Limitations of Damages in Contracts

The Boulder Business Attorneys of LaszloLaw discuss the enforceability of limitation of damages clauses in contracts in Colorado.

Often times, contracts will include a limitation of damages/liability clause in the event of a breach of the contract or even possibly some negligent act committed by one party to the contract. Such clauses can be a good manner in which to define the scope of liability for the contracting parties. Exculpatory clauses–clauses allowing one or both parties to “escape” liability partially or entirely for say their own negligent acts–are generally disfavored by courts but can be enforceable.  However, clauses that limit the type of damages are often valid and enforceable.

Limitation of Damages Clauses in Colorado

In Colorado, limitation of damages clauses in contracts are typically valid and enforceable by courts. For instance, a limitation of damages clause may exclude “incidental damages”–which are defined by the Uniform Commercial Code (UCC) as “expenses reasonably incurred in inspection, receipt, transportation and care and custody of goods rightfully rejected, any commercially reasonable charges, expenses or commissions in connection with effecting cover and any other reasonable expense incident to the delay or other breach.”

Or the contract could exclude consequential damages–defined by the UCC as “(a) any loss resulting from general or particular requirements and needs of which the seller at the time of contracting had reason to know and which could not reasonably be prevented by cover or otherwise; and (b) injury to person or property proximately resulting from any breach of warranty.”  These definitions might seem wordy and amorphous but, simply, these are damages that may not be directly caused by a breach of the contract but are incidental or a consequence of the breach.

For example, a limitation of damages clause might state: “Neither party is liable for consequential or incidental damages of any kind, including but not limited to, loss of profits, use, or interest.”  So, for instance, if a contract requires a project to be completed on a certain day but it is delayed, the non-breaching party may argue that each day is a loss of profits and they are entitled to their reasonable profits. However, because of the presence of the limitation of damages clause, they would not be entitled to lost profits.

While such clauses are valid and enforceable by Colorado courts, as almost always with the law, there are exceptions.  C.R.S. § 4-2-719 states that a limitation of damages clause will not be enforced if it is unconscionable or fails of its essential purpose. In Lutz Farms v. Asgrow Seed Co., 948 F.2d 638 (10th Cir. 1991), the Tenth Circuit refused to enforce a limitation of liability clause in a contract for the sale of onion seeds. The onion seed contract had a clause that limited damages for the seller to merely a return of the purchase price of the seeds. The seeds produced numerous “double onions” which were not able to be sold, causing the farm to suffer significant damages, including the loss of profits. The court refused to enforce the limitation of liability clause finding the clause was both unconscionable and failed of its essential purpose.  It was unconscionable because the terms were unfair and there was no evidence that the provision was commercially reasonable or should have reasonably been anticipated.  The clause failed of its essential purpose because the defect was latent and could not be discovered by the buyer upon reasonable inspection and the buyer was deprived of the substantial value of the bargain. Thus, limitation of damages clauses are typically valid and enforceable–but, put simply, they must be reasonable.

Boulder Business Attorneys

The Boulder Business Attorneys of LaszloLaw represent and counsel businesses on a number of legal matters, including business formation, contracts, risk management, and litigation. Contact our Boulder Business Attorneys at 303-926-0410 or online.