Limitation of liability when negotiating contracts with US and foreign entities

Over time, the incorporation of limitation of liability clauses has become standard practice and it is very rare to come across contracts that leave the parties’ liability unregulated.

However, as companies grow and look to expand their business across international borders there is a vast amount of cultural and legal differences that can result in problems arising.

For example, a frequent but serious mistake that UK companies make is that when selling their goods in other countries, such as the US, they assume that the terms and conditions they use in the UK will also work under the US law.

When contracts and limitation of liability clauses are not drafted appropriately, in the event of a breach of contract, a UK company may become liable to damages and losses exceeding the value of the sale.

Uniform Commercial Code Article 2

There are key regulations that every seller of goods in the US must be aware of such as the Uniform Commercial Code Article 2 (“UCC”). This is a complicated but effective code designated to facilitate sales by enforcing contracts and filling gaps in poorly drafted contracts.

The UCC provides that incidental and consequential damages may be recovered by the buyer. A well-drafted limitation of liability clause would not only exclude liability for incidental and consequential damages but would also limit damages to the price of goods – or alternatively define the amount that is acceptable to both parties.

Furthermore, the UCC allows for a number of remedies, as simply limiting damages does not limit the number of remedies through which those damages can be obtained.

However, where there is a lack of clarity in the contract, default terms provided by the UCC may, in fact, prove disadvantageous. For example, a UK seller with a poorly drafted contract whose goods are lost in transit or damaged, may assume that the UCC protects them and that they still have the right of payment.

Instead, UCC Article 2 includes specific rules about when the risk of loss transfers from the seller to the buyer, which may be disadvantageous to the seller. Therefore, there is greater risk in relying on international laws to bridge any gaps in a contract than ensuring that a contract with an international entity is properly drafted.

In the US, different laws will also apply from state to state. No one contract can therefore simply be governed by US law. Instead, a state will need to be specified and there may be differences in laws between states. Likewise, in the UK, a contract will be governed by the laws of England & Wales or Scotland or Northen Ireland, not the UK.

Therefore, when negotiating contracts or terms and conditions with foreign entities, particularly US entities, it is important to consider the following key points.

Key drafting considerations

• Use clear language and unambiguous wording to specify the limitations on liability and avoid vague terms that can be open to interpretation
• Ensure that the governing law and jurisdiction clauses support the limitation provisions and that they are enforceable under the chosen jurisdiction
• Consider the impact of different legal systems on the enforceability of your limitation of liability clause
• Expressly identify all types of liability to be limited, for example, breach of contract, negligence or misrepresentation, and specify the types of damages excluded or limited, such as direct, indirect, consequential or special damages
• Specify a monetary cap on liability. This can be a fixed sum or a formula based on the contract value or other metrics. For example, the fees paid under the contract
• Clearly carve out non-excludable liabilities such as those for death or personal injury caused by negligence and fraud
• Coordinate indemnity provisions with limitation clauses to ensure they work together and do not contradict each other. Insert an express obligation for all parties to have insurance cover in place
• Keep monitoring the sector. A clause is more likely to be considered reasonable if it reflects the current industry practice
• Keep records of the clause being negotiated and the reasons why the parties agreed the final position.

If you’re negotiating clauses in the US – or anywhere overseas – it is important to ensure you’re covered both in the country and any different jurisdictions within that country in case of a contractual dispute.