Balancing Act: Navigating Limitation of Liability in Commercial Agreements with Pacific Legal Law Firm

As many entrepreneurs can attest, the limitation of liability is one of the most negotiated clauses in any commercial agreement. A limitation of liability is a clause that limits the liability of a party, often the service provider, in situations where the terms of the contract are breached, or the outcomes are not as desired. In this article, Pacific Legal will discuss a few important steps an entrepreneur should take, such as:

1. Imbalance between contract value and limitation of liability

For every party, having the lowest dollar amount in terms of incurring liability is a dream come true; however, the courts may take deep pleasure in waking you up from your dream and consider such an amount as unreasonable or irrational. At Pacific Legal, a business law firm in Toronto, we constantly advise our clients to strike a balance between the contract value and the limitation of liability sought. In simple terms, for a $10 million contract value, having a $2000 limitation of liability is certainly not a good idea.

2. Different contracts attract different liability clauses

Many young entrepreneurs often find themselves seeking litigation lawyers because they choose to use the same contract for different kinds of dealings. We at Pacific Legal recommend that every contract should be tailored based on the dealings, parties’ expectations, varied situations, and exclusivity. For example: A restaurant's liability for not delivering food for 2 people shall be exposed to only direct damages (in certain cases maximum to the amount of the food value), however, a restaurant's liability for not delivering food for 200 people at a wedding ceremony will attract significant direct as well as indirect damages.

3. Avoid Hide and Seek

Often parties enjoy the game of hide and seek by burying, hiding, and using imprecise/unclear language for terms related to the limitation of liability in a contract. The whole idea of making the terms of any clause, specifically liability clauses, inconspicuous and buried is inadvisable as courts often deem them unenforceable. We at Pacific Legal constantly advise clients to use precise words, bold, highlighted, and clear language for such clauses.

4. Negotiation

To avoid any unfavorable decisions in the court of law, it is recommended to negotiate the liability clause with the other party, directly or indirectly. Direct negotiation may include email threads and discussions with the other party; however, indirect negotiation may include using legal language to the extent that each party is responsible for reviewing the terms of the contract and seeking legal counsel, in simple terms, securing independent legal advice. Having such a clause can change the whole dynamic of the case, as the whole idea of having such clauses is to provide a fair chance of negotiation between the parties, hence removing any imbalances between the parties.

5. Time Limitation

At last, having a clause that limits the duration of any liability is very vital to any contract and a contract should have one, not just in terms of monetary value but also in terms of a period, as time is of the essence.

Avi Khanna Partner: Pacific Legal Law Firm

Ph: +1 416.688.5567 



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