What is limitation of liability?
Limitation of liability is a clause that sets a monetary cap on the amount of damages one party can recover from the other in case of a breach of contract or other liability. It is different from a damages waiver, which limits the types of damages a party could recover. The purpose of both types of clauses is to limit the potential financial risk that each party assumes by entering into the contract. The amount of the cap is often tied to the value of the contract, but this can vary based on negotiation and the nature of the services provided.
For example, think about a cloud service for inventory management that calculates orders incorrectly, resulting in a customer over-purchasing. The provider might be liable for the over-purchase, but a limitation of liability clause could mean that the customer is limited in the amount it could recover in a lawsuit.
Why does limitation of liability show up in design partner agreements?
Design partnerships are typically the earliest agreement between a startup and its first customers. Compared to full-fledged sales contracts like a Cloud Service Agreement, a Design Partner Agreement is lighter-weight and emphasizes the partnership aspects of the relationships (feedback sessions, case studies, etc.) as much as the commercial terms. It also acknowledges that the startup’s product is in the early stages of its lifecycle, and may include bugs or other faults that aren’t expected of a mature product or service. However, a startup and its design partner may want to include a limitation of liability clause to protect their potential financial exposure.
Sample langauge
Written to work with Common Paper standard agreements.
Add limitation of liability
Update Section 4 to be called “Disclaimer of Warranties and Limitation of Liability” and add as Section 4.2: “Each party’s total cumulative liability for all claims arising out of or relating to this Agreement will not be more than { $ dollar amount }”