utilizing limitation of liability clauses in business...

Utilizing Limitation of Liability

Clauses in Business ContractsLimiting Potential Damages and Avoiding Pitfalls With Carefully Negotiated Provisions

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TUESDAY, JUNE 5, 2018

Presenting a live 90-minute webinar with interactive Q&A

Monique N. Bhargava, Partner, Loeb & Loeb, Chicago

Eric A. Grasberger, Partner, Stoel Rives, Portland, Ore.

Kenneth W. Lee, Principal, Post & Schell, Pittsburgh and Harrisburg, Pa

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Strafford WebinarUtilizing Limitation of Liability Clauses in Business Contracts

Tuesday, June 5, 2018

Presented By:

Monique N. Bhargava, Esquire

Chicago, IL Offices of Loeb & Loeb, LLP

[email protected]

Eric A. Grasberger, Esquire

Portland, OR Offices of Stoel Rives, LLP

[email protected]

Kenneth W. Lee, Esquire

Harrisburg/Pittsburgh, PA Offices of Post & Schell, P.C.

[email protected]

A. Assumptions for Discussion, “The Big 4”

1. Parties are sophisticated businesses engaged in thesale or purchase of the product or services to befurnished;

2. Parties deal at arm’s length;

3. Parties did consult with or had the opportunity toconsult with legal counsel prior to executing contract;and

4. Parties acting/acted in good-faith and fair dealing witheach other (implied by law in every contract).

a. If other than good-faith, then intentionalconduct; willful, wanton or gross negligence; orcriminal conduct being against public policygenerally voids any limitation of liability clauses.

I. Drafting & Enforceability

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B. “Liability”

1. Legal Theory;

2. Damages;

3. Judgment against = legal theory plus harm (damages).


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C. Limitation of Liability and Limitation of Damages Clauses

1. Apply to negligence;

2. Apply to breach of contracts;

3. Often interchangeable;

4. But “liability” equates to legal theory while “damages” equates to financial harm;

5. “LOL” = limitation of liability (legal theory); and

6. “LOD” = limitation of damages by category or calculation.


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D. What Courts look for

1. “Waiver, release and discharge” signals rights being relinquished;

2. “Exoneration” or “Exculpatory” clause – complete release from one’s own negligence or breach of contract;

a. strictly construed;

b. disfavored; and

c. where enforced, language must be “unmistakingly” clear and unambiguous.


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3. “Exoneration” or “Exculpatory” clause – generally deals with elimination of legal theories or entire groups of damages (incidental, consequential, etc.);

a. cannot be against public policy;

b. between parties relating entirely to their own private affairs;

c. each party must be free to bargain the agreement;

d. while not required, clause should specifically state what is being exonerated, i.e., “negligence”, “liability for any injury incurred while [some act]”, “costs and expenses exceeding original contract amount”;


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e. is there a clause specifically referring to “assumptionof the risk” or party x “specifically assumes or bearsthe risk that [some event will occur].”;

f. is there a cap on damages for which the negligentor breaching party might be responsible and is thecap proportionate to the injured party’s damages; and

g. are the damages incurred economic or involve damageto property, personal injury or wrongful death?


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4. Limitation of Liability clauses which attempt to limit oreliminate theories or damages by category are generallytreated as “exoneration” or “exculpatory” clauses.

5. There are excellent 50 state reviews that can be found on the internet. See, for example, https://www.jdsupra.com/legalnews/limitation-of-liability-clauses-61680 (by Cranfill, Sumner & Hantzog, LLP); “Exculpatory Agreements and Liability Waivers in ALL 50 states” at www.mwl-law.com (by Matthiesen, Wickert & Lehrer, S.C.); and “Express Assumption of Risk, Waiver, Exculpatory Clauses” at https://www.wilsonelser.com/writable/files/legal_analysis/wilsonelser_50-statesurvey_expensewaivers_10-2012.pdf (by Wilson, Elser, Moskowitz, Edelman & Dicker, LLP).


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6. Limitation of Damages clauses are Universally enforcedprovided the Big 4 are met and only economic harm is sought.


