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PART 2: HARD CAP – HOW TO NEGOTIATE CAPPED LIABILITY LIMITS (Read “Part 1: Consequential Damages Limitation of Liability Clause“)

Imagine yourself facing a significant lawsuit from a disgruntled former customer asking you to pay out damages well in excess of the compensation you rightfully received. Wouldn’t it be fantastic if you could point the judge to a clause in your contract limiting the damages to only the amount the customer paid you?

This concept is the “hard cap” provision of a limitation of liability clause (we previously covered how to handle the consequential damages of a liability disclaimer as well). Below, we offer up a terrific, free video that explains this clause in detail.

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Recently I traveled to Thailand, and our hotel offered private boat rides through the city’s extensive canal system. Little did I know, but Bangkok used to be a canal city like Venice, and still has an extensive network of water-borne transportation. We enjoyed the ride thoroughly (you can see the view from our boat to the left). But I wondered a bit about what happened when we booked the tour. The concierge at our hotel’s front desk made clear to us that the boat provider had no affiliation with the hotel, and asked us to sign a liability disclaimer absolving the hotel of any responsibility if things went wrong. Putting aside my fears of capsizing into Bangkok’s “River of Kings” (not an unreasonable concern given that we spotted giant lizards and crocodiles later on the Chao Phraya River), I signed the document.

But I didn’t think the limit of liability clause went far enough, as it only excluded consequential damages. The hotel should have also imposed a hard cap as well.

What’s a hard cap? Here are the key components and negotiating permutations that comprise a typical hard cap contract provision:

OPTION No. 1: One Year Limit.

You can limit the total payout for damages awarded against you in court to just those damages that the customer suffered in the previous year. Or the limit can cap damages to the 1 year period prior to the date that the customer’s cause of action arose. Here’s an example:

EACH PARTY’S LIABILITY SHALL NOT EXCEED THE AMOUNTS PAID UNDER THIS AGREEMENT IN THE ONE (1) YEAR PERIOD PRIOR TO THE DATE THE CLAIM AROSE.

OPTION No. 2: Amounts Paid Under the Contract.

You can also reel in the damages award to just the amount the customer paid you under your contract. Here’s an example:

EACH PARTY’S LIABILITY SHALL NOT EXCEED THE AMOUNTS PAID UNDER THIS AGREEMENT PRIOR TO THE DATE THE CLAIM AROSE.

OPTION No. 3: Total Contract Value.

Savvy negotiating customers push back on these kinds of limitation of liability clauses, and instead insist higher liability limits, equaling the amount paid, due and payable under the agreement. This means that anything the customer paid in the past, any amount currently due but not yet paid, and all amounts required in the future (such as required monthly minimum purchase commitments) add up together to create the numerical amount that equals the actual limit of liability. Here’s an example:

EACH PARTY’S LIABILITY SHALL NOT EXCEED THE AMOUNTS PAID, DUE AND PAYABLE UNDER THIS AGREEMENT.

OPTION No. 4: Multiple of the Contract Value.

Tough customers also insist, whatever the limit of liability amount may be, on raising that limit even higher by requiring it to be a multiple. A typical example might be to say that the vendor’s liability under the contract shall not exceed 3 times the amounts paid, due and payable during the term of the agreement. Here’s an example:

EACH PARTY’S LIABILITY SHALL NOT EXCEED THREE (3) TIMES THE AMOUNTS PAID, DUE AND PAYABLE UNDER THIS AGREEMENT.

MUTUALITY: Mutually Speaking, Of Course.

Per our previous limitation of liability clause post, if you are the customer, be sure to consider the issue of mutuality during these kinds of negotiations. As we said:

If you are a vendor, though, be aware that most savvy negotiating customers push back and insist that if contract includes a limit of liability, then that provision must protect the customer as well when the vendor sues the customer for any reason. This is called “Mutuality” or a “Mutual Limitation of Liability” clause.

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