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What is a Limitation of Liability Clause? Here’s Everything You Need to Know

If you’re providing products or services as a business entity or a freelancer, you may find yourself in need of a contractual limitation of liability clause. This clause reduces or eliminates the liabilities of one or more parties in a contractual agreement and, therefore, can greatly affect finances and overall risk in your business activities.

In this article, we will explain what is, and how it can help you protect your financial health, mitigate risks, and insulate your business from liability and damages. We’ll also provide practical advice for drafting an effective clause that can protect your interests.

So, let’s get started and learn everything you need to know about limitation of liability clauses! 👀

limitation of liability clause

What is a limitation of liability clause?

A limitation of liability clause is a legal provision that limits the liability of one party in the event of damages, losses, or injuries caused to the other party. This clause is often included in contracts, agreements, and other legal documents to protect one party in the event of a dispute over agreed-upon service or work and limits what they can be held responsible for, in the event of legal action.

Why is a limitation of liability important?

Essentially, a limitation of liability clause limits the number of damages, protects your business from being held liable for large amounts of money, and can even prevent bankruptcy in the event of an unforeseen lawsuit or legal dispute.

Without one, your business could be held liable for damages that far exceed your profits or assets, potentially leading to hefty financial problems. By including this clause in your contracts or terms and conditions documents, you’re limiting your exposure to legal risks and protecting your business from excessive liabilities.

💡 Important

It’s important to note that while a this clause can provide some protection, it’s not a foolproof solution. Therefore, make sure you have the support of a legal expert or trusted tools to draft a clause that provides effective protection and is legally binding in the event of a dispute. 👉 See below for how to Draft a Limitation of Liability Clause

Key Elements of the Limitation of Liability Clause

As we have seen, protecting your business and activity from legal risks by including this clause is crucial to their success. Here are some key elements to include in this clause:

  • Types of Damages: clearly state what kind of damages are included and excluded from the limitation of liability clause (add specific wording for liability limitation, going deep with examples and statements). This will help avoid confusion or misinterpretation in the event of a dispute.
  • Liability Cap (non-consumer transactions only): set a maximum amount that your business will be responsible for in the event of liability. This cap should be reasonable and reflect the level of risk associated with your business operations.
  • Scope of Liability: define the scope of the liability that your business will be responsible for. This could include, among others, damages caused by your own negligence but may exclude damages caused by factors outside your control (e.g. force majeure).
  • Indemnification: include an indemnification provision that requires the other party to indemnify your business for any damages that arise, for example, from their actions or omissions.
  • Governing Law: although this provision may be part of the Terms and Conditions document in general, remember to specify the governing law that will be used to interpret and enforce the limitation of liability clause, this can help to avoid conflicts and confusion if a lawsuit arises.

👋 Want to minimize risks for your business?

🔍 Read our guide on What Are the Terms and Conditions, and When Are They Needed?

What is an example of a limitation of liability clause?

In a software development contract, for example, the developer may include a limitation of liability provision that states that they are not responsible for any harm caused by the use of their software, including but not limited to data loss, compensatory damages, or other indirect or consequential damages.

This clause is important for developers because it protects them from liability for issues that may arise due to situations outside their control. For example, if a user loses data due to a virus that affects their equipment while using the software, the developer will not be held responsible.

How to Draft a Limitation of Liability Clause

If you are not very familiar with legal aspects and the different applicable regulations, it can be overwhelming to try to draft a limitation of liability clause on your own, but, it’s important to ensure that it is well-crafted and clearly communicates the extent of the limitation.

Drafting this clause can be quite complicated! Fortunately, there are online generators available that can help you create a well-crafted and legally sound clause.

With iubenda you can save time and ensure that your clauses are well-crafted by an international legal team and land up to date with the main international legislations.

Our solution works for businesses of any size, from small businesses to enterprise-level organizations, protecting their interests and avoiding any legal issues.

It’s really that easy:

  1. Create an account on iubenda or log in to your dashboard.
  2. From the Terms and Conditions Generator, answer a few questions to determine which clauses you need.
  3. Save and add it to your website!

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