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E. Enforceability Begins with Drafting

1. Know client’s business and particular object/subject matter of contract;

2. Advise client that all risks cannot be eliminated;

3. Basic contract clauses;

a. Describe parties – “Party A is a contractor and regular purchaser of fabricated structural steel. Party B is a steel fabricator whose primary business is the fabrication of structural steel for construction projects”;


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b. Describe Uniqueness of products or goods to be purchased and furnished – “Party A desires to purchase and Party B desires to fabricate 1,000 tons of structural steel for the improvement to be constructed and erected by Party A known as Main Street Commons which structural steel is to be fabricated in accordance with the plans and specifications prepared by XYZ Engineers dated June 5, 2018”;


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c. Describe Negotiations - “Upon review by Party A of Party B’s quote for fabricated structural steel, the other quotes received by Party A for fabricated structural steel, and confirmation by Party B that its quote is in conformance with the plans and specifications of XYZ Engineers, the parties hereto enter into this agreement…”;


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d. Eliminate construction against drafter rule due to ambiguities – “This contract shall be interpreted as though mutually drafted by the parties hereto and their respective legal counsel”;

e. Time is of the Essence; and

f. Consultation with Counsel – “The parties hereto have caused this agreement to be executed on their behalves after consultation with or the opportunity to consult with counsel of their choice.”


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4. Utilize both limitation of liability clauses and limitation of damage clauses.

5. Know the forum in which disputes will be heard:

a. Courts required to enforce contract language if clear and unambiguous;

b. Common-law arbitrator (arbitration by agreement) can ignore law and facts and make an award which is “fair” since most states will not disturb such an award based upon arbitrator’s mistake of law or fact; and

c. Permit appeal from arbitration award to court for error of law, including improper calculation of damages.


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6. Make the Limitation Clauses Look Important and/or Negotiated.

a. Use capital letters, bold font or both for the clauses;

b. Have spaces where the clauses can be initialed; or

c. Place the clauses in an amendment or supplement to the form contract.


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7. Make payment of damages subject to conditions precedent;

8. Use appropriate “buzz” words such as “assume the risk” or “bears the risk”;

9. Remember rules of interpretation as to (a) strict construction and (b) the purposeful mention of one is the purposeful exclusion of others. Thus, where a subcontract exonerated a contractor and the owner for delays caused by the contractor or the owner, the contractor will be liable to the subcontractor for delays caused by other subcontractors or vendors to the contractor. Gianetta Associates v. J.J. White, Inc., 573 F. Supp. 112 (E.D. Pa. 1982); and


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10. Make the Limitation Clauses seem fair – give the other party something.

F. Examples of Limitation of Damages

1. Only remedy for delay is an extension of time or, if in contract, elimination of liquidated damages;

2. Payment by contractor to subcontractor is conditioned upon payment to contractor by owner with subcontractor assuming or bearing risk that owner does not make payment;


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F. Examples of Limitation of Damages

3. Prohibiting use of general rate publications for equipment or labor calculations;

4. Providing a specific mark-up percentage (i.e., 15%) on actual costs incurred for work outside the scope of the original agreement which mark-up pays for all indirect costs such as supervision, overhead and profit; and

5. Require an improper default termination to be treated as a termination for convenience under which the damages to be paid are specifically identified.


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Scope of Indemnification

Monique N. Bhargava

Loeb & Loeb

[email protected]

What is the Proper Allocation of Risk?

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Client Wants to be Indemnified for:

•Violation of laws

•Security Breach incidents

•Failure to comply with obligations

•Third-party services/data/tools

•Patents

•Materials and claims supplied by Vendor

Vendor Wants to Limit Indemnification to:

•Intentional acts, gross negligence, or wilful misconduct

•Material failure to maintain the described security protocols

•Pass-through indemnification to the extent received

•Limited patent responsibility

Client Wants to Limit Indemnification to:

•Intentional acts, gross negligence, or wilful misconduct

•Client IP

•Product liability

Vendor Wants to be Indemnified for:

