Morris Manning & Martin, LLP

Drafting a Contract with a Limitation of Liability Clause? Be Sure to Review This Checklist

08.30.2019

When writing contracts, many businesses use clauses intended to limit the amount of money they must pay if they end up on the losing side in a legal dispute. A recent ruling by the Georgia Court of Appeals confirms that these are generally enforceable in the state, but not always. More importantly, it delivered a useful checklist of factors to make sure everyone sees, understands and accepts the meaning of these clauses before new contracts are signed.

The Warren Averett Opinion

In Warren Averett, LLC v. Landcastle Acquisition Corporation, 349 Ga. App. 479, 825 S.E.2d 864 (2019), a law firm hired an accounting firm to audit its financial statements and express an opinion about whether the statements were materially accurate.

A paragraph titled “Issue Resolution,” low on the third page of the contract, contained a limitation of liability clause that stated: “In any event, no claim shall be asserted which is in excess of the lesser of actual damages incurred or professional fees paid to us for the engagement.” In other words, the law firm could not recover more than the fees it paid the accounting firm under the contract.

Shortly after the accountants affirmed the law firm’s financial condition, it came to light that the law firm’s managing partner had embezzled millions of dollars from trust and escrow accounts. The law firm then sued the accounting firm for $17.5 million. The limitation on damages – the “Issue Resolution” paragraph in the contract – would limit damages to a fraction of what the plaintiff (law firm) sought. The trial court found that the limitation intended to reduce the award was not prominent enough, declaring it unenforceable.

The accounting firm appealed. The Georgia Court of Appeals acknowledged that clauses limiting or exculpating liability are generally enforceable in Georgia and that courts should “exercise extreme caution in declaring a contract void as against public policy.” However, in order to be enforceable, these clauses must be sufficiently “explicit, prominent, clear, and unambiguous” so they evidence a true “meeting of the minds on the subject matter.” The court reasoned that these strict requirements were necessary because clauses seeking to limit or exculpate a party from liability inherently allow businesses to relieve themselves of their own negligence and may result in the waiver of substantial rights and future claims by the non-breaching party.

The appellate court affirmed the trial court’s ruling that the clause was insufficiently prominent and could not be enforced.

Why It Matters

The Warren Averett case provides a useful checklist for evaluating whether a limitation of liability or exculpatory clause is sufficiently prominent within a contract as necessary to be enforceable as a matter of law. Specifically, a company seeking to limit its overall exposure should employ the following drafting techniques to emphasize the importance of any such clause to the contracting parties’ overall agreement:

  1. Use larger font size than that used for other provisions in the contract.
  2. Capitalize, italicize or bold text for emphasis.
  3. Isolate the clause in a standalone paragraph or section.
  4. Include a bold, underlined, capitalized or italicized heading to signal the nature of the clause, such as “Limitation of Liability” or “DAMAGES”.

Place the clause next to another important provision, ideally one appearing just before the parties’ signature lines.

The Warren Averett opinion is available HERE. For more information about how this ruling may affect your business and/or current or pending litigation, please contact the authors.