We’ve all seen them: clauses buried in form contracts limiting one party’s liability to the other. For example, your client contracts with a vendor for cloud-based services, including new software for operating its core business, part of which is “back office” and part of which is customer-facing. The client pays significant fees for custom development, migration, and hosts all of its critical data with the cloud vendor. But once the new system goes into production, it’s riddled with errors, difficult for the client’s customers to operate, and frequently causes the client’s website to crash completely. The client’s customers are complaining loudly, and some are walking away. In order to stop the hemorrhaging, the client decides to abandon the new software and return to its legacy product, which it was still running in a parallel environment, just in case this happened. But a significant number of customers jumped ship with remarkable speed, and it’s too late to woo them back. In no time, your client’s damages are measured in millions, including the money it paid the vendor, money spent to get the legacy system up and running again, lost customers, and loss of a ton of customer
Then, your client finally calls you, and you look at the client’s contract with the vendor. The contract includes a limitation of liability provision, capping your client’s damages at “fees paid by
Limitation of liability clauses are frequently used to curtail parties’ substantive rights by capping damages under contracts, should something go awry. Sophisticated parties negotiating at arms’ length are free to agree on whatever contractual provisions they choose, including agreeing to limit any potential damages recovery.
In most states, there is no
Still, there is a special type of contract clause that can be so draconian in
Requirements for Exculpatory Clauses
In analyzing this requirement that exculpatory clauses be explicit, prominent, clear, and unambiguous, courts have given great weight to the prominence factor. Merriam-Webster’s dictionary defines prominent as “standing out or projecting beyond a surface or line; protuberant; readily noticeable; conspicuous.” Further, protuberant is defined as “thrusting out from a surrounding or adjacent surface often as a rounded mass,” and conspicuous is defined as “obvious to the eye or mind; attracting attention; striking.”
Prominence, therefore, depends on factors like typeface, whether the clause appears in a separate paragraph, or whether the clause is set off by an appropriate heading. Simply put, does the clause stand out on the page? Do the words pop out? Are they noticeable? Do they contrast with the other terms on the page? It’s important that the appearance of the provision signals importance to the contracting parties so that they know that by entering into the agreement, they are waiving a substantive right. If a clause is exculpatory—requiring prominence—and that requirement is not met, the clause will be held unenforceable.
A question sometimes arises as to whether a limitation of liability clause qualifies as an exculpatory
If you need to argue that a limitation of liability is an exculpatory clause, the trick is to determine if courts have treated limitation of liability clauses as exculpatory, requiring them to meet the prominence test, even if they have never precisely said why. From such a review, it is obvious that courts treat limitation of liability clauses as exculpatory, even explicitly calling such clauses “exculpatory” in some cases, without any further comment or analysis as to why they are considered exculpatory. Examining cases where courts have unpacked the prominence requirement for exculpatory clauses can lead to no other rational conclusion.