Business vs. Legal Issues, part 1: Limitations of Liability

Can business issues really ever be separated out from legal issues? No. Many sales people anxious to get a deal done have insisted that my job as the lawyer is only to advise a company on the “legal issues” in a contract. In other words, they want me to ignore the provisions they have deemed “business issues” and just look at the “legal matters” in isolation.

This is tough because business and legal issues are often intertwined. Legal representatives should work as partners with business people towards achieving the company's goals.  For instance, within contracts, a limitation of liability clause, which can be one of the most contentious issues, can be seen as both a business and a legal issue. A limitation of liability clause sets the ceiling for a party’s financial responsibility if the contract is breached. Properly drafted, and in jurisdictions where it is enforceable, it provides protection and is a valuable tool for allocating project risk. Usually, neither party’s liability exceeds the amount one is paying to the other, and neither should bear responsibility for consequential/incidental/ indirect damages. Of course, there are exceptions for damages beyond a party’s control: indemnification (protection from third party claims) is typically excluded from a limitation of liability clause, and often breaches of representations and warranties are, too.

Because a limitation of liability clause deals with financial responsibility, some business people it as a pure business term, a deal point to be negotiated and firmed up in the contract. I agree that the ultimate decision as to how much liability to bear is certainly a business risk to be determined by the responsible party. However, the effect of the clause, and particularly its relationship to an indemnification or warranty clause, needs to be examined in the context of the entire contract and viewed in light of both the business and the legal consequences of the language. Because of this, limitation of liability clauses serve as an excellent example of the interdependence of business and law, and the ways one shapes and constructs the other.