“Super Caps” and Other Current Trends in Liability Limitations
Bank & Financial Business Law
Limitation-of-liability clauses are key contract provisions that limit contracting parties’ potential exposure. The most common type of clause is a cap on a party’s potential liability, which is often set as either a flat dollar amount (such as $500,000 or $1 million), or a multiple of the fees paid over a period of time (such as, all fees paid in the prior 12 months).
But, times are changing, and with new risks come new risk mitigation strategies. Here is an overview of some current trends in liability limitations:
“Super Caps” for Specific Liabilities
One recent trend is the “super cap.” In addition to general liability caps, contracting parties may agree to an increased cap amount for certain specific liabilities. This approach has become particularly common in the information technology (IT) field, with vendors agreeing to risk additional liability for, as an example, data breaches and other cybersecurity incidents.
When negotiating super caps, both parties need to make informed decisions. The party seeking the heightened cap must conduct a risk assessment to determine the potential costs of a breach. Historically, in some cases, these parties would accept no limitation on a party’s liability, so even agreeing to a super cap can be a big deal. On the other hand, the vendor who agrees to the super cap should ensure that its insurance coverage is both adequate to cover the super cap and will respond to a claim. Vendors will also want to be careful to ensure that their contracts’ super cap provisions are drafted as narrowly as possible to ensure that they only apply in limited circumstances.
Aggregate Liability Caps
It is also becoming increasingly common to see aggregate liability caps in commercial contracts. These provisions limit a party’s total liability over the entire duration of a contract, either in addition to or in lieu of limiting the party’s liability on a per-event basis.
We also see contracts with durationally-limited aggregate liability caps. This isn’t exactly new, but we are finding it more common for parties with potential exposure to try to negotiate limits on their exposure by various means. As company leaders become more informed about their companies’ risks, they are putting more time and effort into mitigating these risks in order to protect their companies’ assets and shareholders.
Annual Liability Caps
If a party will not agree to a total aggregate liability cap, it may agree to cap liability on an annual basis. For example, rather than a $10 million total aggregate liability cap, a party may be willing to agree to a cap of $2 million per year. This type of clause can work to a customer’s benefit if modest liabilities are likely to accrue over time, but it can also serve to protect the vendor should a major liability arise.
As with all liability limitation clauses, these clauses must be drafted very carefully to ensure that they function as intended for both parties. If it is not clear when a liability “accrues” or when a party must file a claim, for example, this could lead to the very type of high-stakes litigation these clauses are intended to prevent.
Speak with a Commercial Contract Lawyer at GS2Law
Do you have questions about what you can (and should) be doing to limit your company’s liability exposure? If so, we can help. Inquire online today to schedule an appointment with a commercial contract lawyer at GS2Law.