Part II of V: Unlimited Liability

1. RED FLAGS IN CUSTOMER CONTRACTS
Part II of V:
Unlimited Liability
August, 2012
Satya S. Narayan
SNarayan@rroyselaw.com
Royse Law Firm, PC
Copyright © 2012, Satya S. Narayan. All rights reserved.

2. UNLIMITED LIABILITY
• Direct damages
• Incidental damages
• Consequential damages
• Punitive damages
• Extra-contractual liability
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3. UNLIMITED LIABILITY
• Definition: Damages that are a direct result of the vendor’s contract
breach. Put the customer in the position they would occupy if the
vendor performed the contract as promised.
• Examples
• Cost of cover (i.e., difference between market price or
purchase price of substitute products/ service and price of
undelivered or defective products/ services)
• Cost to repair or complete work
• Liquidated damages (i.e., reasonable dollar amount specified in
the contract because the parties believe damages arising from
a particular breach will be difficult to ascertain; must not be a
penalty)
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4. UNLIMITED LIABILITY
• Definition: Damages that are reasonably associated or related to
actual damages; incident to the vendor’s breach.
• Examples:
• Expenses in effecting cover
• Recall and transportation expenses
• Inspection charges
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5. UNLIMITED LIABILITY
• Definition: Damages that are not a direct result of the contract
breach, but are a consequence of the breach and are reasonably
foreseeable at the time of contracting.
• Examples:
• Customer’s loss of profits or loss of operating revenue due to
vendor’s delay or failure to deliver products or services.
Alert! Consequential damages may break your business.
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6. UNLIMITED LIABILITY
• Definition: Damages awarded when defendant acts with
recklessness, malice, or deceit; designed to punish the defendant.
Generally not awarded for breach of contract; but punitive damages are
available for torts (i.e., civil wrongs identified in common law or judge-
created law and by statute) arising out of a contract.
• Examples:
• Punitive damages for fraud
• Some states prescribe punitive damages for violating consumer laws
• Infringement??
Alert! Punitive damages can be several multiples of actual damages.
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7. UNLIMITED LIABILITY
• Definition: Liability arising outside the terms of the contract
(i.e., liability that is in addition to any breach of contract claims) for
wrongful or illegal vendor acts.
• Examples:
• Liability for torts or civil wrongs
• Criminal liability
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8. UNLIMITED LIABILITY
• One-sided customer favorable limitation of liability:
• CUSTOMER SHALL NOT BE LIABLE TO VENDOR FOR ANY
PUNITIVE, INDIRECT, INCIDENTAL, SPECIAL, OR CONSEQUENTIAL
DAMAGES, INCLUDING, BUT NOT LIMITED TO, DAMAGES FOR LOSS OF
PROFITS, GOODWILL, USE, OR DATA ARISING FROM OR RELATED TO THIS
AGREEMENT EVEN IF CUSTOMER HAS BEEN ADVISED OF THE
POSSIBILITY OF SUCH DAMAGES. CUSTOMER’S TOTAL CUMULATIVE
LIABILITY ARISING FROM OR RELATED TO THIS AGREEMENT IS LIMITED
TO [XXX] DOLLARS.
• No limitations on liability (i.e., no disclaimer of damages; no cap
on aggregate liability)
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9. UNLIMITED LIABILITY
First instinct is to take the customer favorable limitation of liability
and make it mutual; but that may not be the best approach for you
and may not be acceptable to the customer.
• Disclaimers, caps and exclusive remedies
• Exclusions from liability limitations (understand what are market non-
negotiable exclusions)
• Period for bringing claims
• Governing law of the contract
• Insurance
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10. UNLIMITED LIABILITY
• You may be sued
• Tool for customers to demand more than you
expect
• May be a red flag for investors and acquirers
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11. Questions?
Satya S. Narayan
E-mail: SNarayan@rroyselaw.com
Phone: 650.521.5745
PALO ALTO LOS ANGELES SAN FRANCISCO
1717 Embarcadero Road 11150 Santa Monica Blvd., 135 Main Street,
Palo Alto, CA 94303 Suite 1200 12th Floor
Los Angeles, CA 90025 San Francisco, CA 94105
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