When your company is entering into a contractual relationship with another party, it is important to set forth what will happen if there is a breach of the agreement. A “breach” is the failure of a party to perform its duties or obligations under the contract. When a breach occurs, the contract should provide the breaching party’s liability for the damages incurred by the other party.
When a breach of contract occurs, there are three major types of contract damages or compensation available to the non-breaching party. In order to make the injured party “whole,” the contract may allow for a combination of damages. The three primary types of contract damages are:
- Compensatory. The non-breaching party is entitled to recover its direct or actual damages incurred. Compensatory damages compensate the injured party directly for its loss.
- Incidental. Incidental damages are expenses incurred by the non-breaching party as a result of the other party’s breach. This type of damages must be reasonably associated with, or related to, the injured party’s actual damages.
- Consequential. As the name suggests, this type of damages includes those that do not flow directly and immediately from the breach, but from the consequences of the breach. They are more indirect in nature and they are sometimes referred to as “special damages.”
If you are the seller of a product, it is important to confer with legal counsel on ways to limit your liability in the contract. Failure to do so could result in you being liable for the above types of damages if you breach the contract. Let us review the transaction before it is executed and add the necessary language to limit the scope of your potential liability. The most common way this is done is to exclude your liability for incidental or consequential damages and specify that your maximum liability under the contract is limited to the purchase price of the product at issue in the deal.
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.
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:
- 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.
- 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.
- 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.
- “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.