A guide to limitation of liability

Risk management helps to protect your business and revenue, and a limitation of liability clause is an effective tool for this. When included in your contracts, this clause helps to safeguard your organization from financial repercussions if things go wrong, whether it’s due to product issues, service disruptions, or legal claims. 

This is especially important for businesses that collect and manage customer data, as there can be substantial risks that come along with handling personal information. If something goes wrong, like data breaches or unauthorized access, your business could face significant penalties in addition to loss of customer trust and reputational damage.

In this article, we’ll explain what a limitation of liability is and why it’s so important for businesses. We’ll also look at how, when paired with a robust consent management platform (CMP), it can help you to proactively manage data risks and avoid issues before they arise.

What is a limitation of liability clause?

A limitation of liability clause is a provision that’s included in contracts, Terms of Service (ToS), and End-user License Agreements (EULAs) to cap the amount one party can claim from another if something goes wrong during their contractual relationship. Businesses use this clause to manage risk and avoid reputational damage and unforeseen financial burdens from legal penalties. 

For example, a software company might limit its liability in case its product causes a customer to lose data. A consulting firm could limit its liability in case a client claims the advice provided led to financial losses. Or an online retailer might cap its liability for shipping delays or lost packages, ensuring that they aren’t liable for more than the value of the items purchased. 

Limitation of liability clauses essentially set a maximum financial liability to protect a business from unpredictable economic consequences or high legal costs that come about because of damages, losses, or injuries. 

What can limitation of liability cover?

A limitation of liability clause can cover a variety of aspects of a business relationship. Here are some of the most common factors these clauses include.

• Caps on damages: This sets a maximum amount that a party can be held responsible for. For example, it could limit liability to the total amount paid for a product or service over a set period, protecting businesses from excessive financial claims.
• Consequential damage waivers: A limitation of liability clause can waive responsibility for consequential damages, like lost profits or business opportunities. This helps businesses avoid being held accountable for indirect costs that are often unpredictable or outside their control.
• Time limitations: This limits the amount of time a party has to file a claim. Setting a time frame prevents long-term exposure to potential liability, ensuring that claims are made in a reasonable period after an issue arises.

Limitation of liability clause example

To understand how a limitation of liability clause works in practice, let’s take a look at the Usercentrics General Terms and Conditions for Using the Usercentrics Software (USA).

This clause excludes Usercentrics from being held responsible for indirect or consequential damages, such as profit or data loss, and limits liability to the fees paid by the customer in the year preceding the damage. It works to shield the company from large financial claims, especially in situations involving sensitive data.

Presenting the clause in all caps makes it stand out within a terms and conditions document. This formatting helps ensure that customers are aware of the boundaries of the company’s responsibility, which can help to reduce risk of misunderstandings, claims of unfamiliarity, and disputes.

Why you should have a limitation of liability clause 

A limitation of liability clause helps you manage risk, maintain healthy business relationships, and protect your organization against risk of excessive financial loss. 

Mitigate financial risks

A limitation of liability clause reduces the chances of major financial setbacks and helps protect your business from substantial and potentially unpredictable costs and the economic impact they entail. It caps potential damages so you know exactly what your maximum liability will be should a situation arise. 

Proactively manage business relationships

By clearly defining what each party is responsible for, a limitation of liability clause helps to set expectations right from the outset of a relationship. This transparency helps prevent misunderstandings and conflicts from arising in the future. It also fosters trust and creates a foundation for smoother, more effective business partnerships.

Facilitate dispute resolution

Should issues escalate, having a limitation of liability clause can speed up the dispute resolution process. It gives both parties clear guidelines for addressing issues and resolving claims, which can help you avoid protracted litigation and quickly come to a fair settlement, saving all involved parties time, money, and stress.

Balance contractual risk and reward

When entering high-risk ventures, a limitation of liability clause protects you from exposure to potentially catastrophic losses. It enables both parties to take on new opportunities with a clearer sense of what each of you is liable for and can ultimately make the agreement fairer and more beneficial to everyone involved.

To which business activities does limitation of liability apply?

Whether you sell products, offer services, or engage in partnerships, including a limitation of liability in your contracts and/or ToS is crucial. However, it’s important to note that these clauses are not a failsafe. Businesses must still act with reasonable care to avoid risks that can’t be mitigated through contractual agreements.

Here are a few sectors where these clauses can be especially important. 

Software and technology services

The potential for technical issues, system failures, and data breaches make a limitation of liability clause especially important for businesses operating in the software and technology sector.

