Limitations of Liability
Contracts usually include liability limitation clauses, which limit a party’s liability for damages for breaches of contract.
The limitations of liability often e.g. 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 is no statutory definition of direct and indirect losses, so it is advisable to define their meaning in the contract.
Liability is also 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 in order to allow the seller to at least cover e.g. the costs of production.
It must be emphasized that it is not possible to exclude liability for breaches of contract induced intentionally or by gross negligence. Liability limitation clauses do not free a party from liability where the breach of contract is caused intentionally e.g. by a criminal act, or by neglecting precautions to avoid remarkable damages. They are also invalid if a party has acted unscrupulously or negligently.
Ambiguous liability limitation clauses are interpreted to the disadvantage of the party who drafted it, i.e. to minimize the limitation of liability as much as possible.
Liability limitation clauses are often considered severe and surprising. Consequently these clauses should be clearly shown in the agreement documentation.