Limitation of Liability Clauses Protect Sellers from the Unexpected
Editor’s note: As molders experience greater challenges with supply chains, material availability, and onerous contract terms, it is imperative that they take the time now to address risk. In the first article of this four-part series, Alan Rothenbuecher, a lawyer with deep ties to the plastics industry, provided advice on how molders can minimize risk related to warranties. The second article explained how the judicious use of Incoterms in sales contracts mitigate risk in the transport and delivery of goods. In this, the third article in the series, Rothenbuecher details the importance of limitation of liability clauses for protecting manufacturers from financial risk.
Imagine this: You are a seller who has designed a shower seat that provides support for customers with limited physical mobility. Someone buys your shower seat and takes it home. Upon opening the package, the customer decides that it would make a nice stepstool, an idea totally outside the realm of your shower seat’s intended use. A moment later, the customer is standing on top of the shower seat, trying to reach something on a high kitchen shelf. An accident ensues. Next thing you know, notice of a lawsuit arrives on your desk. As that seller, you may be asking yourself: Am I exposed to liability for this? The answer is “yes,” unless you have appropriately limited your exposure through a limitation of liability clause.
Protecting against exposure: Limitation of liability clauses
Limitation of liability clauses can be used to eliminate the seller’s risk of financial exposure for incidents like this one. A limitation of liability clause is a contract term that limits a seller’s possible exposure for a claim related to the seller’s product. Sellers should include these clauses in their sales contracts to avoid being held responsible for the consequences of a buyer’s actions that are entirely beyond the seller’s control. Specifically, sellers, under the terms of their agreements, should not be responsible for misuse, mishandling, or improper storage of the product by the buyer.
The shower seat turned stepstool incident above is a classic example of misuse — when a customer uses a product improperly or for the wrong purpose. Similarly, mishandling is using a product wrongly or ineffectively. Improper storage means handling the product incorrectly such that it is exposed to conditions that damage its effectiveness. A seller should not be financially responsible for consequences that arise from these post-sale actions of a buyer. Limitation of liability clauses can protect sellers from such exposure.
Limitation of liability clauses also allow a seller to limit the amount of money that can be sought in a potential lawsuit against them. Sellers should ensure that they are not responsible for the various forms of money that can be sought in a lawsuit, including consequential damages, incidental damages, and punitive damages.
Consequential damages involve indirect loss, such as lost profits, loss of goodwill, or attorney fees incurred as a result of the seller’s failure to the timely delivery of conforming products. Likewise, incidental damages can leave a seller liable for other associated costs that a buyer incurred that are deemed reasonably related to the claim, like the shipping cost to return nonconforming products to the manufacturer. Or the costs incurred by the buyer in searching for and obtaining substitute goods. These damages can be speculative and unforeseeable at the time that the seller enters into an agreement with the buyer. They should be excluded by a seller via a limitation of liability clause to protect against the possibility of exorbitant exposure.
Additionally, punitive damages pose a significant risk of financial liability and uncertainty for sellers operating without the protection of limitation of liability clauses. Punitive damages can be awarded as punishment if a court finds certain conduct particularly harmful. While such damages typically are not awarded in contract claims, the circumstances of an incident can lead a court to impose additional damages if it finds that the party’s wrongdoing warrants it.
Using limitation of liability clauses
All supply contracts for the purchase or sale of goods are subject to Uniform Commercial Code (UCC) requirements. The UCC is a set of laws that applies to all commercial transactions in the United States. Under the UCC, for limitation of liability clauses to be enforceable, they must be clearly displayed in consumer contracts (i.e., in bold type and large print) and easy for customers to read and understand.
Sellers should look at sample clauses to ensure that the language used in their agreements minimizes their own risk as much as possible. Sellers should consider the extent of all clauses, and make sure that they are excluding all potential damages. While you cannot predict when someone will try to use your shower seat as a stepstool, you can protect yourself against being responsible for it.
Special thanks to Katie Berens, who assisted with this article.
About the author
Often hailed as the “plastics lawyer,” Alan Rothenbuecher has developed particular expertise in the plastics industry, enabling him to assess business trends and needs to proactively develop solutions for molders. His industry expertise has led to Rothenbuecher being selected to act as counsel for and to serve on the boards of trade associations and molders considered leaders in the plastics industry.