., two times) of the fees paid by the client for the specific project.
Other clauses that are similar or related to the Limitation of Liability concept include:
1. Indemnification clause:
This clause outlines the responsibility of one party to indemnify (compensate) the other party for specific losses, damages, or liabilities incurred due to the indemnifying party's actions, negligence, or breaches of the contract. See more details about Indemnification here.
2. Force majeure clause:
This clause covers unexpected events or circumstances beyond the control of the parties, which may excuse performance under the contract or limit a party's liability for non-performance or delays. See more details about Force Majeure clause here.
3. Exclusion of consequential damages:
This clause is often used to exclude or limit a party's liability for indirect or consequential damages, such as loss of profits or business interruption, which might be suffered by the other party as a result of a breach of the contract.
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