Who doesn’t want to limit the likelihood of potential lawsuits and other claims? Most companies use insurance as protection, but not all claims are insurable. For architects and engineers, the solution often means incorporating a limitation of liability clause into their contracts. It’s an excellent way to limit the amount of liability undertaken by design professionals and adds a layer of protection and peace of mind should future problems arise. It may also mean the difference between staying in business and financial ruin.
What exactly is a limitation of liability clause? It’s a provision in a contract that limits the amount of exposure a company can face if a lawsuit is filed or another claim is made. A limitation of liability clause can also “cap” the amount of potential damages a company has to pay and is a highly effective risk management tool. It can also lower insurance premiums and is allowed and enforceable in most states, as long as the language is clear, agreed upon by both parties, and free of ambiguities. The limit can apply to all claims that arise during a contract or it may apply to certain causes of action. Limitation of liability clauses typically limit liability in one of the following amounts:
- Compensation and fees paid under the contract
- An agreed-upon amount of money
- Available insurance coverage
- A combination of the above
Keep in mind that a limitation of liability clause does not protect from claims by third parties, like members of the public or injured workers. However, claims from contracting parties are more likely to occur.
Of course, a limited liability clause is only as helpful as its ability to be enforced. That’s why the way the contract is drafted is key and increases the likelihood that it can be enforced if needed. Here are some drafting tips to keep in mind:
- Use clear and concise language: It’s important to ensure that the clause is unambiguous as it relates to the contract as a whole, so no questions arise in the future.
- Make sure the clause stands out and is conspicuous: It’s as easy as using bold face print or underlining the text in order to set the clause apart and make the other party aware of its existence. Some parties even choose to handwrite the dollar amount of the limit and both parties initial the clause to ensure that they’ve read and agreed upon the terms.
- Negotiate the clause: Discuss the clause with the party that is signing the agreement and make sure there are no questions or problems that need to be negotiated. Also, be sure to keep notes, drafts, and copies in order to confirm the clause was discussed.
A limited liability clause may not be attainable in every client contract for varying reasons, but negotiating one is always a worthy goal. A limited liability clause is usually considered mandatory for high-risk projects or those performed for very low fees. Limitation of liability clause wording can be obtained from legal counsel.