Risk Management Essentials Workshop: Limitation of Liability

A limitation of liability clause restricts how much one party has to pay the other for losses, damage or injuries caused by a breach. Noelle sees vendors add them most often in technology, cyber, product and professional services contracts.

The takeaway: Look for an LOL clause in every vendor contract, and read it before you sign.

An LOL can cap damages at a fixed amount or a multiple of fees, such as one or two times the annual contract value. It can set a time limit, such as requiring claims within 12 months of a loss. Or it can waive consequential damages, so neither side pays the other's indirect losses.

The takeaway: Identify which type, or types, you are looking at before you negotiate.

Direct damages are the cost of fixing the problem: correcting work, hiring a replacement contractor, or paying extra wages during a delay. Indirect damages include lost profits, lost customers, fines, lost rental income and reputational damage, and Noelle says they typically carry the higher risk.

The takeaway: Before you waive consequential damages, list the indirect losses your agency could actually suffer.

An LOL generally can't limit liability for bodily injury or property damage to third parties such as the general public, for gross negligence or intentional misconduct, or in ways that violate public policy. The rules vary by state.

The takeaway: Check your state's rules, and expect carve-outs for willful misconduct, gross negligence, IP infringement, data breaches and indemnity.

Copying an LOL from one contract into the next is common, and Noelle advises against it. Weigh the level of risk, your risk appetite, and the vendor's size: push for a higher cap with a large vendor, while a smaller vendor may need a lower cap with carve-outs for insurance and indemnity.

The takeaway: Tailor each LOL to the contract and the vendor in front of you.

If the negotiated cap conflicts with the indemnity terms, the contract can become ambiguous, unfair, or riskier than either side expected. The wording should be clear and unambiguous, and depending on the law it may need its own section or bold formatting.

The takeaway: Draft the LOL with the indemnity clause open beside it.

Your own contract template is usually written in your favor, so start there and leave the vendor's LOL out. Require vendors to submit any exceptions to your template with their bids, and meet early to explain why a public entity can't agree to certain terms.

The takeaway: Set expectations before bids come in, not right before work starts.

When one bidder adds an LOL cap and the others don't, the bids are no longer apples to apples. Noelle would tell the bidders adding caps that it weakens their bid and ask them to reconsider.

The takeaway: Use competing bids without caps as leverage.