Exclusion of liability: Overview, definition, and example
What is exclusion of liability?
Exclusion of liability refers to a contractual provision that limits or eliminates one party’s responsibility for specific types of losses or damages that may arise under an agreement. This clause is commonly used to protect businesses from liability for indirect, unforeseeable, or certain categories of damages, such as lost profits or incidental damages. However, exclusions of liability are typically subject to legal limits, such as consumer protection laws or public policy considerations.
For example, a software provider might include an exclusion of liability clause stating that it is not responsible for data loss resulting from a user’s improper use of the software.
Why is exclusion of liability important?
Exclusion of liability is important because it helps businesses manage risk by limiting their exposure to claims for damages. For SMBs, this provision is particularly valuable in safeguarding against financial losses arising from unforeseen circumstances or user errors.
Including an exclusion of liability clause in contracts clarifies the extent of each party’s responsibilities, reduces the risk of disputes, and provides a legal defense in case of claims. It ensures that liability is balanced and proportionate to the scope of the agreement.
Understanding exclusion of liability through an example
Imagine an SMB sells an e-commerce platform to a retailer. The contract includes an exclusion of liability clause stating that the SMB is not responsible for any lost sales or revenue resulting from server downtime. This protects the SMB from being held accountable for the retailer’s lost profits in the event of unexpected technical issues.
In another scenario, a construction company contracts with a subcontractor for a specific project. The subcontractor’s agreement includes an exclusion of liability clause stating that the company is not responsible for damages caused by delays due to weather or other uncontrollable events. This limits the subcontractor’s exposure to claims for project delays beyond their control.
An example of an exclusion of liability clause
Here’s how an exclusion of liability clause might appear in a contract:
“Except as expressly provided in this Agreement, neither Party shall be liable for any indirect, incidental, consequential, or punitive damages, including but not limited to lost profits, revenue, or data, arising from or related to this Agreement, even if advised of the possibility of such damages. This exclusion of liability shall not apply to damages resulting from gross negligence, willful misconduct, or fraud.”
Conclusion
Exclusion of liability clauses are essential for protecting businesses from disproportionate or unforeseeable claims for damages. For SMBs, these provisions provide a safeguard against financial and legal risks while ensuring clarity about each party’s responsibilities. A well-drafted exclusion of liability clause balances risk, reduces disputes, and fosters trust by defining clear boundaries for liability in business relationships.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.