Limitations of Liability

Contracts usually include limitations of liability clauses, which limit a party’s liability for damages for breaches of contract.

The limitations of liability often exclude indirect loss from the scope of liability. Indirect losses are excluded because they usually constitute unpredictable and great risks. Indirect loss is e.g. the loss of income and loss arising from the disturbance of other contractual relations. There are no statutory definitions of direct and indirect losses, so it is advisable to define their meaning in the contract.

Liability is often restricted by setting a fixed maximum amount for the liability. The parties may also agree to limit the liability to the value of the contract or a certain percentage of its value to allow the seller to at least cover the costs of production, for example.

It is important to note that liability cannot be excluded for breaches of contract caused intentionally or due to gross negligence. Liability limitation clauses do not free a party from liability where the breach of contract is caused intentionally, for example, by a criminal act, or by neglecting precautions to avoid remarkable damage. Clauses limiting liability are also invalid if a party has acted unscrupulously or negligently.

Ambiguous limitation of liability clauses are interpreted to the detriment of their drafter, i.e. in a way that limits liability as little as possible.

Limitation of liability clauses are often severe and surprising. Therefore, these clauses should be clearly identified in the agreement documentation. An electronic link is not necessarily sufficient.