Are Limitation of Liability Clauses Enforceable?

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Are Limitation of Liability Clauses Enforceable?

A limitation of liability clause in a contract reduce exposure by limiting the amount or type of damages for which the breaching defendant is responsible. For example, a limitation of liability clause may limit a company’s liability to:

  • Only the compensation/fees paid under the contract
  • Damages other than, say, lost profits or consequential damages
  • A capped amount

Limitation of liability clauses are generally enforceable under Arizona law. The rationale is that commercial parties should be free to negotiate these provisions as they see fit, as they are in the best position to order their own affairs. It is important, however, that the provisions are clear, unambiguous, and conspicuous.

Although enforceable, limitation of liability clauses can be avoided. First, a party who has breached a contract in bad faith may not rely on a limitation of liability clause in the contract. In other words, if the defendant has acted to impair the right of the plaintiff to receive the benefit of the agreement, the defendant cannot then breach and raise the limitation of liability clause to limit the plaintiff’s damages.

Second, under the Uniform Commercial Code, such a clause is invalid where the circumstances cause it to fail of its essential purpose.

Third, the limitation of liability clause cannot be unconscionable. Thus, where a tomato grower sued its seed dealer for lost profits because the infected seeds it bought caused all of the plants to die, the court held that the dealer could not rely on the limitation of liability clause. Under the circumstances, that clause failed of its essential purpose and was unconscionable.

Contract litigation can be complex. Skilled representation is necessary. Williams Mestaz, L.L.P., is a law firm with decades of experience in commercial litigation, including employee lawsuits, IP infringement, business divorce, aviation, and high stakes litigation. Contact us at (602) 256-9400 and schedule a time to meet with us today.

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