limitation of liability – Attorney Evan Brown

January 18, 2023 Contracts, Licensing

Why are limitation of liability provisions important in technology agreements?

liability cap

Limitations of liability are an important aspect of any technology agreement, as they help to define and limit the amount of financial responsibility that each party in the agreement must accept in the event of a dispute or legal action.

Caps

One of the main limitations of liability in a technology agreement is the cap on the amount damages. This means that even if a party is found to be at fault in a dispute, the maximum amount of financial responsibility that it is willing to accept is limited to a specific dollar amount. For example, a technology company may agree to a cap on damages of $1 million in the event of a legal dispute. Or it could agree that the maximum amount it would have to pay would be whatever its insurance will cover. It is important to note that while damages caps can provide predictability and stability in terms of financial exposure, they can also limit the recovery of a party that has suffered significant losses. So they should be negotiated thoughtfully.

Exclusions

Another limitation of liability in a technology agreement is the exclusion of certain types of damages. This means that even if a party is found to be at fault, they are not responsible for certain types of losses or damages. For example, a technology company may exclude consequential damages, such as lost profits or loss of business, in the event of a legal dispute.

Carveouts

Though a limitation of liability provision may call for a damages cap or an exclusion of the types of damages available, parties recognize that in certain situations, damages should not be limited. For example, a breach of confidentiality by one party may be particularly harmful to the other party, and thus it would be unfair to cap the amount of damages. Another example arises in the context of indemnification. If one party is obligated to pick up the tab because the other party got sued for what the indemnifying party did, then the indemnified party will want to make sure it is made whole, regardless of what the damages are. In situations such as these, the parties may negotiate a “carveout” from the damages cap or exclusion, and agree that if something occurs within a defined set of circumstances, the liability caps or exclusions will not apply.

Limitations on limitations

It is important to keep in mind that limitations of liability are subject to legal interpretation and may not be enforceable in all jurisdictions. They can be evaluated and interpreted by courts in different ways. Additionally, some courts may hold that a limitation of liability clause is unenforceable if it is found to be unconscionable or against public policy.

Tough negotiation

In many technology transactions, the limitation of liability provision is among the last remaining issues to negotiate. This fact underscores how important such provisions are in making a particular transaction palatable to a party. A particular vendor may not be willing to “bet the company” on a particular deal (i.e., would not want to risk everything if something goes wrong). So these sorts of provisions are useful in giving parties comfort to enter into a deal.

Evan Brown is a technology attorney in Chicago. Follow him on Twitter: @internetcases

May 7, 2014 Contracts

Limitation of liability clause in software license agreement did not excuse customer from paying fees

Customer did not like how software it had bought performed, so it stopped paying. Vendor sued for breach of contract, and customer argued that the agreement capped its liability at $5,000. Both parties moved for summary judgment on what the following language from the agreement meant:

NOTWITHSTANDING ANYTHING TO THE CONTRARY, THE TOTAL DOLLAR LIABILITY OF EITHER PARTY UNDER THIS AGREEMENT OR OTHERWISE SHALL BE LIMITED TO U.S. $5,000.

Customer argued that the sentence meant what it said, namely, that customer would not be liable for anything over $5,000. But the court read otherwise, holding that construe the language as excusing customer’s payment of fees would render those provisions calling for fees (which were much more that $5,000) meaningless.

The court observed that when parties use the clause “notwithstanding anything to the contrary contained herein” in a paragraph of their contract, they contemplate the possibility that other parts of their contract may conflict with that paragraph, and they agree that the paragraph must be given effect regardless of any contrary provisions of the contract.

In this situation, the $5,000 limitation language was the last sentence of a much longer provision dealing with limitations of liability in the event the software failed to function properly. The court held that the rule about “notwithstanding anything to the contrary” applies if there is an irreconcilable difference between the paragraph in which that statement is contained and the rest of the agreement.

There was no such irreconcilable difference here. On the contrary, reading in such difference would have rendered the other extensive provisions dealing with payment of goods and services meaningless, which would have violated a key canon of construction.

IHR Sec., LLC v. Innovative Business Software, Inc., — S.W.3d —, 2014 WL 1057306 (Tex.App. El Paso March 19, 2014)

Evan Brown is an attorney in Chicago, advising clients on matters dealing with software licensing, technology, the internet and new media.

September 10, 2012 Contracts

GoDaddy outage reminds us why limitation of liability clauses are important

The legal team at GoDaddy today probably had more than one conversation about Section 13 of the company’s Universal Terms of Service. That Section contains pretty widely used language which limits how badly GoDaddy could get hurt by an epic failure of its system like the one that happened today.

We are conspicuously told that:

IN NO EVENT SHALL Go Daddy, ITS OFFICERS, DIRECTORS, EMPLOYEES, OR AGENTS BE LIABLE TO YOU OR ANY OTHER PERSON OR ENTITY FOR ANY DIRECT, INDIRECT, INCIDENTAL, SPECIAL, PUNITIVE, OR CONSEQUENTIAL DAMAGES WHATSOEVER . . .

Language like this is critical to technology service agreements. Today’s huge blackout illustrates the extent to which GoDaddy would be on the hook if such a limitation were not in place. Thousands of sites were offline for hours, losing uncountable pageviews and ecommerce sales. Holding GoDaddy responsible for those millions of lost dollars (which would be in the categories of indirect, special and consequential damages) could put a company into bankruptcy. GoDaddy would be big enough (probably) to pick up the tab in such a situation once or twice. Smaller enterprises would likely not be as lucky.

This kid is like GoDady inasmuch as he's trying to limit his liability.

To illustrate the effect of limitation of liability clauses, I have often used the example of similar language in Microsoft’s end user license agreement for Office. Because that is there, you cannot go after Microsoft for the business you lose if Word fails on your computer and you miss the deadline for submitting that big proposal. After today we have a new, perhaps more relevant example. GoDaddy would be pretty protected if you claim that you missed out on that million dollar client because your website was down.

So if you were looking for me through my site today, let me know, so I can send a bill for what you would have paid me to GoDaddy. Then again, I guess I’ve already shown why that won’t get paid.

Photo courtesy Flickr user Mikol under this Creative Commons license.

November 13, 2007 Contracts

Purported John Kerry ex-flame’s suit against Yahoo tossed

I’m going back in time a little bit to pick up on an unreported September 5, 2007 decision by a New York state trial court in the case of Whitnum v. Yahoo! [2007 WL 2609825].

Plaintiff Whitnum is the author of the book Hedge Fund Mistress, and also the owner of the website of the same name. Yahoo, who hosted the site, is alleged to have shut down the site for 8 hours on August 19, 2004, which was the same day that the book was mentioned on the front page of the Boston Herald.

Whitnum claimed that this caused her to lose out on $125,000 in revenue, so she sued Yahoo for that amount. Yahoo moved to dismiss, however, citing to its hosting terms of service which provided that it had the right “at any time and from time to time to modify or discontinue, temporarily or permanently, the [hosting] Service.” The terms of service also provided, among other things, that Yahoo would not be liable for any indirect or consequential damages resulting from a customer’s inability to use the service.

The court granted the motion to dismiss. It rejected Whitnum’s arguments that she should be allowed to file an amended complaint alleging intentional conduct or gross negligence, instead finding that her basis for saying that Yahoo may have shut down her account to silence her story about having dated John Kerry was mere speculation.