Limitations of liability and disclaimers: legal drafting

Checklist for drafting a limitation of liability that will hold up

• State expressly what is limited and what is not (don’t write “everything”)
• Set a specific, defined monetary cap
• Make the clause stand out: large font, a box, a separate signature
• State the exceptions: malice, bodily injury, breach of the law
• In a standard-form contract (also with businesses), check it against the Standard Contracts Law before you finish
• Don’t write “complete exclusion of liability”: it will not hold up

Service page: Commercial contracts lawyer: drafting, review and enforcement.

What is a limitation of liability clause, and why does it matter?

A limitation of liability is a contract clause that reduces the damage one party can claim from the other. In commercial contracts between businesses it is legitimate as a rule, but when it is a standard-form contract, the Standard Contracts Law applies there too. In consumer contracts there are significant legal limits on what can be limited.

What does “limited liability” or a “limited warranty” mean in a contract or in a warranty certificate?

In a contract, “limited liability” is a clause that limits the types of damage that can be claimed or their amount, for example a cap equal to the consideration paid. Such a clause is valid as a rule, but in a standard-form contract a term that exempts the supplier from liability for bodily injury or for a malicious act is void (section 5(b) of the Standard Contracts Law, 5743-1982), and a term that exempts it from liability under the law or unreasonably restricts its contractual liability is presumed unfair (section 4(1)). In a warranty certificate for a consumer product, a “limited warranty” cannot deny rights that the law gives: the provisions of the Consumer Protection Law apply despite any waiver or agreement to the contrary (section 36), and section 18A(a)(5) of the Law empowers the Minister to set in regulations the content of warranty certificates and to prohibit them from contracting out of the consumer’s rights under the law.

What is the difference between a limitation of liability and a disclaimer?

A limitation of liability is a clause in a contract between two parties. A disclaimer is a one-sided statement, usually on a website, in an appendix or in an advertisement, that makes clear what you are not responsible for.

• A typical disclaimer for websites: “The information on this website is not legal advice.” It does not kill a claim, but it strengthens the argument that the user understood the limits of the service.
• A typical disclaimer for information services: “The data is provided as-is, without responsibility for its accuracy.” Valid, but only if it is clear and prominent enough.
• A disclaimer does not replace a contract. If you wrote in the contract that you are responsible for quality, a disclaimer that tries to cancel this will not hold up.

What do Israeli courts examine?

Not every limitation of liability will hold up in court. Three main filters:

• Standard Contracts Law, 5743-1982: in a standard-form contract, even between businesses, the court will void or change an unfair term (sections 3 and 19); a term that exempts the supplier from liability that would have applied to it by law is presumed unfair (section 4(1)), and a term that exempts it from liability for bodily injury or for a malicious act is void (section 5(b)).
• Consumer Protection Law, 5741-1981, section 36: the provisions of the Law apply despite any waiver or agreement to the contrary, so a clause that tries to deny the consumer a right the Law gives them is not valid.
• Malice and gross negligence: in a standard-form contract, an exemption from liability for a malicious act is void (section 5(b) of the Standard Contracts Law); in any contract, an exemption for fraud or malice is open to being struck down as contrary to public policy (section 30 of the Contracts (General Part) Law, 5733-1973). There is no express prohibition in the law on an exemption for gross negligence, but in a standard-form contract it is presumed unfair (section 4(1)).

How do you write a limitation of liability that will hold up?

Four elements that must be in the clause:

• Who is limited: state it expressly: “Supplier X will not be liable” (not “limited liability” without saying whose).
• What is limited: “indirect damage, loss of profit, business interruption”, not “any damage whatsoever”. A sweeping clause defeats itself.
• How far: set a specific monetary cap: “up to the total contract payment” or “up to NIS 50,000”.
• What is not included in the limitation: state the exceptions expressly: malice, bodily injury, breach of the law.

An example of good wording: “In no event will the supplier’s liability exceed the amount of the consideration paid in the 12 months before the event that caused the damage, except in cases of malice or bodily injury.” The balance between a cap that will pass the test and a cap that will be voided is exactly what is worked out in legal support with commercial contracts.

What can’t be limited, or is exposed to being struck down if limited?

Five areas in which a limitation of liability is open to being voided or narrowly interpreted, even if both parties agreed:

• Liability for fraud or deliberately misleading conduct
• An exemption from gross negligence: in a standard-form contract it is presumed unfair (section 4(1) of the Standard Contracts Law)
• Liability for bodily injury or death: in a standard-form contract such an exemption is void (section 5(b) of the Standard Contracts Law), and a manufacturer’s liability for bodily injury caused by a defective product cannot be contracted out of (section 7 of the Defective Products (Liability) Law, 5740-1980 (חוק האחריות למוצרים פגומים, התש״ם-1980))
• Breach of mandatory consumer laws (which cannot be contracted out of: section 36 of the Consumer Protection Law)
• Liability for breach of environmental protection and public health laws and the like

Wording a clause that tries to cancel liability for these too may lead the court to void the whole clause.

Which four parameters does the court weigh in a dispute over a limitation of liability?

When a dispute reaches the court, the judge examines four parameters:

• Balance of power: did a large supplier impose terms on a small customer? A significant power gap counts against the supplier.
• How prominent the clause is: was it highlighted, explained, signed separately? A clause buried between page 8 and page 9 is open to the argument that it was not brought to the customer’s attention.
• Economic reasonableness: is the limitation in proportion to the risk and the consideration? A limit of NIS 100 on a service that costs 100,000 is not reasonable.
• The parties’ intention: what did the parties intend to cover? In a contract that can be interpreted in different ways, an interpretation against the party that had the advantage in shaping its terms is preferred (section 25(b1) of the Contracts (General Part) Law).

In a standard-form contract, a term that exempts the supplier from liability that would have applied to it by law is presumed unfair (section 4(1) of the Standard Contracts Law)