Limiting Liability and Damages in a Contract
Certain contract terms can limit liability exposure from potential lawsuits and other claims that may arise. These terms are generally found in limited liability clauses. Certain contractual terms can also limit damages, such as a liquidated damages clause. For these terms to protect contracting parties from liability, they have to be properly drafted and in line with California law.
Limited liability clauses are permitted by California law, but courts will strictly construe such contract terms. There are certain acts that parties cannot limit liability for, such as instances of gross negligence, fraud, willful injury to persons or property, or violations of law whether the violations of law were intentional or not. Cal. Civ. Code § 1668.
In addition to limiting liability in a contract, parties may also agree to exclude or limit damages consistent with Cal. Com. Code §2719(3). For example, parties may limit consequential damages of a commercial loss, so long as the limitation is not unconscionable.
However, if a limited remedy clause fails, a plaintiff will be able to pursue all the remedies available for a breach of contract. To determine the validity of a contract term limiting damages, California courts weigh factors such as the type of goods involved, the parties, the allocation of risk, and the precise nature and purpose of the contract. To help ensure that a limiting clause will be enforced, the parties should make clear and explicit statements regarding the intent of the contract.
Sometimes, it is difficult to determine the damages that will result from certain breaches of a contract. To help mitigate against the difficulty of ascertaining the scope of the damages suffered, the parties will include a liquidated damages clause. In this clause, the parties agree to a specified amount of compensation if one of parties to the contract fails to adhere to its terms. Liquidated damages clauses are frequently found in contracts where a specific dollar amount of damages can be hard to determine because of changing circumstances, such as in real estate transactions.
Liquidated damages clauses are enforceable under California law as long as they are reasonable and consistent with Cal. Civ. Code. § 1671. For such a clause to be “reasonable,” it must be shown that at the time of contracting, damages would have been difficult to calculate, so the parties agreed upon an amount that was a reasonable estimate of any potential damage a breach of contract might cause. The stated amount has to be reasonable to both parties. In the event of a breach, liquidated damages will not necessarily be the only remedy unless the parties expressly so state in the contract.
Ezer Williamson Law provides a wide range of both transactional and litigation services to individuals and businesses. We have successfully prosecuted and defended various types of business and contract claims. Contact us at (310) 277-7747 to see how we can help you with your business law concerns.