Limitations on Liability
Whenever you enter into a contract, you should always have a limitation of liability paragraph. A limitation of liability reduces your overall exposure. Essentially the language will state, to some extent, that your company (and its related personnel) will not be liable for damages under the contract. Further, if a court finds your company liable, the liability will be limited to the monies paid under the agreement.
For example, you agree to a contract with another entity for $25,000. If there was a dispute and a court found you liable for damages, even if the damages exceeded $25,000, the court would most likely limit the judgment to the $25,000.
However, courts do not always follow the contract. The court could disregard that paragraph if you committed negligence or knew of the breach. But, depending on the severity, the court will still limit that judgment threshold to the amount of money detailed in the contract.
But there is even an exception to that. In a recent case, H1 Lincoln v. South Washington Street, LLC et al. (SJC-13088), the Court found that because the defendant violated 93A, there was no limitation of liability and no limit on the damages. 93A is a statute that states if a party willfully and knowingly engages in unfair and deceptive acts against another party, they are liable for damages. And not just actual damages, but punitive damages that can include attorney fees, plus double or triple the actual damages. The court, in this case, found that the defendant acted in such bad faith; it threw out the limitation of liability language and found that the defendant was not only liable but there was no limitation of the damages.
The lesson is that a clear paragraph of limitation of liability in your contract could save you if there were ever a lawsuit. But be forewarned that it is not an absolute shield from liability. If you are negligent or willfully deceptive, the court will carve out that language and find you liable.
But it never hurts to have preventive language in all your contracts. If you have any questions about the construction and protection of your contracts, please feel free to contact me to provide you with a review.