Contracts often contain clauses designed to limit a company’s exposure to lawsuits and liability, particularly in situation where the claim is not insurable. Especially when drafting a master service agreement, unknown future issues and liabilities should be taken into account.
Limitation of liability clauses are often enforced, particularly when they are unambiguous. They need to clearly limit the liability a company has when faced with a claim by placing a top limit on the amount of damages. This clause can be drafted such that it applies to all claims arising from the contract or only certain types.
Historically, there has been debate over how enforceable these clauses are and not all courts and states will enforce them (something to keep in mid when conducting businesses in multiple states). Others have found that a mutually-agreed upon contract can allow parties to agree to limit the liability.
The historic case in Minnesota states that controls the enforceability of limitation clauses is Carpenter v. United States Express Co. 120 Minn. 59, 139 N.W. 154 (Minn. 1912) where a shipment of furs was covered by a contract that limited the liability of the carrier. The court found that since the limitation was valid both in the state the shipment originated from (New York) and the destination (Minnesota) that it was valid for the contract to contain a limitation of liability. Further, since higher rates were available for shipments of higher value, the plaintiff had the opportunity to raise the amount of liability the defendant carried and chose not to do so.
To be enforceable, limitation of liability clauses need to very clearly state what their purpose is and both parties need the ability to negotiate the contract to ensure that it is not unconscionable. To draft a clause that is more likely to be enforced, you should make sure the clause stands out to ensure it is read. The other party needs to have the opportunity to ask a lawyer for advice. If there is negotiation of the clause, keep revisions of the document to demonstrate that the other party understood the agreement and actively negotiated. One method, mentioned in the case above and still used today, is to offer different rates for services that limit your liability in different ways, allowing your customers to make an informed choice.
When you want to add a clause like this to a master service agreement and want it to be enforceable, for larger companies, invite and expect negotiation. For smaller clients less likely to negotiate details, be sure you identify the clause to them and offer them different rates depending on your liability. Many software providers do this when they offer a free version, a personal-use version, and a business version of their product.
Virtus Law Firm has drafted effective master services agreements that fit the needs of their clients and negotiated many contracts to come to a mutually satisfying arrangement for both parties. Give us a call at 612.888.1000 or contact us by email at firstname.lastname@example.org.