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Limitations of liability: Try varying them with time, and/or with circumstances


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Last week I posted a call to negotiate limitations of liability, in complex contracts, on a risk-by-risk basis, and not as one-size-fits all.

Here's another possibility to consider: Exclusions of consequential damages and damage-cap amounts don't necessarily have to be carved in stone for all time. The parties could easily agree to vary them, either as time passed or as circumstances changed.

Consequential-damages example

Suppose that:

  • A software vendor is negotiating an enterprise license agreement with a new customer for a mature software package.
  • The customer has successfully completed a pilot project, but it hasn't rolled out the software for enterprise-wide production use.
  • Knowing how tricky a production roll-out can sometimes be, the customer is concerned about the vendor's insistence on excluding all 'consequential' damages, whatever that really means.

The vendor might try offering to waive the consequential-damages exclusion during, say, the customer's first three months of production use of the software, subject to an agreed dollar cap on the vendor's aggregate liability for all damages — which might be a higher dollar amount than at other times, as discussed below. This approach could make the customer more comfortable that the vendor is 'standing behind its software' during the roll-out phase.

In theory, certainly, the vendor would be exposed to additional liability risk during those first three months. But the business risk might be eminently worth taking. Remember, we're assuming that the software is mature, that is, most of its significant bugs have already been corrected. In that case, the vendor might be willing to take on that additional theoretical risk — which in any case would go away after three months — in order to help close the sale.

Damages-cap example

As another example, perhaps such a vendor could agree that the damages cap would be, say —

  • 4X for any damages that arise during, say, the first three months of the relationship, or possibly until a stated milestone has been achieved;
  • 3X during the nine months thereafter;
  • 2X thereafter.

In the 4X / 3X / 2X language, X could be defined —

  • as a stated fixed sum;
  • as the amount of the customer's aggregate spend under the contract in the past 12 months, 18 months, etc.;
  • in any other convenient way.

* * *

The details in the above example aren't important. The point is that sometimes 'standard' limitation-of-liability language is too broad to allow the parties to specify what they really need. Negotiators might have more success if they drilled down into the language — perhaps using the table approach discussed in the previously-cited post.

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