Limiting Contractual Liability The Right Way

Lets say that you are entering into a business contract and you are a bit concerned about your liability under the contractual agreement. You could just include language in the contract that says that you cannot be sued if you do something wrong—sometimes called a hold harmless agreement.

But is that legal? Would that actually work?

Hold Harmless in Injury Cases

Hold harmless agreements are usually used in an injury context, where people who engage in higher risk activities, or who agree to engage in certain activities which could cause injury, agree that they won’t sue the organizer or property owner.

But hold harmless agreements, also caused exculpatory clauses, also play a role in business law and commercial litigation. In fact, in almost every online terms of service, if you bother to scroll and read them, you are likely to find some provisions where the end user promises that he or she cannot sue if something goes wrong.

Watch for Illusory Contracts

One major problem with just insulating yourself from liability and having a contractual language that says that you can’t be sued is that you risk that the entire contract is void and unenforceable.

That’s because the contract could be considered to be illusory. An illusory contract is one where one party is a party to the contract, but isn’t actually legally bound to perform. Saying “I will do this, but if I don’t, there’s no consequence” really doesn’t bind you to a contract, which could make your contract illusory.

But that doesn’t mean that you are helpless and have no ability to limit your liability under a commercial agreement.

Limiting Liability in Part

One thing you can do is limit, as opposed to absolutely restrict, your liability under a contract. There are a few ways of doing this.

One thing you could do is limit the type of damages that you could be liable for if you default in an agreement. So for example, you could say that you won’t be liable for consequential damages, attorneys fees, or statutory damages.

You could also include notice provisions, which give you the chance to cure or fix the default, before anybody can sue you. In cases where you may “accidentally default” on a contract, the notice provision gives you the chance to correct the problem.

You could also soften provisions of the agreement. For example, if the agreement has time constraints, including language that the time deadlines are flexible, to some extent.

Using ADR

Using mandatory alternative dispute resolution, like required mediation before a lawsuit can legally be filed, won’t limit your legal exposure—but compelling the parties to mediation presuit, may allow an avenue for parties to sit down, and work out solutions before things get contentious and expensive in court.

In mediation you can fashion workouts to problems, face to face, that you can’t do once a lawsuit is filed.

Call our Fort Lauderdale business lawyers at Sweeney Law P.A. at 954-440-3993 today for help with your business contracts.

Sources:

law.cornell.edu/wex/hold_harmless#:~:text=Hold%20harmless%20is%20defined%20as,damage%20to%20the%20first%20party.

investopedia.com/terms/h/hold-harmless-clause.asp