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limitation of liability clause

Contributor(s): Ivy Wigmore

A limitation of liability clause (sometimes referred to simply as a liability clause) is the section in a contracted agreement that specifies the damages that one party will be obligated to provide to the other under terms and conditions stipulated in the contract.

In a legal context, a liability is generally a responsibility to compensate for some failure to perform according to an established or agreed-upon stipulation. Because there is an element of risk inherent in most business agreements, limitation of liability clauses are common in all areas of contract law.

In IT, limits of liability clauses are typically written into contracts between any two parties, including distribution agreements,  software license agreements and service-level agreements. In a software license agreement, for example, the limitation of liability is one of the most important clauses because it limits the amount and types of damages one party can recover from the other party. For example, if the software doesn't work and the company suffers damages as a result, the limitation of liability will restrict the company's ability to recoup its loss.

Because a limitation of liability clause typically favors whichever party drafted the agreement -- usually the vendor -- it's particularly important to negotiate that part of the contract after careful consideration. 

 

This was last updated in June 2014

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