Can I Exclude a Loss of Profits in My Limitation of Liability Clause?

By: Farrah Rahman

Landing a huge contract is exciting – and risky! The stakes are high when a large proportion of your business’ resources are dedicated to an important project – especially if the contract is terminated prematurely by the customer.

As drafters of commercial agreements, we understand how important it is to our clients to limit or exclude their liability as much as possible, whether they are the customer or the service provider. At the same time, we know you need to be paid for your services.

A recent case, Atos IT Solutions and Services v Sapient Canada Inc, highlighted a number of issues that can arise in a claim for breach of an IT services contract. The defendant, Sapient, subcontracted work to the plaintiff, Siemens, in connection with a $49.5M project to build a single software platform; convert existing data to the platform; and provide support for the new platform for up to three years. The defendant terminated the contract early, and the plaintiff sued for damages, including lost profits.

One of the issues was whether the plaintiff could sue for loss of profits (a whopping $3,575,990) even though ‘loss of profits’ was excluded in the limitation of liability clause. The clause provided that the parties “will be liable to the other with respect to this agreement and any other obligations related thereto only for direct damages…” Neither party was to be liable for “any indirect, special,consequential, punitive or for loss of profits (collectively “Excluded Damages”), even if the other party has been advised of the possibility of such damages…”.

The court held that the excluded damages applied only to indirect loss of profits, for example opportunities lost because of the acceptance of the contract, but did not apply to the direct loss of profits resulting from early termination of the project.

In relation to damages, a key principle of contract law is to place the plaintiff in the same position they would have been in had the contract been performed (i.e. make the plaintiff “whole”). In this case, the contract for up to three years of support services was priced on a fixed fee basis, and was a reliable indication of the amount of loss of direct profits.

Lessons learned from Atos:

1. The significance of  drafting a tight limitation of liability clause that takes into account the reasonable expectations of the parties and common law interpretations of similar clauses cannot be understated. While no claim for indirect loss of profits was made in this case, the court implied that the language of the limitation clause, which is similar to many clauses found in various commercial contracts, can exclude indirect profits.
2. If you want the protection of being able to claim for a loss of direct profits, it is important to specifically include that right in your contract without inadvertently limiting it in the limitation provisions.

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This article is provided for informational purposes only and does not create a lawyer-client relationship with the reader. It is not legal advice and should not be regarded as such. Any reliance on the information is solely at the reader’s own risk. Clausehound.com is a legal tool geared towards entrepreneurs, early-stage businesses and small businesses alike to help draft legal documents to make businesses more productive. Clausehound offers a $10 per month DIY Legal Library which hosts tens of thousands of legal clauses, contracts, articles, lawyer commentaries and instructional videos.

Orginally posted at Clausehound.com.