Sellers’ Arguments for Limiting Liability
When negotiating to limit liabilities, sellers aim to reduce their risks and maintain their profit margins. Here are some common arguments sellers use:
1. Inadequate Financial Coverage: Sellers often argue that the profit from the transaction isn’t sufficient to cover all associated risks.
2. Supplier Risks: Sellers claim they cannot take on the buyer’s risks in addition to their own.
3. Encouragement of Legal Action: High limitations in the contract may encourage the buyer to pursue legal action.
4. Risk Sharing: Business inherently involves risks, and the buyer should also assume a portion of these risks.
Example:
Suppose a home appliance manufacturer wants to enter into a contract with a distribution company. The manufacturer might request that their liabilities be limited to the amount paid, so that in case of any issues, their financial risk is minimized.
Maximum Liability Clauses
Most contracts include clauses that limit the amount of damages one party can claim from the other. These clauses typically involve various criteria used to calculate the maximum liability. These criteria include:
1. Monetary Value of the Transaction: This criterion usually involves the amount paid or payable under the contract. For example, if the contract value is 100 million Tomans, the maximum liability may be limited to that amount.
2. Type of Product or Service: This criterion refers to the category of goods or services to which the value applies. For instance, the maximum liability for a specific product might be lower than the maximum liability for the entire contract.
3. Transaction-Related Documents: This criterion refers to the documents used to identify the value and product. For example, the maximum liability might be determined based on a specific purchase order.
Example:
In automotive parts supply contracts, the maximum liability clause might limit liability to the amount paid for the parts to reduce financial risk.
Beware of Liquidated Damages Without an End Date
Liquidated damages clauses must be carefully drafted to avoid complications. Most contracts follow basic principles, but they often fail to specify an end date for liquidated damages. For example, if the seller fails to deliver the product on time, the customer might be left waiting for weeks or months, leading to significant issues.
Example:
In a construction project, if the contractor fails to complete the project on time, liquidated damages clauses without a specified end date could cause further problems, leading to greater losses for the client.
Setting Maximum Liability in B2B Commercial Contracts
To set maximum liability in business-to-business (B2B) commercial contracts, a careful analysis is required. Here are four key frameworks commonly used:
1. Assessment of Damage Probability: Evaluating the likelihood that either party might cause damages.
2. Proportionality of Potential Damages: Assessing whether both parties would equally bear the potential damages.
3. Risk Factors: Reviewing risk factors such as performance requirements, the credibility of the other party, and risks associated with the goods.
4. Risk Mitigation: Determining whether this limitation falls within our insurance coverage and if there are exceptions to this limitation.
Example:
In import and export contracts, maximum liability clauses may be carefully crafted to ensure that in the event of issues such as delivery delays, both parties can protect their rights.
What Are Incidental Damages?
Incidental damages are the costs and expenses that one party incurs to mitigate the effects of a breach of contract by the other party. These damages include storage costs for sellers and costs related to the wrongful rejection of goods by buyers.
Example:
Suppose a food supplier incurs storage costs for products that were wrongly rejected by the buyer. These costs would be considered incidental damages.
Options for Limiting Liability in Contracts
Liability in contracts can be set in various ways, ranging from no limitation to very strict limitations. Some common options include:
1. No Liability Limitation for the Seller: In this case, the seller assumes responsibility for all damages.
2. Limiting the Seller’s Liability for Specific Claims: Here, the seller is only liable for certain specific claims.
3. Limiting the Seller’s Liability to the Total Value of Contracts: In this scenario, the seller’s liability is capped at the total value of all contracts with the buyer.
4. Limiting the Seller’s Liability to a Specific Contract: The seller’s liability is restricted to the value of a specific contract.
Example:
In an electronic components supply contract, the seller may request that their liability be limited to the total value of the contract to reduce financial risks.
By following these guidelines and practical examples, you can structure your contracts to minimize risks and avoid legal complications.
Source: Frederick, L. (2022). Practical Tips on How to Contract: Learn How to Draft and Negotiate from a Former Big Law and Tesla Commercial Contracts Lawyer. How to Contract LLC.
