Limitation of Liability and Exclusive Delay Credits in an EHR Implementation
MedAxis Clinics licenses and implements an electronic health record system from CoreVault for $250,000. The contract states: 'CoreVault's total liability shall not exceed fees paid; neither party is liable for consequential damages; service credits of $2,000 per day for go-live delay, capped at 30 days, are the sole remedy for delay.' CoreVault misses the January 1 go-live by 50 days because its data-migration subcontractor corrupts patient records. MedAxis spends $75,000 on overtime and loses $300,000 in billed services. CoreVault has been paid $200,000. MedAxis also learns CoreVault used the subcontractor without notice, contrary to a contract clause requiring approval. MedAxis sues for lost profits and overtime. The parties are businesses of equal bargaining power. The system is still not fully functional.
1. Is the limitation-of-liability cap enforceable against MedAxis's claims?
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The contract is predominantly for services and a license, so common-law contract principles govern rather than UCC Article 2. Courts generally enforce limitation-of-liability clauses between sophisticated business parties unless the clause is unconscionable or violates a clear public policy. MedAxis and CoreVault are businesses of equal bargaining power, the contract is commercial, and the cap is a common risk-allocation device. MedAxis is not a consumer and the losses are economic, not personal injury.
The cap limits total liability to fees paid, which is $200,000. MedAxis's overtime claim of $75,000 falls within that cap, but its $300,000 lost-profits claim would exceed it. The consequential-damages waiver separately bars lost profits if lost profits are classified as consequential damages. MedAxis may argue that lost billed services are direct damages because they flow naturally from a failed go-live, but most courts treat lost profits from a delayed system as consequential or indirect, especially where the contract expressly addresses delay through service credits.
The unauthorized subcontractor clause is a separate breach, but it does not automatically blow up the cap. MedAxis would need to show that the subcontracting breach was independently actionable and caused a loss outside the cap, or that the cap is unenforceable as applied. On these facts, the cap likely stands.
2. Are the $2,000-per-day service credits a penalty, and are they MedAxis's exclusive remedy for delay?
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The service credits look like valid liquidated damages. At contracting, the parties could reasonably estimate delay harm at $2,000 per day. MedAxis's actual lost billing appears much higher-$300,000 over 50 days is $6,000 per day-so the credit is not a punitive overestimate. A liquidated-damages clause is a penalty when it is grossly disproportionate to foreseeable loss or unrelated to actual harm. This clause is tied to the delay and capped at 30 days, which also limits the exposure.
The harder issue is exclusivity. The contract says the credits are the 'sole remedy for delay.' Courts enforce exclusive-remedy clauses unless the remedy fails of its essential purpose. MedAxis will argue that a 30-day cap leaves 20 days of delay with no remedy, so the exclusive remedy fails. CoreVault will argue that the cap is part of the bargain and that MedAxis received a meaningful remedy for the first 30 days. The outcome is fact-specific, but a court is likely to enforce the clause as written between sophisticated parties, especially because the cap was a negotiated risk allocation.
If enforced, MedAxis recovers $60,000 in service credits-$2,000 times 30 days-and cannot also recover lost profits for the same delay. If the court finds the exclusive remedy fails of its essential purpose, MedAxis could pursue other contract damages, but the liability cap and consequential-damages waiver would still limit recovery.
3. What effect does CoreVault's use of an unapproved subcontractor have on MedAxis's remedies?
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The subcontractor clause is an independent contractual promise. CoreVault agreed to obtain approval before using a subcontractor. Using one without notice is a breach, even if the subcontractor's work had been perfect. Because the work was not perfect-the data migration corrupted records-MedAxis can argue the breach caused the delay and the data problems.
But the breach does not automatically void the limitation-of-liability clause. MedAxis must show either that the contract makes the cap inapplicable to subcontracting breaches, or that the breach is so fundamental that enforcing the cap would defeat the contract's essential purpose. A court might also consider whether CoreVault's conduct was grossly negligent or willful; ordinary negligence in data migration is not enough to overcome a commercial cap. MedAxis should check whether the contract has a separate indemnity or data-security clause that survives the cap.
Practically, MedAxis can use the unauthorized subcontracting as leverage: it supports a claim for breach of an express covenant, may support a claim for breach of the implied duty of good faith, and may entitle MedAxis to require removal of the subcontractor. But it probably does not unlock unlimited lost profits. MedAxis's best monetary recovery remains the $60,000 in delay credits, plus any direct damages within the $200,000 cap.