Liability Caps and Exclusions from Liability


1. Definitions

The following definitions apply to these IACCM Contracting Principles:

  • "Liability Cap" means the monetary cap placed on a party’s liability for damages arising under an agreement. Generally, the agreed upon Liability Cap will be a (i) fixed amount, (ii) percentage of charges invoiced and/or paid over a period of time under the agreement, or (iii) combination of (i) and (ii) (e.g., whichever is greater).
  • "Exclusions from Liability" means categories of damages for which a party is not contractually liable. Examples include consequential, punitive and other indirect damages that do not flow proximately from the breach. Damages such as lost profits, loss of business revenues, loss of anticipated savings, and loss of goodwill are also typically excluded.
  • "Unlimited Liability" means that the monetary Liability Cap (or, in some cases, the Exclusions from Liability) does not apply to specified breaches of the agreement or there is no Liability Cap designated for a party.

2. General Concepts

These general concepts form the basis for the more detailed IACCM Contracting Principles that follow:

  • A party’s liability under an agreement should be solely related to a failure to meet obligations specified in the agreement.
  • A party seeking damages pursuant to an agreement has the burden of proof for the amount of those damages unless the agreement specifies liquidated damages in the particular situation.
  • The parties to a commercial relationship owe duties to their respective stakeholders to limit their risks and exposure to a reasonable and foreseeable degree to maintain their fiscal integrity. The Liability Cap in an agreement, typically set at a level proportional to the value of the deal, is a key way for the supplier – and even the customer – to protect itself from catastrophic financial impacts that far exceed that value.
  • A damaged party should have the responsibility to mitigate its damages to the extent reasonable under the circumstances. This obligation should be either pursuant to governing law or explicitly stated in the agreement.
  • Damages caused by the contributory acts or omissions of both parties should be apportioned to both parties, and each should be liable only for those flowing from its fault (including negligence).
  • Exclusions from Liability are generally accepted as a standard in commercial agreements, although exceptions to those exclusions may be carved out for particular breaches. Possible carve-outs are breach of confidentiality* (where the main damages that flow from the breach would otherwise be excluded in their entirety) and some indemnifications (where the indemnitor should be obligated to deal with the applicable claims whatever they may be).
  • In many jurisdictions, public policy prohibits parties from limiting their liability in certain instances where parties are expected to take full responsibility for their acts or omissions, such as bodily injury or death, or for damages proximately caused by a party’s gross negligence or wilful misconduct.
  • Liability Cap and Exclusions from Liability associated with indemnifications of third party claims are also addressed in the IACCM Contracting Principles - Indemnifications and IACCM Contracting Principles – IP. See also IACCM Contracting Principles – Data Security and Privacy.

* Data breaches are not included here and are dealt with in a separate IACCM Contracting Principle – Data Security and Privacy.

3. IACCM Contracting Principles

3.1. Reasonable Liability Caps

  • The monetary Liability Cap in an agreement should have proportionality to the monetary value of the applicable scope, generally specified in larger transactions (perhaps over $1M in value) as the greater of a multiple of annual revenues paid (or payable) during the six or twelve months preceding a claim, or a fixed dollar amount. During the first year of the relationship, the parties may specify a revenue number based on the anticipated volume of business following any ramp-up. For smaller deals, a fixed dollar Liability Cap should suffice.
  • The Liability Cap may be either on a per incident basis or over a period of time (annual or life of the contract) or can be a set of co-existing Liability Caps per incident and for the time period as a whole.
  • Customers should not rely on a Liability Cap as a defense against supplier claims for non-payment of invoices, nor should suppliers do the same with respect to SLA credits or reversals of billing errors.
  • Higher Liability Caps may be warranted for certain breaches that may reasonably result in direct damages that exceed the overall Liability Cap in the agreement and where particular breach(es) would likely have a catastrophic effect on the customer and is recognized as resulting from egregious conduct by the supplier.
  • The Liability Cap clause should survive any termination of the agreement to apply to claims raised post-termination.

3.2. Exclusions from Liability

  • Except as set out in section 3 below, parties to the agreement should not be subject to claims for damages listed in the Exclusions from Liability clause.
  • Claims for payment of charges under the agreement should not be rejected by a customer by relying on a clause excluding liability for lost revenues.
  • The Exclusions from Liability clause should survive any termination of the agreement to apply to post-termination claims.

3.3. Exceptions to Liability Caps or Exclusions from Liability

  • Unless the agreed upon clauses for confidentiality and indemnification for intellectual property infringement claims pose unusual risk to a party, claims for breaches of those provisions should not be subject to either the Liability Cap or the Exclusions from Liability clauses.
  • The liability of the parties for wilful misconduct and (if it cannot be limited under applicable law) gross negligence should not be subject to the Liability Cap or the Exclusions from Liability.
  • Liability for bodily injury and death and damages to real or tangible personal property (not including data) should not be subject to the Liability Cap but should be subject to the Exclusions from Liability.
  • Additional exceptions from Liability Caps and/or Exclusions from Liability may also be considered in specific situations (e.g., data breach subject to a separate Liability Cap, compliance with applicable laws, or compliance with tax obligations).