•Violation of laws

•Improper provision of data

•Failure to comply with obligations

•Third-party services/data/tools

•Risks client has opted to take

•Client supplied Information

•Product liability

•Client modifications/scope of use

Typical Limitation of Liability Provisions

• Limitations based on type of damage

• Direct

• Consequential

• Lost Profits/Revenue

• Punitive

• Limitations based on cause of damage

• Breach of Confidentiality

• Data/Privacy

• Indemnification

• Patent and Other IP claims

• Limitations on amounts of damages

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Typical Limitation of Liability Provisions Requested• Disclaimer of Liability for Certain Damages

• Consequential, special, incidental, indirect damages, punitive damages, or lost profits/reputational harm; and

• Cap on Total Liability

• Often capped to total fees paid under the contract, or

• fees paid in the prior 12 months

Source: 2016 Willis Towers Watson Winter 2016 Cyber Claims Brief

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Typical Provision

• Limitation of Liability. IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES, OR DAMAGES FOR LOSS OF PROFITS/REPUTATIONAL HARM, REVENUE, DATA, OR USE, INCURRED BY OTHER PARTY OR ANY THIRD PARTY, WHETHER IN AN ACTION IN CONTRACT OR TORT, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. TOTAL LIABILITY OF FOR A SERVICE IS LIMITED IN ALL CASES AND IN THE AGGREGATE TO THE AMOUNT OF FEES ACTUALLY PAID BY COMPANY FOR THE CORRESPONDING SERVICE DURING THE TWELVE (12) MONTHS PRECEDING THE DATE OF THE EVENT THAT IS THE BASIS FOR THE FIRST CLAIM.

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Typical “Carve-Out” to Provision

• Limitation of Liability. EXCEPT WITH RESPECT TO CLAIMS OF INDEMNITY, BREACH OF CONFIDENTIALITY, BREACH OF DATA SECURITY OBLIGATIONS, AND ARISING FROM A DATA INCIDENT (AS SET FORTH IN SECTION XX), IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES, OR DAMAGES FOR LOSS OF PROFITS/REPUTATIONAL HARM, REVENUE, DATA, OR USE, INCURRED BY OTHER PARTY OR ANY THIRD PARTY, WHETHER IN AN ACTION IN CONTRACT OR TORT, EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES. EXCEPT WITH RESPECT TO CLAIMS OF INDEMNITY, BREACH OF CONFIDENTIALITY, BREACH OF DATA SECURITY OBLIGATIONS, AND ARISING FROM A DATA INCIDENT (AS SET FORTH IN SECTION XX), TOTAL LIABILITY FOR A SERVICE IS LIMITED IN ALL CASES AND IN THE AGGREGATE TO THE AMOUNT OF FEES ACTUALLY PAID BY COMPANY FOR THE CORRESPONDING SERVICE DURING THE TWELVE (12) MONTHS PRECEDING THE DATE OF THE EVENT THAT IS THE BASIS FOR THE FIRST CLAIM.

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Two Questions

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• Consequential: Parties often agree to this with carve-outs, but … do they know exactly what they are giving up?

• Indemnity: Parties often agree to this carve-out, if necessary, assuming it will be covered by insurance, but … patent infringement is often not covered by insurance

• Confidentiality: Parties often agree to this carve-out, if necessary, assuming that the chance of a significant loss will be low but … this should be confused with a carve-out for data breach/privacy claims

• Data Breach: Vendors highly contest this liability given the perceived large potential liability

1) Will the Vendor be liable for consequential

damages and/or lost profits/reputational harm

for claims of indemnity, confidentiality and data breach, and if so, how

much?

• Parties sometimes agree to a cap on direct damages (1x, 2x, or 3x amount paid), but clients press to have unlimited liability claims of indemnity, confidentiality, and data breach

2) Will there be an overall cap on liability, and if so, will claims of indemnity, confidentiality, and data

breach be excluded?

What Are the Types of Damages?

• “Direct”

• Damages which, in the ordinary course of human experience, can be expected to naturally and necessarily result from a breach

• These damages are presumed to have been foreseen or contemplated by the parties as consequences of a breach

• “Consequential” or “Special” Damages

• Damages that arise out of special circumstances, not ordinarily predictable

• May not be obvious to one of the parties in advance without communication of the other party’s special circumstances

• “Incidental”

• Expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or breach

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How Are Damages Categorized?

