How do you negotiate the limitation of liability clause? If your answer is “I pass it on to our legal team” or, even worse, “I thought the all-caps meant it was non-negotiable”, then you’re missing out on the opportunity to get a better deal and avoid excessive risks for your organization.
You don’t need to be a lawyer to take advantage of limitation of liability. You just need to know your way around it - and then get your lawyers’ approval before signing.
Watch this week’s video to learn how to negotiate this clause to your advantage:
I’ve always found the term “limitation of liability” to be the ultimate example of legal doublespeak. If you’re liable for something, why are limiting what you’re liable for?
Which is why I love the fact that the acronym for this clause is “lol”, because that’s what I’m doing when I see some of the language suppliers put into their agreement.
Now I know a lot of my lawyer friends who watch our videos are probably shaking their heads right now and getting ready to send me an email. Guys, relax. I’m not saying a contract shouldn’t have a limitation of liability or that it shouldn’t be mutual.
But for all of the non-lawyers watching, don’t be intimidated by the fact that this is a legal term, as opposed to a business term.
At a high level, here’s what you need to know: this is usually one of those terms that’s bold and in all-caps, giving the impression that it’s non-negotiable. But as we discussed a few weeks ago, everything in the contract is negotiable.
Also, the language is intended to limit the amount of damages one party would pay to the other party in the case there’s a breach of the agreement. And there are different ways to calculate that. Usually, the language will have some kind of a calculation like “no more than the fees paid in the 12 months immediately prior
Usually, the language will have some kind of a calculation like “no more than the fees paid in the 12 months immediately prior to when the claim arose". Or "three times the total fees paid."
Now here’s when it gets a bit tricky: for most technology agreements, you pay your initial fees and first-year maintenance right up front. And then at the end of the year, you pay maintenance fees for the following year
In this case, you don’t want to limit your liability to the 12 months prior to when the claim arose, because if a breach happens in the middle of the year, you’re only going to get back a portion of the fees that you paid.
Also, a 3x or a 5x multiplier might sound like a lot, but depending on what the supplier is providing, you might want to carve out certain items from the limitations, because you have no way of knowing what the actual damages will be for say, a breach of privacy or an IP infringement.
A few years ago, we were working with a client who got hit with an infringement lawsuit. It turned out that a tiny piece of software that they bought from a small supplier hadcode embedded in it that was written by a former employee of that supplier who claimed that he still owned that code.
Now what often happens in these cases is that the employees won’t sue their employers right away. They’ll let the software be sold to larger clients like ours and let those clients generate revenues for months (sometimes even years) and then they’ll sue the client or multiple clients for a portion of the revenue.
Thankfully, our client had a carve-out in their limitation of liability, so the supplier was on the hook for all of the damages, which were way more than 5 or even 10 times the fees they paid.
Now an important note here - limitation of liability is a legal term, so any changes made to your standard language should be reviewed and approved by your lawyers.
But if you understand the nuances of this language, you can use it to leverage other parts of the deal. I’ve used the limitation of liability clause to get better pricing, increase payment terms, and extend maintenance. And so can you if you understand how all the different parts of the contract tie in together.
And please remember to check out free video course on the “7 Skills of an Elite Negotiator” at oneviewnow.com/negotiator.
We’ll see you next week when we discuss payment terms.