Shake Logo

Limitation of Liability and Independent Contractor Agreements

by Vinay Jain

In this article, we share some of the legal research behind our forms. Please note that refining these forms is an ongoing process informed by continuous research as well as possible changes in the law. As a result, the language we reference below may differ from what’s currently in use on the app.

Shake’s freelance (independent contractor) agreements contain the following limitation of liability provision:

UNLESS A RESULT OF GROSS NEGLIGENCE OR WILLFUL MISCONDUCT, THE LIABILITY OF EITHER PARTY TO THE OTHER FOR ANY TYPE OF DAMAGES IS LIMITED TO THE AMOUNT OF (FREELANCER’S NAME) TOTAL FEES UNDER THIS AGREEMENT.

The purpose of this provision is to help ensure that the parties to the agreement do not find themselves in a situation where their interaction creates liabilities that exceed the value of the contract. It is a longstanding rule of contract law that courts will limit damage awards in breach of contract claim to those damages which are reasonably foreseeable by the parties the time of contracting.1  However, this does not necessarily limit contract damages to the immediate financial loss caused by a breach.  Courts may award “consequential damages” (sometimes called “special damages”), which are damages that result indirectly from the breach.2 For example, absent a limitation of liability clause, courts may award damages for lost profits, as was the case in Perini Corp. v. Greate Bay Hotel & Casino, Inc., where the court upheld an arbitrator’s damage award of $14.5 million, despite the value of the contract being only $600,000.3

The provision stipulates that the amount of “any type of damages” will be limited to the value of the agreement. The phrase “any type of damages” is intended to encompass the various categories of damages recognized under the law, as the limitation of liability clause need not specifically list each category of damages to be enforceable.4  There are several categories of contract damages a party can seek: direct/general damages (damages that are actually incurred as a direct result of the breach), incidental damages (expenses reasonably incurred as a result of the breach) and consequential damages (indirect losses).  The general default rule courts follow is that breach of contract should result in expectation damages (which may or may not include some or all of the aforementioned categories), which places the wronged party in the same position as had the breach not occurred – in effect giving the harmed party the benefit of its bargain.5

Limitations of liability are generally enforceable for claims brought under contract law,6 but are less reliably enforceable under tort law.7  Limitation of liability clauses do not necessarily cover liability for negligence claims.  Because exclusion of liability clauses are not favored by courts, such clauses must clearly demonstrate an intent to exclude recovery for negligence.8

Limitation of liability provisions will not be enforced when they violate public policy. The public policy basis for voiding a limitation of liability clause may be as straightforward as the presence of a statute which has something to say about contract damages.9  Under public policy grounds, courts might also ask whether damages are so minimal as to drastically minimize a breaching party’s consequences for its breach.10 Courts may also look at a range of other factors in determining whether “public policy” should be grounds for restricting a limitation of liability clause.11

Liability for gross negligence or willful misconduct generally cannot be limited or disclaimed by contract.12 The provision explicitly carves them out of the liability limitation.

The limitation of liability provision is written in all capital letters to satisfy the requirement in some states that such a provision be “conspicuous.”13

 

 

 