Often Seen as Direct

• Money paid for the service

• Cost of corrections of Work Product

• Lost profits

Often Seen as Indirect, Consequential, or Incidental

• Lost value of consumer information

• Lost profits from business interruption

• Loss of revenue from downstream relationships

• Data breach notification and remediation-related costs

• Attorneys’ fees and other expenses

• Third-party claims (in some cases)

• Government fines or penalties

• Damage to reputation

• Increased customer attrition/reputation damage

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Common Exclusions

• Exclude consequential, incidental, indirect, damages

• Exclude lost profits/revenue and/or reputational harm• Do not assume that these are consequential damages

• Carve-outs to Exclusions• Indemnification – with caution about patent liability

• Confidentiality

• Data Breach/Privacy

• Consider liability in the context of your insurance limits

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Unenforceable Exclusions

• All damages, particularly in sales contracts

• Whitesell Corp. v. Whirlpool Corp., 2012 WL 3631491 (6th Cir. Aug. 23, 2012)

• Agreement clause precluded recovery of damages arising from “any performance or breach,” which effectively barred all damages and deprived the plaintiff of any adequate remedy

• Court found the clause to be contrary to contract law requiring that sales contracts must provide at least minimum adequate remedies

• Gross negligence

• Willful misconduct or intentional wrongdoing

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Lost Profits

• Courts have held that “lost profits” can be either direct or consequential damages

• The important question is whether the lost profits would follow naturally and necessarily from a breach of the contract

• direct lost profits → generated from an agreement between the contracting parties

• consequential lost profits →generally dependent upon an agreement with a nonparty

• Thus, lost profits should be a separate category from consequential damages

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What is the Right Amount?

• Should there be a cap at all?

• Consider the cap in the context of the whole agreement

• Is the cap reasonable in relation to the contract price and, therefore, enforceable?

• Is the cap overly expansive and therefore irrelevant?

• Should the cap be mutual?

• Should the cap be tied to insurance amounts?

• Is the amount sufficient incentive to prevent breach?

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Types of Caps

• Identifying a fixed monetary amount

• Relating the cap to a proportion of the fees (excluding any media and other third-party costs) paid to the Vendor during a fixed period (prior to the claims)

• Relating the cap to an amount of the fees paid for the particular work or project from which the claim resulted

• Proportionally sharing liability (e.g., based on ratio of Vendor fee to client marketing spend)

• Having the Vendor responsible for an initial fixed amount and then a proportional sharing of responsibility with client for any amount above such initial fixed amount

• Contractual statute of limitations

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8th Cir. Case on Limitation of Liability in Security Breach CaseSchnuck Markets Inc. v. First Data Merchant Data Services Corp.

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• First Data provided credit and debit card processing services to Schnucks

• First Data claimed damages in order to reimburse banks that issued payment cards affected by a Schnucks data breach

• Schnucks must indemnify for “all losses, liabilities, damages and expenses” but limits Schnucks’ liability to $500,000

• Exception for “chargebacks, servicers’ fees, third-party fees and fees, fines, or penalties” assessed by payment card networks

Facts:

• Are damages owed to banks exempted from the limitation of liability as “third-party fees” and “fees, fines, and penalties”?

Issue:

• Schnucks’ liability is limited to $500,000

• Exception for “third-party fees” and “fees, fines, and penalties” was not intended to apply to liability for issuer losses assessed

Holding:

Tying Enforcement of Limitations of

Liability to Key Performance

Conditions

Presented by

Eric A. Grasberger

Strafford - Limitation of Liability Clauses

June 2018

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OUTLINE OF PRESENTATION

1. Should There Be Any LOL in the First Place

2. Why Consider Adding Conditions to LOL Enforceability or Applicability

3. What Conditions are Available

a. Insurance Conditions

b. Downstream Vendor Conditions

c. Notice Conditions

d. Performance of the Work Conditions

4. Other Negotiating Considerations

5. Conclusion

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1. SHOULD THERE BE ANY LOL IN THE

FIRST PLACE

• The trends show increasing LOLs

• “Standard Form” documents attempt to set the trend

• LOLs should be limited to special circumstances

– Results outside the reasonable control of the

provider (e.g., soils testing)

– The business model would not survive without LOL

– Fee earned is disproportionate to risk

– LOL is not a disincentive to good performance

• Some professions cannot limit liability (doctors/lawyers)

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2. WHY CONSIDER ADDING CONDITIONS?

