Resolving the issue of Limitation of Liabilities between Buyer and Seller

When a buyer and seller are negotiating the issue of limitation of liabilities, it can get messy. The goal of your attorney is to eliminate or at least reduce the amount of risk, while a business person’s goal is to get the deal done ( and, of course, all deals have inherent risk). It is important for you to be involved in this part of the transaction. Don’t assume that it is only a legal issue, because this provision determines which party will ultimately be responsible and pay the money if something goes wrong. Thus, you and your counterpart in the transaction should realistically assess the risk and discuss who will take responsibility for what liability.

Below are a few tips for how to resolve the issue of limitation of liabilities between the buyer and the seller:

  • Approach the negotiation with the understanding that every prudent business must make a conscious decision as to which risks it is willing to assume and those it is not. A buyer should not view a seller’s limitation of liability clause as the seller refusing to stand behind its product or services. That is not what this clause means. The seller’s limitation of liability is its attempt to protect itself in our very litigious society.
  • Consider the real world risks and determine what makes sense under the circumstances. This includes talking to your supplier regarding real world examples and concerns. For example, if you are purchasing direct material, you’ll probably want to discuss what the supplier would do in the event of field failures….which will likely require expenses for recall, transportation, etc.
  • When discussing real world contingencies, avoid using legal terms such as limitation of liability or consequential damages. If you use these legal terms, your supplier is likely to turn it over to their attorney to handle those issues.
  • Talk about these concepts before you talk about the contract language. Reaching an agreement with your supplier ahead of time makes writing the contract easier.
  • Keep in mind the likelihood that you will have to go to court in order to recover consequential damages such as loss of business, loss of profit, downtime and other large dollar amounts. One approach is to agree to a swap with your supplier. That is, permit the supplier to limit its liabilities for damages with respect to certain damages (such as loss of business or downtime, for example) for which you’ll probably not pursue recourse from your supplier. In exchange for that agreement to limit the seller’s liabilities, require that the seller be responsible for the costs and expenses that you’re more likely to incur (such as field failures). Another common approach is to create a maximum dollar amount for which the seller will be liable.

Whatever your approach is to resolving disputes over limitation of liabilities, the bottom line is to make sure the upside gain is commensurate with the risk. If you are reasonable, the other party is more likely to be reasonable too.

To ensure that your contract provides you with the most protection from liability available, contact Leslie S. Marell to schedule an appointment. Our office is located in Torrance, California, but we proudly serve businesses of all sizes from all over the country.