Limitation of Liability

Limitation of liability in contracts is one of the most commercially critical clauses in commercial agreements. Even so, it is often pushed down the priority list when licence agreements, confidentiality agreements or more complex collaboration agreements are negotiated, despite the fact that an experienced contract lawyer can help clarify and balance liability before the agreement is signed.

What Is Meant by Limitation of Liability in Contracts?

A limitation of liability in a contract regulates the amount of damages a party may be required to pay in the event of breach of contract. It is often drafted as a cap, for example an amount corresponding to a specified portion of the annual fees payable under the agreement.

The purpose is to create predictability. The parties should know in advance what financial risk they are assuming when entering into the agreement – something that is particularly important where major IT solutions, licences or outsourcing services are involved. It is also important to note that even where there is a monetary cap, there are often exceptions to that cap, either expressly set out in the agreement or arising as a matter of law.

Typical Issues to Address in a Limitation of Liability Clause

A carefully drafted limitation of liability clause is connected to the other parts of the agreement, including provisions on intellectual property rights. Recurring issues include:

• Should all liability be subject to a general cap, or should certain types of loss be carved out?
• How does the limitation of liability interact with the provisions on intellectual property rights, for example in the event of infringement of third-party rights?
• Does the limitation of liability also apply to breaches of confidentiality agreements or the GDPR?
• How is the risk profile affected by the payment terms – does the customer pay in advance or in arrears, and what is the total commercial value of the transaction?

When Can Liability Not Be Limited?

A limitation of liability cannot freely override mandatory Swedish law. There are situations in which limiting liability is either invalid or risky, for example in cases of wilful misconduct or gross negligence. Such limitations may simply be disregarded in a dispute.

It is also common for liability for certain specific risks to be excluded from the monetary cap, such as infringement of intellectual property rights or breach of confidentiality. In technology-heavy licence agreements, this can have significant financial consequences.

Practical Points When Negotiating Liability Clauses

When negotiating limitation of liability in contracts, the following can serve as a practical starting point:

• Link the limitation of liability to the actual commercial value, for example an amount corresponding to fees paid or invoiced during a specified period.
• Consider which scenarios are genuinely critical: service interruptions, data loss, IP infringement and leaked confidential information under confidentiality agreements, and ensure that the clause addresses them.
• Ensure that the limitation of liability is consistent throughout the entire agreement, including schedules on service levels, payment terms and intellectual property rights.
• Avoid unclear drafting that obscures what constitutes indirect loss, consequential loss or loss of profit; define the concepts in the agreement.

For many businesses, it is only when a dispute arises that it becomes clear that the limitation of liability does not reflect the allocation of risk the parties believed they had agreed. An early review with a lawyer experienced in commercial contracts can therefore save both time and money.

At Morling Consulting, our contract lawyers help companies and organisations structure limitation of liability, intellectual property rights, payment terms and other key clauses in licence agreements, confidentiality agreements and other commercial contracts. Read more about our legal consultancy services here.