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In the contractual universe, one of the most complex and debated topics is the limitation of liability between parties. While this clause seeks to balance risks, it can also become a source of litigation if not properly structured. In Brazil, the Civil Code (Law #10,406/2002) provides guidance on contractual liability, requiring a technical approach to address inherent risks and define liability limits.

This article addresses how limitation of liability clauses can be structured fairly, avoiding excesses that could render them abusive or unconscionable. The analysis begins with the legal concepts provided for in Brazilian legal system, explores the common risks in contractual relationships, and concludes with practical suggestions for balancing parties’ interests without undermining legal certainty.

Contractual liability in Brazilian legislation

Contractual liability is governed primarily by Articles 389, 395 and 927 of the Brazilian Civil Code. These provisions establish that a party who breaches a contractual obligation must compensate the other party for any damages incurred. Such obligations encompass material damages, lost profits and, in some cases, moral damages.

However, Article 393 stipulates that a debtor is not liable for damages resulting from force majeure or unforeseeable events, unless expressly agreed otherwise. This exception is essential for maintaining balance between the parties, as it excludes liability in unpredictable and uncontrollable situations. A current global example that illustrates Article 393 is the COVID-19 pandemic, during which numerous contracts needed to be reassessed to account for the business disruptions caused by the pandemic.  

Furthermore, Article 421 of the Brazilian Civil Code, which establishes the social function of contracts, reinforces that contractual clauses cannot violate principles such as good faith and equity, which are crucial when drafting limitation of liability provisions.

Contractual risks: brief identification  

Every contractual relationship involves risks that must be carefully identified and analyzed to implement measures to either prevent or mitigate them. Among the most common, the following stand out: (i) operational risks - failure to fulfill obligations for internal reasons, such as delays or unsatisfactory deliveries; (ii) economic risks - cost fluctuations that directly impact contractual execution, such as currency fluctuation or increased input costs; (iii) legal risks - noncompliance with applicable legal or regulatory rules to the subject of the contract; (iv) third party risks - subcontracting or reliance on suppliers that may compromise execution; and (v) force majeure and unforeseeable events - unpredictable and unavoidable incidents, such as natural disasters or global crises.

When drafting a contract, it is essential to foresee how these risks will be allocated between the parties and the extent of their respective responsibilities.

Risks and contractual liability

The allocation of risks in a contract directly reflects the liability assigned to the parties and, consequently, the legal certainty of the agreement. The principle of contractual freedom, enshrined in the Brazilian Civil Code, allows the parties to define the rules that will govern their relationship, including risk distribution and liability limits. However, this freedom is not absolute, as it must respect legal limits, the social function of contracts and the principles of good faith and equity.

Including clauses that limit or exclude liability is a common and effective practice for balancing obligations between the parties. These clauses aim to provide predictability and reduce exposure to risks that could jeopardize contract performance or result in significant financial imbalances. Among the main strategies are:

1. Exclusion of Liability for Indirect Damages - Many contracts stipulate that a party will not be liable for indirect damages, such as loss of revenue, opportunity or profits arising from circumstances unrelated to the primary obligation. This exclusion is particularly significant in service or goods supply contracts, where indirect financial impacts can be challenging to predict and measure.
2. Limitation of Damages - setting a cap on financial liability is another common practice. This limit can be defined as a percentage of the total contract value or equivalent to the amounts paid up to a specific point. Such clauses aim to prevent penalties or damages from exceeding the responsible party’s financial capacity, thereby preserving the contractual relationship.
3. Specific Damage Limitations - in addition to overall limits, parties may define restrictions for certain types of damages, such as delays, defects in services or delivered products, or performance failures. These limits help align the parties’ expectations regarding the consequences of partial breaches.
4. Exclusion of Liability for Unforeseeable Events and Force Majeure - the Brazilian Civil Code already exempts parties from liability for unforeseeable events or force majeure (Article 393), unless there is a contractual provision to the contrary. However, it is advisable to explicitly include such exclusions in contracts to enhance legal certainty and avoid interpretative disputes.

Despite their utility, limitation of liability clauses can be challenged in court if they are not drafted clearly or if they violate the principles of balance and reasonableness. Essential precautions include:

1. Avoid Ambiguity - general or vague clauses can lead to unfavorable interpretations for one party, causing disputes and legal uncertainty. It is crucial that the limits of liability are described objectively, using technical and direct language.
2. Proportionality - the limitation of liability must be proportional to the risk assumed by each party. Disproportionate allocation of risks may render a clause abusive, especially in adhesion contracts.
3. Legal Compliance - some liabilities, such as those arising from willful misconduct or gross negligence, cannot be excluded contractually. Consumer relations are also subject to stricter limitations through Brazilian Consumer Protection Code.
4. Prior Validation - it is advisable to negotiate and discuss limitation clauses before signing the contract, ensuring mutual awareness and agreement. Unilaterally imposed or disproportionate clauses may be annulled in disputes.

Thus, while limitation of liability clauses aim to protect parties from excessive risks, they should not be used as a tool to evade basic obligations or undermine the social function of contracts. Balance is key to the validity and effectiveness of these provisions. A contract that combines clear boundaries with fair risk allocation not only reduces potential disputes but also promotes mutual trust and legal certainty.

Practical Guidelines for Balanced Limitation of Liability

As previously mentioned, the limitation of liability is valid as long as it does not imply transferring all risks to one of the parties, which could constitute an abusive clause. Therefore, some recommended practices include:

1. Specific Risk Provisions - identify major contractual risks and set proportional limits for each.
2. Exclusion Liability for Unforeseeable Events or Force Majeure - explicitly include such exclusions unless the contract's nature requires otherwise.
3. Definition of Direct and Indirect Damages - specify which damages will be subject to compensation, excluding indirect damages, if applicable.
4. Insurance Utilization - insure significant risks to mitigate exposure of the parties.  
5. Clarity in Drafting - avoid vague or broad terms that make it difficult to interpret the clauses.
6. Balance Between the Parties - prevent one party from bearing an excessive disadvantage.

These measures protect both parties’ interests and prevent future disputes when drafting a contract.

The Balance Between Risk and Limitation of Liability

Carefully assessing risks and seeking fair mitigation methods is essential when entering a contract. A well-structured limitation of liability clause should consider both parties' interests, promoting legal certainty without imposing disproportionate terms.

Balanced contracts allocate risks fairly, fostering trust between parties and ensuring compliance with obligations. For lawyers, drafting such clauses demands technical skill, sensitivity, and a thorough understanding of the negotiation context.

Limitation of liability is a powerful tool for risk management in contracts, but it must be applied prudently, supported by a detailed risk analysis. Clauses reflecting transparency, good faith, and respect for legal boundaries enhance legal certainty and mutual trust, resulting in stronger and more effective agreements.