Limited Liability Clauses in Contracts

Those familiar with the online gaming industry might have heard about a live-streaming platform for gamers called “Twitch”. If you are particularly good at playing a certain video game (or maybe you have great commentary), you may stream videos of you playing a video game on Twitch for others to watch you play online. But right now, Twitch is getting more attention in the news for its legal battle with one of its more popular gamers: James “Phantomlord” Varga. You can read about the whole legal battle between them here. 

Even though this is a case of significant importance with a number of legal issues, the focus of this post clause capping Twitch’s damages in its form contracts. To sum up, Varga sued Twitch for a number of claims, and the damages he suffered potentially amount to millions of dollars. The damages cap in Twitch’s standard form contract with its players, however, caps damages at $50,000. The San Francisco County Superior Court judge ruled that Twitch’s limited liability clause in it’s form contract with players was “unconscionable” and ultimately unenforceable. 

As someone on the outside looking at the judge’s reasoning and ruling, I couldn’t agree more with his decision. These clauses are sometimes overlooked, and its important to recognize their impact when agreed to in a contract.

What is a Damages Cap or Limitation of Liability Clause?

A damages cap or a limitation of liability clause is a statement in a contract that limits a party’s damages or recovery amounts if a dispute arises between them. These clauses can cap the amount with an actual amount (e.g. $50,000), a calculation (e.g. two times the contract value), or some other valuation.

How is the amount determined? 

The amount depends on several factors, and should ideally be a negotiated term between parties. The primary factor in determining the amount is risk. This could mean risk of the services being provided, risk of the transaction, risk of doing business with another party, etc. You also have to think of this from both parties’ point of view. For example, in a service contract between a construction company and a demolition contractor, the construction company is likely going to want the amount to be as high as possible (or no cap at all), whereas the demolition contractor will likely want the amount to be as low as possible. This is because there is likely a higher risk that something will go wrong during demolition of a building (which is inherently high risk), and the demolition contractor would want to pay as little as possible if something went wrong. 

Are these clauses negotiable? 

Sometimes. However, you should always try to negotiate them if you can. Most people don’t realize that they sign contracts all the time (e.g. all online terms and conditions). But these types of contracts (often called “adhesion” or “clickwrap” contracts) are generally non-negotiable. Using the standard Twitch contracts as an example, it makes sense that they would have their users and players agree to the terms and conditions in order to use their service due to the high volume of people using their site. But most other contracts should be negotiable most of the contract terms. 

If a contract isn’t negotiable however, for whatever reason, the general rule is that the contract favors the non-drafting party. So even if you can’t negotiate better terms, the courts (like in the Twitch vs. Varga case above) may not enforce certain provisions of the contract if they are unfair or unconscionable.

How does this ruling affect me as a Colorado business owner?

Well, it really doesn’t right now. This case is in California so it doesn’t directly impact your business. However, it is a good reminder to review any standard or templated contracts you have and look at the damages cap and see if it’s reasonable. 

You also may want to look at:

• what you’ve been agreeing to with other companies
• whether this clause is included in your risk assessments of a contract
• re-train the people negotiating your contracts if necessary to ensure they are properly negotiating this term.

You should also know that sometimes these types of decisions, while not binding on courts in other jurisdictions, can influence decisions made in other states. This is especially true when it comes to terms and conditions for the services provided online. 

How does this ruling affect me as a consumer and user of these types of online platforms?

Telling you to read every privacy notice and set of terms and conditions you accept is the best advice I can give you. If you’re a famous gamer, influencer, YouTube star, etc. then you should talk to an attorney about how to best manage the legal aspects of your business. This could include negotiating contracts, understanding the legals risks and benefits of certain transactions, and making sure you don’t get taken advantage of when working with your sponsors, online platforms, and other businesses.