Sellers: Limiting Your Liability for Damages in Contracts

There are four major ways to reduce your risk and limit liability in contracts—disclaimers, limitation of liabilities, indemnification, and “Entire Agreement” clauses.  These are discussed in more detail below:

  1. Disclaimers. Shrewd contract negotiators live by the rule of disclaiming responsibility for anything beyond the specific commitments listed in the contract.  The only way a seller can disclaim implied contract warranties is by adding clear, specific language in BOLD, CAPITALIZED TYPE disclaiming the implied warranties.
  2. Limitation of Liabilities. Breaching parties are automatically liable to the other party for damages as a result of the breach unless the parties have specifically agreed to limit their liabilities.  Consider just what you want to limit.  For example, a Seller may negotiate that it will not be responsible to the Buyer for incidental or consequential damages.  As another example, you might also choose to negotiate your company’s maximum dollar limit on liability.
  3. Indemnification. Indemnification shifts the responsibility from one party to another in a contract.  Indemnity clauses can be drafted to protect your company from any acts, misrepresentations, wrongdoing, or omissions of the other party. 
  4. “Entire Agreement” Provisions. “Entire Agreement” or “integration” provisions in a contract limit the seller’s warranty liability to exactly what is written into the agreement.  In other words, adding this type of clause negates any other prior verbal agreements or commitments between the parties.  Put yet another way—if it is not in the agreement, it is not agreed to!

If you have questions about limiting liability in your business agreements, attorney Leslie S. Marell can help.  Leslie has more than 25 years of experience as in-house counsel and as a legal adviser working with businesses, business people, and business contracts, in the technology, manufacturing, software, and medical device industries.  She understands the real-world practicalities of what it takes to draft, review, and negotiate corporate contracts, and has presented her dynamic seminars to Fortune 500 companies and small to mid-sized businesses across the country.  Leslie specializes in helping contract analysts, project managers, and department leaders work better with their own internal legal departments and outside counsel.  To learn more about Leslie’s seminars, or get expert advice on contracting matters, contact Leslie at (310) 372-8663, or visit her online.