Handbook / Contracts and proposals

Limitation of liability clauses for freelancers and small businesses

If your work goes wrong, how much could a client claim? Without a limit, the answer could be far more than you earned from the job. A limitation of liability clause sets boundaries on what each party can claim from the other. For freelancers and small service businesses, it is one of the most important clauses in a contract, and one of the most commonly missing. This guide is general information, not legal advice.

What the clause does

A limitation of liability clause can:

• cap the total amount one party can recover from the other
• exclude certain types of loss, such as indirect or consequential damages
• set time limits for bringing claims
• apply to both sides, or only one

Cornell's Legal Information Institute describes an exculpatory clause as a contract provision that releases or limits one party's liability for certain damages. Limitation of liability clauses are a form of this.

Common caps

Service agreements often cap liability at:

• the total fees paid under the contract
• fees paid in a recent period, such as the last few months, for ongoing work
• a fixed amount
• the amount of available insurance

Choose a cap that is proportionate to the work and that the client will accept. A cap far below the value of the work may be harder to defend.

Excluding consequential damages

Many clauses exclude consequential or indirect damages. Cornell's Legal Information Institute describes consequential damages as harm caused as a consequence of a party's actions, which need not arise directly from the wrongful act but result naturally from it. Lost profits are a common example in business disputes. For example, if your website code has a bug, the direct loss might be the cost of fixing it; a consequential loss might be sales the client says they lost while the site was down. Those can be much larger than your fee.

When clauses may not be enforced

Courts scrutinise these clauses. According to Cornell's Legal Information Institute, a court may refuse to enforce an exculpatory clause if, for example, it is overly broad, violates public policy, is not clearly disclosed to the agreeing party, or tries to waive liability for gross negligence or intentional misconduct. Rules vary by state and by type of contract, and consumer contracts often face extra protections. Do not rely on a clause to excuse careless or deliberate wrongdoing.

Writing a clear clause

To give your clause the best chance:

• write in plain language
• make it visible, such as with its own heading
• explain it to the client if asked
• make it mutual where reasonable
• keep the cap proportionate
• carve out things that should not be limited, such as each party's payment obligations, confidentiality breaches or intellectual property infringement, as you and the client agree

A simple illustration of structure, not a recommended wording:

Except for payment obligations and breaches of confidentiality, each party's total liability under this agreement is limited to the fees paid under it, and neither party is liable for indirect or consequential losses.

Have a lawyer review the wording for your state and industry.

Negotiating with clients

Larger clients may send their own contracts with unlimited liability for you, or ask you to indemnify them for broad categories of loss. Read these terms carefully. You can ask for a cap tied to fees or insurance, for mutual terms, or for specific exclusions. If the client will not agree, weigh the risk against the value of the work and check whether your insurance would cover it.

Insurance comes first

A liability clause reduces your exposure, but it does not stop claims or pay for them. The SBA describes professional liability insurance as coverage for businesses that provide services, protecting against negligence and errors claims. Match your contract cap to your policy limits where possible. See professional liability insurance and general liability insurance.

Where the clause fits

Include it in your independent contractor agreement, terms of service or the terms attached to your proposal. Other clauses that work with it include warranties, indemnities, intellectual property and termination.

Cap liability at a proportionate amount, exclude indirect and consequential losses where appropriate, write the clause clearly and visibly, never rely on it for gross negligence or misconduct, match it to your insurance and have it reviewed for your state.