Question

17–4bEnforceability of Limitation-of-Liability Clauses

Learning Objective 5

What is a limitation-of-liability clause, and when will courts enforce it?

Whether a limitation-of-liability clause in a contract will be enforced depends on the type of breach that is excused by the provision. Clauses that normally will not be enforced include provisions excluding liability for fraudulent or intentional injury or for illegal acts or other violations of law. Clauses excluding liability for negligence may be enforced in certain situations, however. When an exculpatory clause for negligence is contained in a contract made between parties who have roughly equal bargaining positions, the clause usually will be enforced.

Case Example 17.14

Engineering Consulting Services, Ltd. (ECS), contracted with RSN Properties, Inc., a real estate developer, to perform soil studies for $2,200 and render an opinion on the use of septic systems in a residential subdivision being developed. A clause in the contract limited ECS’s liability to RSN to the value of the engineering services or the sum of $50,000, whichever was greater.

ECS concluded that most of the lots were suitable for septic systems, so RSN proceeded with development. RSN constructed roads and water lines to the subdivision in reliance on ECS’s conclusions, which turned out to be incorrect. RSN sued ECS for breach of contract and argued that the limitation-of-liability clause was against public policy and unenforceable. The court, however, enforced the limitation-of-liability clause as “a reasonable allocation of risks in an arm’s-length business transaction.”

Reviewing … Breach and Remedies

Kyle Bruno enters into a contract with X Entertainment to be a stuntman in a movie. Bruno is widely known as the best motorcycle stuntman in the business, and the movie Xtreme Riders has numerous scenes involving high-speed freestyle street-bike stunts. Filming is set to begin August 1 and end by December 1 so that the film can be released the following summer. Both parties to the contract have stipulated that the filming must end on time in order to capture the profits from the summer movie market.

The contract states that Bruno will be paid 10 percent of the net proceeds from the movie for his stunts. The contract also includes a liquidated damages provision, which specifies that if Bruno breaches the contract, he will owe X Entertainment $1 million. In addition, the contract includes a limitation-of-liability clause stating that if Bruno is injured during filming, X Entertainment’s liability is limited to nominal damages. Using the information presented in the chapter, answer the following questions.

One day, while Bruno is preparing for a difficult stunt, he gets into an argument with the director and refuses to perform any stunts. Can X Entertainment seek specific performance of the contract? Why or why not?

Suppose that while performing a high-speed wheelie on a motorcycle, Bruno is injured by an intentionally reckless act of an X Entertainment employee. Will a court be likely to enforce the limitation-of-liability clause? Why or why not?

What factors would a court consider to determine if the $1 million liquidated damages clause is valid or is a penalty?

Suppose that there was no liquidated damages clause (or the court refused to enforce it) and X Entertainment breached the contract. The breach caused the release of the film to be delayed by many months. Could Bruno seek consequential (special) damages for lost profits from the summer movie market in that situation? Explain.

Debate This

Courts should always uphold limitation-of-liability clauses, whether or not the two parties to the contract had equal bargaining power.

Need help with this Discussion #4 below.

See the 17-4, Limitation-of-Liability Clauses and at the end of Chapter 17, Reviewing...Breach and Remedies

Answer by incorporating facts, laws, rules, factors, etc., into your argument.

Debate this/Arguments/Discussion: Courts should always uphold limitation-of-liability clauses, whether or not the two parties to the contract had equal bargaining power.

Answer 1

MEANING OF LIMITATION OF LIABILITY-

A limitation of liability clause is a provision in a contract that limits the amount of exposure a company faces in the event a lawsuit is filed or another claim is made. If found to be enforceable, a limitation of liability clause can "cap" the amount of potential damages to which a company is exposed. The limit may apply to all claims arising during the course of the contract, or it may apply only to certain types of causes of action.

In first situation, Bruno gets into an argument with the director and refuse to do any stunt in this situation X Entertainment can sue Bruno for breach of contract and Bruno will liable for it.

In second situation, Bruno is injured by an intentionally reckless act of an X Entertainment employee. So the court be likely to enforce the limitation-of-liability clause because in this situation X Entertainment employee is liable for the injury of Bruno