Limitation of Liability and Voluntary Payment in the Business World

March 10, 2014

Limitation of liability clauses in business agreements, sometimes called indemnification clauses (or exculpatory clauses), have always been fairly common in construction contracts. The major purpose is to shift responsibility from one party to another and to limit one party’s exposure.

In recent years, these clauses have found their way into business agreements such as software, performance, provider agreements and cloud agreements, the idea being to shift responsibility – regardless of fault – to the other side.

In the recent case of ProHealth Care, Inc. v. HealthEOS By Multiplan, Inc., decided February 5, 2014, the Wisconsin Court of Appeals for District II determined, after closely scrutinizing a limitation of liability contract clause, that it failed to provide protection where reports were not provided as part of the parties’ agreement, as opposed to perhaps providing protection if the reports were provided that had problems – the key issue being the scope of the limitation protection.

The simple takeaway from the case is to be very careful in how one drafts or accepts the terms of limitation of liability clauses. In addition, limitation clauses are a contract concept (not negligence), and it is always important to have one’s insurance agent review the limitation obligations and terms to know if there is or is not insurance coverage.

The second part of the ProHealth Care, Inc. case pointed out that under the voluntary payment doctrine (just pay the bill without comments on the performance problem) if one does have a problem, he or she may not be able to complain and take legal action in regards to the failed performance. The takeaway here is to make sure one does not let his or her bookkeeping department pay on a contract each month without pointing out the performance problem. One may need to document the performance issues and make sure he or she has not waived his or her right to complain. Additionally, one should carefully review the terms of any contract he or she signs before it is executed, especially any limitation of liability clauses, and compare those clauses to the key contract terms.

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