  1. See Hadley v. Baxendale, 9 Ex. 341, 156 Eng. Rep. 145 (1854).
  2. See Black’s Law Dictionary (9th ed. 2009, damages).
  3. 129 N.J. 479 (1992). See also Western Union Tel. Co. v. Martin, 9 Ill. App. 587 (1882) (the court contemplated but ultimately refused to award the Plaintiff lost profits in the amount of $1450 for winnings he would have made on a horse race bet, but did not make because his $250 bet was not delivered by Western Union); Evra Corp. v. Swiss Bank Corp., 673 F.3d 951 (1982) (overturning the lower court’s decision to award Plaintiff over $2 million in consequential damages for the Defendant Bank’s failure to execute a $27,000 wire transfer).
  4.  See e.g., Valhal Corp. v. Sullivan Assoc., Inc., 44 F.3d 195 (3d Cir. 1995) (upholding a limitation of liability clause under Pennsylvania law which limited a party’s “total aggregate liability” to a fixed dollar amount); World-Link, Inc. v. Citizens Telecomm. Co., No. 99CIV2054 GEL. WL 1877065, at *3 (S.D.N.Y. Dec. 26, 2000) (noting that a limitation of liability clause reading, “(Party’s) sole liability under this Agreement … shall be limited to the actual amount of (Party) charges incurred …” would be interpreted to prohibit recovery for consequential damages); Bernstein v. GTE Directories Corp., 827 F.2d 480 (9th Cir. 1987) (applying Nevada law to deny plaintiffs lost profits damages and enforcing a limitation of liability clause which stated, “(Party) shall not be liable to the advertiser for damages … in excess of the amount paid by the advertiser …”).
  5. See Black’s Law Dictionary (9th ed. 2009, damages); 24 Williston on Contracts § 64:2 (4th ed. 2009-2010).
  6. “With certain exceptions, the courts see no harm in express agreements limiting damages to be recovered for breach of contract.” Corbin, Contracts § 1068 (2003),.  See e.g., Metropolitan Life Ins. Co. v. Noble Lowndes Inter., Inc., 84 N.Y.2d 430, 436 (finding that “a limitation of liability provision in a contract represents the parties’ Agreement … which the courts should honor.”); Computrol, Inc. v. Newtrend, L.P., 203 F.3d 1064, 1069 (8th Cir. 2000) (“Illinois law allows parties to limit remedies and damages for breach of contract if no public policy bar exists.”)
  7. A party’s failure to perform its obligations under a contract and the resulting harm to the injured party can take the form of a breach of contract claim and a tort claim.  See Sommer v. Fed. Signal Corp., 79 N.Y.2d 540, 551 (1992) (“a contracting party may be charged with a separate tort liability arising from a duty distinct from, or in addition to, the breach of contract.”).
  8. See Chepkevich v. Hidden Valley Resort, L.P., 607 Pa. 1, 26 (2010) (noting that a limitation of liability clause will be unenforceable with respect to negligence claims “unless the language of the parties is clear that a person is being relieved of liability for its own acts of negligence.”); CAZA Drilling (California), Inc. v. TEG Oil and Gas U.S.A., Inc., 142 Cal. App. 4th 453, 467 (Cal. Ct. App. 2006) (“An agreement which seeks to limit liability generally without specifically mentioning negligence is construed to shield a party only for passive negligence, not for active negligence.”).
  9. See, e.g., Markborough Cal., Inc. v. Super. Ct., 227 Cal. App. 3d 705 (Cal. Ct. App. 1991) (the court analyzed a state law that attempted to restrict remedies related to construction contracts).
  10. See, e.g., Valhal Corp. v. Sullivan Assoc., Inc., 44 F.3d 195, 204 (3d Cir. 1995).
  11. See Glassford v. BrickKicker, 191 Vt. 1, 9 (2011) (“It concerns a business of a type generally thought suitable for public regulation. The party seeking exculpation is engaged in performing a service of great importance to the public, which is often a matter of practical necessity for some members of the public. The party holds (it)self out as willing to perform this service for any member of the public who seeks it, or at least for any member coming within certain established standards. As a result of the essential nature of the service, in the economic setting of the transaction, the party invoking exculpation possesses a decisive advantage of bargaining strength against any member of the public who seeks (the party’s) services. In exercising a superior bargaining power the party confronts the public with a standardized adhesion contract of exculpation, and makes no provision whereby a purchaser may pay additional reasonable fees and obtain protection against negligence. Finally, as a result of the transaction, the person or property of the purchaser is placed under the control of the seller, subject to the risk of carelessness by the seller or (the seller’s) agents.”).
  12. See, e.g., Cal. Civ. Code § 1668 (2013) (“All contracts which have for their object, directly or indirectly, to exempt any one from responsibility for his own fraud, or willful injury to the person or property of another, or violation of law, whether willful or negligent, are against the policy of the law.”); see also, Novak & Co. v. New York City Housing Authority, 480 N.Y.S.2d 403 (N.Y. App. Term. 1984); Net2Globe Intern., Inc. v. Time Warner Telecom of New York, 273 F. Supp. 2d 436, 449-50 (S.D.N.Y. 2003 (summarizing New York law.); Doty Commc’n, Inc. v. L.M. Berry & Co., 417 F. Supp. 2d 1355, 1359 (N.D. Ga. 2006) (“Limitations of liability clauses … are enforceable under Georgia law unless the defendants’ conduct gives rise to a tort claim for gross negligence or wanton or willful conduct.”).  But see Ripley Heatwole Co., Inc. v. John E. Hall Elec. Contractor, Inc., 69 Va. Cir. 69 (Va. Cir. Ct. 2005) (“To allow an allegation of gross negligence to defeat a contract defense or support a tort claim between contracting parties on ‘equal footing’ would undermine the reliance the parties justifiably place on their negotiated rights and obligations …”).
  13. See, e.g., Purcell Tier and Rubber Co., Inc., v. Executive Beechcraft, Inc., 59 S.W. 3d 505 (Mo. 2001); United Van Lines v. Hertz Penske Truck Leasing, Inc., 710 F. Supp. 283 (D. Wash. 1989); Stauffer Chemical Co. v. Curry, 778 P.2d 1083 (Wyo. 1989).
photo of Vinay Jain
Vinay Jain

As Chief Legal Officer, Vinay serves as Shake's general counsel, is responsible for the company's legal contracts and content, and leads efforts to educate consumers and small businesses about the law.

Read more posts by Vinay