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Limitation of Liability Provisions

A common contractual provision used in business-to-business contracts in Massachusetts is a limitation of liability. As the name implies, this clause limits when the drafter of the contract can be held liable in certain circumstances.

The simplicity ends there, though, and recent state court decisions have changed when they liability limitation provisions reach too far and will not be enforced in court.

How Do Liability Limitation Provisions Work?

A limitation of liability provision is a clause in a contract that explicitly restricts when a party can be held liable, or caps how much compensation that liability can create. By signing the contract, the other party agrees to waive its right to hold them liable.

For example, liability limitation provisions can state that the party, nearly always the one drafting the contract, cannot be held liable for:

They can also limit the extent of that liability against a party, such as by:

  • Barring consequential or liquidated damages
  • Capping compensatory damages at a certain amount
  • Providing insurance coverage, but only up to the policy limitation

As you can tell, these provisions can be incredibly powerful, as they can shield a party to the contract from the repercussions of even the worst kinds of conduct. However, when used in a contract between businesses, which are presumed to be commercially sophisticated parties that understand what they are getting into, they are generally still enforceable in court.

There are Limitations to the Use of Liability Limitation Clauses

However, Massachusetts courts do realize that liability limitation clauses can go too far. These instances generally center on unfair trade practices that are prohibited by the state's Consumer Protection Statute, Massachusetts General Law Chapter 93A.

Unfortunately, the circumstances where a liability limitation has gone too far in this context are vague, at best.

Back in 1990, the Supreme Judicial Court deemed liability limitation clauses to be unenforceable if they “frustrated the public policies” of Chapter 93A (Canal Electric Co. v. Westinghouse Electric Corp.). They frustrated these policies when the limitation of liability insulated the party from unfair trade practice allegations that went beyond just a breach of contract claim.

For over 30 years, Massachusetts courts have interpreted this to mean that liability limitation provisions were enforceable against contract claims but not against tort claims like intentional interference with a contract, breaching a contract in bad faith, or deceptive business practices. While still opaque, this explanation provided at least some guidance.

Just recently, though, the Supreme Judicial Court reiterated that it was the cryptic “frustration of public policies” of Chapter 93A approach that was still the law (H1 Lincoln, Inc. v. South Washington Street, LLC). The court did, however, explain that the public policy of Massachusetts unfair trade practice law was to “deter and punish… defendants who willfully or knowingly engaged in unfair or deceptive acts” with other businesses.

Basically, liability limitation clauses that would immunize a company in advance from the penalties of unfair trade practices would not be enforced by courts.

Massachusetts Business Attorneys at the Katz Law Group

Liability limitation provisions are powerful. But they are not always enforceable.

The business and contract attorneys at the Katz Law Group can help you and your company draft effective ones that protect your financial well-being, or can work to render one unenforceable so you can invoke your rights. Contact them online or call their central Massachusetts law office at (508) 480-8202.

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