Bad Boy Acts: Common "Carve-Outs" for Limitation of Liability Provisions

Faegre Baker Daniels partner Brian Clifford authored the following article for the Control System Integrators Association in February 2016.

Working in the control systems and integration industries, I often see master limitation of liability contract provisions in the terms and conditions of purchase orders, project services agreements and master services agreements. These terms usually cap a party’s risk for direct claims to a certain maximum exposure and can be very useful in allocating the parties’ respective risks involved in the relevant project.

However, these provisions may also carve-out damages caused by certain events from the scope of the liability waiver. Some of these more common events, sometimes called bad boy acts, are the following:

• Breach of a confidentiality/non-disclosure requirement: Parties are often hesitant to set a limit on damages for the improper use of their proprietary information, and such a cap can have unintended consequences — such as making it profitable for a party to breach the relevant provisions.  
• Infringement on intellectual property rights: Because these damages may not be proportional to the price of the contract, they may be excluded from the liability waiver. 
• Gross negligence: This concept is often defined as failing to take even a slight care for the consequences of your actions or inactions on another person, or a reckless disregard for such other person’s well-being. In order to encourage both parties to act reasonably, damages resulting from this level of negligence are often recoverable notwithstanding a contractual limitation of liability.  
• Willful misconduct: In order to prevent a party from intentionally causing harm, knowing that its liability was limited under the contract terms, this bad act is commonly an exception to any contractual liability waiver, either by the terms of the contract itself or because of laws prohibiting enforcement of such waiver.
• Violation of laws: In some cases, parties carve-out from a limitation of liability damages that result from the other party violating an applicable legal requirement. Although many times this is appropriate, the provision may have unintended consequences, especially when laws such as tax, import/export, equal employment and workplace safety statutes are not contemplated in drafting the various terms of the agreement.

Master limitation of liability provisions are not all alike. If you have one in your agreement, consider whether its scope appropriately limits the parties’ respective project risks.