Limitation on liability of the depositor: Overview, definition, and example
What is limitation on liability of the depositor?
Limitation on liability of the depositor is a clause in financial or trust-related agreements that protects the depositor—usually the party that transfers assets into a trust or special-purpose vehicle (SPV)—from being held personally responsible for losses, damages, or legal claims related to those assets after the transfer.
In simple terms, it means the depositor says, “I’m handing over these assets, but if something goes wrong with them later, you can’t come after me personally.”
Why is limitation on liability of the depositor important?
This clause is important because it draws a clear line between what the depositor is responsible for and what they’re not. Once the depositor has transferred the assets—like loans, securities, or other financial instruments—they often want to limit their ongoing risk.
Without this protection, the depositor could be dragged into lawsuits, financial claims, or losses related to how those assets perform down the road. By including a limitation on liability clause, they reduce that risk and protect themselves from future liability tied to the transferred assets.
This clause is especially common in structured finance, securitization deals, and trust agreements.
Understanding limitation on liability of the depositor through an example
Imagine a bank transfers a pool of mortgage loans into a trust to create mortgage-backed securities (MBS). The bank is the depositor—it moved the loans into the trust so investors can buy securities backed by those loans.
To protect itself, the bank includes a limitation on liability of the depositor clause in the agreement. This means that if those mortgage loans later go into default, or if investors lose money, the bank isn’t personally liable for those losses—unless it broke the rules or made false statements during the transfer.
That way, the depositor’s liability is limited to what it actually promised at the time of the deal.
An example of a limitation on liability of the depositor clause
Here’s how this clause might appear in a trust or securitization agreement:
“The Depositor shall not have any liability or obligation under this Agreement or in connection with any of the transactions contemplated hereby, other than as expressly set forth herein. In no event shall the Depositor be liable for any indirect, special, or consequential damages arising out of the ownership or operation of the Trust Estate.”
Conclusion
Limitation on liability of the depositor is a key legal safeguard that helps depositor parties limit their exposure after transferring assets into a trust or similar structure. It clarifies that, once the transfer is made and the agreed representations are honored, the depositor isn’t on the hook for future problems tied to the assets.
If you're involved in any transaction where you're handing over assets—especially in finance, investment, or trust-related deals—this clause can help protect your business from long-term risk and legal headaches.
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.