Thursday, March 3, 2011

Limits of Liability

A Supplier may try to limit the potential liability in many different ways.
  • Limits on the type of damages that may be recovered. 
"Neither party shall be liable for incidental, consequential, special damages, lost revenue or lost profits"
  • Limits on the amount of damages that may be recovered
 This can be dollar cap, multiple of sales or percent of business.
  • Limits on various types of claims
 For example, exclusion of warranties for merchantability or fitness for a particular purpose is a form of avoiding liability for those.
  • Limits on total liability for the contract term
"Suppliers total liability for all causes during the term of this agreement shall not exceed"
  • Limits on liability for a defined period such as annual limits.
Supplier shall not be liable for any more than $______ per calendar year
  • Limits on liability per occurrence.
Supplier’s liability shall not exceed $____ per occurrence.
  • Limits on the types of costs that may be recovered/
Supplier shall reimburse Buyer’s reasonable out of pocket costs (That would preclude any internal Buyer expenses)
  • Limits on other remedies.
This shall be Suppliers sole liability and Buyers sole and exclusive remedy.
  • Limits on individual costs.
Supplier shall not be liable for more than  x times the Price for any cost of re-procurement.
  • Limits on periods when claims may be made.
"Any legal or other action related to a breach of this Agreement must be commenced no later than two (2) years from the date on which the cause of action arose"
  • Limits on individual charges.
"Supplier shall reimburse Buyer for its reasonable costs incurred". This places a reasonableness standard on cost that may be claimed
  • Thresholds that must be met before it triggers the right to claim a remedy is a form of limitation.
 If one percent of the products are defective then …. (That would have the Buyer be assuming most if not all of the cost until that threshold is met). 
  • The standard of commitment used limits what the Supplier is responsible for:
For example Supplier shall use “reasonable commercial efforts” can mean that if its costs any more to do it, it doesn’t need to be done, Best efforts can mean a requirement to use all resources available to complete it.
  • Refusing to accept certain terms and responsibilities also helps limit the Supplier’s exposure should they not be able to meet those commitments.
  • Any liquidated damages provisions also serve as a limitation on the Supplier's liability

The key point here is while there may be a specific limitation of liability section in the agreement, language used throughout the agreement can further limit the Supplier's  potential liability. In understanding what the Supplier is potentially liable for you need to read all of the terms together to make sure that they are not in conflict.  If there is potential conflict between the remedy and potential liability in one section versus the Limitation of Liability Section you need to make the intent clear.

There are two ways to make the intent clear. One would be to specifically exclude that section from the Limitation of Liability. The other is to make it clear in that section that that the limitation of liability section does not apply to that section.  If you don't make it clear the Limitation of Liability limiting the remedies in the the other section.  For example if your limit of liability limited recoveries to only direct damages and you had a section where if there was problem the Supplier was to reimburse you for all costs you incur, the two would be read together and you would only be able to recover costs associated with the direct damages you incur and not be able to recover incidental or consequential costs.

Want to learn more? The companion book "Negotiating Procurement Contracts - The Knowledge to Negotiate" is now available on

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