In commercial contracting, bargaining parties regularly allocate risk in various ways, including contractual limitations of liability. However, it can be difficult to appropriately apportion responsibility for high-risk contingencies such as data breach. A seller may be unwilling to accept uncapped liability for a contingency whose cost could exceed the expected value of the transaction. Conversely, a buyer may be unwilling to live with only a general damages cap established as a rough-and-ready compromise for more ordinary contingencies. To surmount this impasse, which typically arises toward the end of a negotiation, deal lawyers have begun to craft elevated dollar caps, or “super caps,” to account for specified high-risk contingencies.
This Article draws on interviews with a dozen commercial dealmakers and insights from the contemporary literature on contract design to identify and examine previously unexplored multi-tiered systems of contractual damages caps, or “liability ladders.” This Article contends that super caps, which represent rungs on a liability ladder, should not be deployed as a last-minute patch but recognized as an integral part of a commercial deal’s overall allocation of risks and responsibilities. Introducing the possibility of multitiered liability caps earlier in the bargaining process would maximize efficiency, encourage appropriate incentives, and amplify value creation.