An important but not well understood element in creative services agreements is the limitation of liability clause (“LOL”). Usually in ALL CAPS toward the end of the services agreement, this chunk of what seems like legal jargon is an essential part of managing risk and maintaining a balanced working relationship. In this article, we’ll break down what LOL clauses are, their purpose, and how they can protect your agency.

What Is a Limitation of Liability Clause?

An LOL is a contract provision that restricts the amount or type of damages one party can claim against another. There are three common types of liability limitations:

  • Monetary Caps: These clauses limit the total dollar amount the agency could be held liable for, such as an amount equal to the project’s fees or a set percentage of the contract’s value.
  • Type Limitations: Defines the types of damages for which the agency may be responsible. For example, lost profits and punitive damages are a common type of damages that are excluded.
  • Time-Based Limitations: These clauses state the time frame that claims related to the work must be made.

The core purpose of an LOL is to protect your agency from absorbing more risk than the project justifies. As a creative agency, you can have a substantial impact on a client’s brand, but this impact — and any related risk — should be proportionate to the size and scope of the work you’re performing. An LOL also ensures that an agency isn’t responsible for the business results that come from use of the services or deliverables. 

Are Limitations on Liability Standard?

Limitation of liability clauses are standard in service agreements. This means that an agency’s ​“typical” price for work generally assumes the presence of an LOL. While it is certainly possible to do without an LOL, you should only do so if you are being paid a premium for taking on the extra risk and have appropriate insurance.

A client will sometimes object to a limitation of liability clause saying that the agency should ​“stand behind” its work. This misconstrues what an LOL is doing. The LOL doesn’t absolve the agency of liability, it just puts limits on amount. The agency is still responsible for its work and the client has remedies for breach of contract should they occur. Don’t be bullied into removing a limitation of liability clause if you face this argument.

Common Exceptions to Limitation of Liability Clauses

It’s typical for certain ​“carve-outs” or exceptions to exist in limitation of liability clauses. These carve-outs mean that in some scenarios, the liability cap won’t apply. Agreeing to these types of exceptions are generally low risk but be sure to consult with your attorney.

  • Intentional Misconduct or Gross Negligence: If there’s evidence of extreme carelessness or intentional harm, liability caps may not apply. This exception holds both parties accountable for any purposeful wrongs.
  • Indemnity Obligations: If there are indemnity provisions (where one party agrees to cover the other for third-party claims), limitation of liability caps may not apply. But be sure to work with your attorney to make sure the indemnification clause is properly drafted.
  • Claims Covered by Insurance. Sometimes an exception is added that states that the LOL doesn’t apply where insurance proceeds are available. This makes sense and ensures that your Client receives the benefit of any insurance proceeds should a claim be covered (that’s what it is there for).
  • Data or Confidentiality Breach. Liabilities for data breach or breach of confidentiality are also common exceptions.

Sometimes instead of completely removing a cap, a different higher cap is proposed for certain types of claims. This ​“super cap” as they are called give you additional options when negotiating an LOL. The most common application of super caps are for indemnity claims or intellectual property infringement liability. 

Practical Tips for Agencies

If you’re an agency owner or operations manager reviewing or negotiating limitation of liability clauses, here are some helpful tips:

  • Consider Mutual Clauses: While unilateral caps protect the agency, mutual clauses create a fairer impression and may help the negotiation proceed smoothly.
  • Define Appropriate Caps: Be specific and realistic. A cap set to the fee under the SOW is what we typically recommend. For ongoing engagements like retainers, cap the fee to 6 or 12 months of service fees.
  • Use Super Caps Sparingly: When agreeing to a super cap, be sure the project fee justifies the additional risk and that the super cap claims are narrowly defined.

Conclusion

Limitation of liability clauses are a fundamental part of creative service agreements that enable agencies to protect themselves against disproportionate risks. Caps help agencies maintain balanced and profitable client relationships. Use exceptions judiciously and work to ensure that the cap is limited to no more than your fee.