• Parties seeking LOLs usually are the drafters

• Parties responding to a proposed LOL usually consider negotiating only the following:

– Nothing, because they blindly sign the form

– All or nothing, because they see it as black or white

– The LOL dollar amount

• What dictates whether conditions can be added to the enforceability of an LOL?

– Leverage

– The nature of the product or service

– Creativity

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2. WHY CONSIDER ADDING CONDITIONS?

• Adding conditions serves a number of purposes:

– Limits LOL application to appropriate circumstances

only (e.g., ordinary negligence not intentional

conduct)

– Requires other safeguards to ensure an adequate

remedy even when an LOL applies (e.g., the

contractually required insurance is placed by the

provider)

– Ensures that you don’t inadvertently limit other

remedies (such as rights against 3rd parties not

expressly subject to the LOL)

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3. WHAT CONDITIONS ARE AVAILABLE?

A. Insurance conditions

– LOL is limited to listed dollar limits of required vendor

insurance (incentivizes vendor to help collect limits)

– LOL is limited to vendor’s available insurance

– LOL is limited to actual proceeds from vendor’s

insurance

– LOL is limited to the greater of $1M or the amount of

available insurance (or proceeds of insurance)

– LOL is limited to vendor’s insurance limits +

$500,000 (the “skin in the game” approach)

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A. Insurance Conditions

– LOL will not apply unless all required insurance of vendor is purchased and maintained

– LOL will not apply unless all required insurance of vendor’s subs and suppliers is purchased and maintained

– LOL can be paid only from vendor’s primary insurance, not from subcontractor policies where vendor is listed as an additional insured

– LOL will not apply if unacceptable exclusions are included in the insurance policy

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B. Subcontractor/Supplier Conditions

– LOL applies only to the prime vendor

– Preserve your right to make direct claims against

downstream subs and suppliers of vendor

– Ensure subcontracts and supply contracts are

assignable to you upon request

– Condition prime LOL enforceability on subcontracts

maintaining proper insurance and assignment

clauses

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C. Notice Conditions

– LOL unenforceable unless prime vendor gives

notice of mistake within 10 days of occurrence


notice of other claims made against insurance

assets within 10 days of claim


notice of actual reduction in limits within 10 days of

reduction

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D. Performance of the Work Conditions– LOL applies only to certain types of error (e.g., engineer’s

liability is limited only for professional negligence, not car wrecks, IP liability, etc.)

– LOL does not apply to failure to meet the standard of care; LOL applies only to other failures (e.g., warranty or guarantee of certain results)

– LOL applies only to fringe commitments (no LOL for failure to produce 100 widgets/week; LOL applies for failure to produce over 100 widgets/week)

– LOL unenforceable unless prime vendor first exhausts all remedies against insurance, subs and suppliers, or other responsible parties

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4. OTHER NEGOTIATING CONSIDERATIONS

• Make the LOL mutual

• Limit the LOL to certain types of damage

- Direct damages – No LOL

- Consequential/Punitive/Indirect – LOL applies

- Indemnity from 3rd party claims – No LOL

- Attorney Fees – LOL dollar amount does not include fees (separately collectible)

• Make the LOL a % of your damage (50/50) instead of an absolute dollar amount

• NPL Clause as Alternative

- No principal / member liability

• Make the LOL per claim (not per contract)

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5. CONCLUSION

• Do not blindly agree to LOLs

• Do not assume only the dollar amount is negotiable

• Find exceptions (like sub liability) that the vendor

cares less about

• Consider the many alternatives and conditions that

can help ensure better performance and a better

remedy if there is a performance failure

utilizing limitation of liability clauses in business...

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