I Want to Limit My Liability to the Maximum Extent Possible


One of the more common refrains I hear from clients is the phrase “I want to limit my liability to the maximum extent possible.” And I think most lawyers are thrilled when they hear this, because it means the client is risk averse and wants legal services. But the expression always gives me pause.

I get it. No one wants to get sued. But the business world is competitive, cutthroat, and outsized profits are not easy to find. Outsized profits require some risk.

I can draft you an Abrams tank of a contract. And if you are a large, enterprise company with the negotiating leverage to force your counterparty to agree to your terms, and if you have enough leverage in the marketplace to still convince people to do business with you, then ok, let’s build you an Abrams tank. I’m happy to bill the hours!

But the Abrams tank of a contract is not the best contract for every business.

One of my more successful startup clients has a one-page sales contract. One page. Not one page front and back, but just one page, including the signature block.

Each word is carefully chosen. We identify the parties, explain the scope of work, the payment terms, the conditions under which the parties can terminate, provide a quick warranty disclaimer, name the governing law, and we have a one-sentence clause that limits liability.

Is that contract drafted with the intent to “limit the client’s liability to the maximum extent possible?”

No, it is not.

It is drafted with the intent to enable the client to close deals while limiting the outsized risks for their business. The client is making a calculated risk assessment that the liability limitations of a 10 or 20-page contract are not worth the potential reduction in deal flow. And as the lawyer who’s paid to think about risk, I think they’ve got it right.

And while the Abrams tank of a contract that I might have drafted for a Fortune 500 company would be effective and necessary for certain circumstances, it would require a lengthy review from the legal teams of each of the client’s potential customers. And there would be more back and forth with their lawyers. And negotiations for almost every deal. And this client doesn’t want that. It wants to close deals and limit their most salient risks.

And so a one-page contract makes sense for them.

Many neophyte startups are oblivious to this fact, but there is a tension between limiting liability and getting deals done. And so too there is there a tension between having a one-sided contract that favors your business over the counterparty and long-term, healthy relationship with your clients. And there is a broad spectrum of contract preferences from the Abrams tank to the one-page sales agreement.

Almost every business has one or two contracts that are the lifeblood of their business. But so often, the owners of the business put so little thought into what risk preferences make sense for their business. So often, businesses blindly resort to boilerplate or the desire to “limit your liability to the maximum extent possible.” That’s just not optimal for most businesses.

The goal of contract design shouldn’t just be to “limit your liability to the maximum extent possible.” It should be to maximize profits long term. And if you want to do that, you must put careful thought into what risks are unique to your business, and how to limit those risks while maximizing sales and profits.

And that’s just not a thing that most companies do. And people are leaving a lot of money on the table because they don’t.