Most important points

• Limitation of liability clauses are used to limit the liability of a contracting party for possible damages, e.g. through liability caps, exclusion of certain types of damage or limitation to intent and gross negligence.

• Under German law, liability for intent cannot be excluded (Section 276 (3) BGB). In the case of gross negligence and bodily injury, liability is also generally full; clauses that exclude this liability are ineffective in general terms and conditions (Section 309 No. 7 BGB).

• It is permissible and customary to exclude indirect damages (consequential damages, loss of profit) and to limit the amount of liability (e.g. to the order value or a certain amount).

• In B2B contracts, limitations of liability can be agreed more freely than with consumers; nevertheless, general terms and conditions control standards also apply here (transparency requirement, no complete devaluation of essential obligations).

• A clearly regulated limitation of liability creates costing security for start-ups: risks, e.g. from software errors or delayed delivery, are limited in a plannable manner.

Purpose and types of limitation of liability

Every business project involves risks. Contracting parties use limitation of liability clauses to cover these risks. Particularly in the case of larger contracts, the contractor wants to avoid a single loss event (possibly beyond its control) threatening its existence. There are various forms:

• Exclusion of liability: Complete exclusion of liability for certain cases. Example: “Liability for slight negligence is excluded.” (Permissible in the B2B area, but not for cardinal obligations).

• Maximum liability amount (liability cap): Limitation of the obligation to pay compensation to a maximum amount, e.g. the order amount, the annual fee or a lump sum.

• Exclusion of certain types of damage: Loss of profit, indirect damage or consequential damage are often excluded from the scope of compensation.

• Time limitation: shortening of the limitation period for certain claims (as far as legally possible).

• Cumulative cap: Clarification that all claims together can reach the maximum cap (not new for each individual case).

Legal limits and effectiveness

German law sets certain limits to the principle of freedom of contract in the area of liability, particularly for the protection of contractual partners:

• Liability for intent cannot be waived in advance. Anyone who intentionally causes damage is always liable without limitation.

• The restrictions of Sections 305 et seq. of the German Civil Code (BGB) apply to unilateral general terms and conditions (GTC). BGB APPLY: § Section 309 No. 7 BGB prohibits the exclusion or limitation of liability for bodily injury and for gross negligence (intent/gross negligence). These may therefore not be excluded. Liability for simple negligence can be limited in the GTC, but not for so-called cardinal obligations (essential contractual obligations, the breach of which jeopardizes the achievement of the purpose of the contract).

• Limitations of liability are much more strictly regulated for consumers. In the B2C sector, protective regulations apply which in fact only allow very limited limitations of liability (e.g. warranty for new products for at least 2 years).

• Nevertheless, in consumer transactions, suppliers, for example, can exclude liability for slight negligence within certain limits, provided that no essential obligations are involved or consumers suffer physical injury/damage to health.

It is important that a liability clause is formulated transparently so that the contractual partner clearly understands which claims are limited in the event of damage.

Examples of typical liability clauses

In practice, limitations of liability often look like this:

• “The parties shall be liable to each other without limitation for intent and gross negligence as well as for damages resulting from injury to life, body or health. Otherwise, liability shall be limited to [amount X]. Liability for loss of profit is excluded.”

• Or staggered: “In the event of a slightly negligent breach of material contractual obligations, liability shall be limited to the foreseeable damage typical for the contract, but to a maximum of [amount or x% of the order volume].”

• There is often a special rule for data loss: Liability only to the extent that the damage would have occurred even if proper data backup measures had been taken.

Such clauses are intended to ensure that normally foreseeable damages are covered, but that excess risks (such as extremely unlikely consequential damages) are limited.

Importance for start-ups

Limitations of liability are often existential, especially for young companies that provide services or software. A startup may not have the financial substance to fully cover major losses for many customers (e.g. a serious software error that leads to loss of sales for customers).

Startups can manage this risk with clever liability limitation clauses in their contracts and general terms and conditions. Nevertheless, care must be taken to ensure that the clauses hold in the event of an emergency:

• When using model T&Cs, these should be adapted to your own industry and legally reviewed in order to avoid ineffective formulations (especially in consumer business).

• It is advisable to continue to fulfill central obligations in full; limitation of liability is no substitute for quality assurance.

Even with limited liability, damage remains damage, which can be expensive in terms of reputation.

Start-ups should also consider taking out public liability insurance or special financial loss liability insurance to cover any remaining risks. Combined with this, contractual liability limitations and financial insurance policies ensure that a mishap does not mean the end of the young company.