This contract tip is about how we label the limit of liability provisions.
I have a bad habit of referring to them as the consequential damages waiver and the direct damages cap. There are a lot of others who do this too.
We need to stop.
The problem is we intend for the direct damages cap to limit all liability not specifically excluded from this cap.
So why do we keep labeling the cap with just one type of liability?
Remember there are three big buckets of liability associated with a contract - direct damages, indirect or consequential damages, and other liability that isn't a damage. This last category includes indemnification and some warranty claims.
You may think, "We only need it to cap direct damages. We already waived all consequential damages."
Let's consider that for a second. Usually there are exceptions to that waiver. Should the excluded indirect damages be capped? What about the other non-damage liability? If you aren't specific about it, a court, jury or arbitrator may read it differently than you intended.
Limits of liability are one of the most important provisions and a pivotal concept in many contract disputes.
Join me in trying to break this bad habit.
Stop calling it a direct damages cap. It's a limit of liability or other phrase that doesn't include the word "direct."
Do you ever find yourself calling it "cap on direct damages" like I do?
