Limitations: Overview, definition and example
What are limitations?
Limitations refer to restrictions or boundaries imposed within a contract that define the extent of the parties' rights, obligations, or liabilities. These can include limits on the amount of damages one party can claim, the duration of certain rights or obligations, or the scope of the services or goods provided. Limitations are included to manage risks and ensure that parties do not have excessive or unreasonable expectations.
For example, a contract may include a limitation on liability, stating that one party's total liability for any breach will not exceed the amount paid under the contract.
Why are limitations important?
Limitations are important because they help manage risks and prevent disputes by clearly defining the boundaries of each party's responsibilities. They can provide protection for the parties, particularly in situations where the risks of loss or damage are high. By setting limits, the parties ensure that they are not exposed to excessive or unpredictable liabilities and create a fairer balance in the agreement.
Including limitation clauses in contracts helps provide clarity on the consequences of breaches, reducing the potential for costly or prolonged legal battles.
Understanding limitations through an example
A service agreement between a contractor and a client includes a limitation on the contractor’s liability. The clause specifies that if the contractor fails to meet certain service standards, the client’s remedy is limited to a refund of the amount paid for the specific service, rather than damages for consequential losses. This provides both parties with clarity about the maximum financial risk involved.
An example of a limitations clause
Here’s how a limitations clause might appear in a contract:
“The liability of the Service Provider under this Agreement for any claim, whether arising from breach of contract, negligence, or otherwise, shall not exceed the total amount paid by the Client for the specific services giving rise to the claim. The Service Provider shall not be liable for any indirect, special, or consequential damages.”
Conclusion
Limitations clauses are essential for managing risks and ensuring fairness in contracts by setting clear boundaries on rights, obligations, and liabilities. They help protect both parties from excessive exposure to loss or legal claims and provide predictability in the event of a dispute. A well-drafted limitations clause fosters transparency, reduces uncertainty, and ensures that the contract operates within reasonable and mutually agreed-upon parameters.
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.