Almost every business operating today is reliant on technology, and they face heightened risks when products malfunction, security vulnerabilities are exploited, or services are disrupted. A limitation of liability clause helps shield the companies that create software and systems from the financial fallout of such events, capping their liability at manageable levels.

For example, if a software as a service (SaaS) company that offers cloud storage solutions experiences a data breach or downtime, customers could suffer significant data loss or business interruption. Without a limitation of liability clause, the SaaS provider could be held liable for extensive damages, including lost profits or reputational harm. 

By including a cap on liability and excluding certain types of indirect damages, the company can protect itself from excessive claims and contain potential losses.

Manufacturing

In the manufacturing sector, a limitation of liability clause helps manage the risks associated with product defects, delays, or accidents. 

If products cause harm or damage, or fail to meet agreed standards of specifications, manufacturers can face potential legal claims from customers, suppliers, or regulatory bodies. A limitation of liability clause helps control these risks by capping financial responsibility and excluding certain types of damages.

Consider a manufacturer of industrial machinery that supplies equipment to factories. If the machinery malfunctions and causes operational downtime or even damage to a client’s property, the manufacturer could be held liable for substantial repair costs or lost revenue. 

Capping the liability to the price of the equipment sold helps ensure that the manufacturer won’t be exposed to claims that could threaten its financial stability while still enabling it to honor its responsibilities.

Ecommerce

A limitation of liability clause is useful for managing the risks associated with online transactions, shipping issues, product returns, and other common challenges that ecommerce businesses face. It enables retailers to limit liability to the value of the purchase and exclude responsibility for consequential damages. 

As they often deal with large volumes of orders and customer interactions, these businesses are more likely to face disputes. A limitation of liability clause helps protect them from excessive claims related to shipping delays, damaged or defective products, and issues with payment processing, among others.

Think about an online retailer that sells electronics. If a product arrives at a customer’s door damaged or is delayed in transit, the customer may seek compensation for the inconvenience or potential losses incurred. 

Without a limitation of liability clause, the retailer could be held liable for the full value of the damaged goods as well as indirect damages, like lost business opportunities. 

Professional services

For businesses offering professional services — such as business consultancies, legal practices, or accounting firms — errors or omissions can have significant consequences, and limiting exposure helps mitigate potential financial damage. 

Here, a limitation of liability clause helps to protect the business against claims arising from the advice or services provided.

For example, take a consulting firm that advises a client on business strategy. It could be held liable if the advice it provides leads to financial losses. By including a limitation of liability clause, the firm can cap its liability to the fees paid for the services rendered, ensuring that it isn’t exposed to catastrophic claims. 

Transportation and logistics

In the transportation and logistics industry, a limitation of liability clause can protect businesses against risks related to shipping delays, damages, or accidents. 

Businesses in this sector often handle valuable goods and operate under tight schedules, making them susceptible to claims for things like lost shipments or cargo damage. A limitation of liability clause helps ensure that the company’s financial exposure remains controlled.

For instance, a logistics company responsible for delivering fragile electronics might face claims if goods are damaged during transit. Without a limitation of liability clause, the company could be held liable for the full value of the goods or any consequential losses incurred by the client. 

A limitation of liability can cap the business’s responsibility to the cost of shipping or the value of the goods rather than much larger, operationally driven claims.

Construction 

Without a limitation of liability clause, contractors and construction companies would face significant exposure to claims from clients, subcontractors, or regulatory bodies if a project didn’t meet deadlines or code requirements, or failed to live up to client expectations. 

Imagine if a construction company that builds commercial properties could be held liable where a delay in completion results in lost revenue for the client. Without a limitation of liability clause, the contractor could end up liable for covering lost business opportunities and property-related revenue. 

By including a cap on damages, the contractor can limit liability to the amount of the project’s value, helping protect its financial stability while still meeting contractual obligations in an industry where delays, accidents, and defects are commonplace. 

Proactively protect your business (and bottom line) 

A limitation of liability clause is one of the most effective ways to help protect your business from unexpected financial losses. Without it, your company could be exposed to significant risks, whether from product failures, legal claims, or service disruptions. 

In terms of data protection, you need to take all reasonable and legally required actions to prevent issues from occurring, and to limit your liability in case something does go wrong. Meanwhile, take a proactive approach to safeguarding customer data and complying with privacy regulations. Using a CMP that can help you to prevent privacy compliance issues from arising in the first place.

Usercentrics enables you to collect, handle, and store customer data in a legally compliant manner, reducing risks of regulatory noncompliance, violation of users’ privacy rights, and the potential reputational damage and legal or financial penalties that can accompany them. This can help you avoid the very issues that limitation of liability clauses are meant to protect against, giving you peace of mind while also safeguarding your business.