Liability Caps in Contracts: Limits on What You Can Recover
What Is a Cap on Liability?
A cap on liability (also called a limitation of liability) is a contract clause that sets a maximum dollar amount one party can recover from the other, regardless of the actual damages suffered. Even if your losses far exceed the cap, you cannot recover more than the stated limit.
How Liability Caps Work
A typical clause might read: "In no event shall either party's total liability exceed the fees paid under this agreement during the twelve months preceding the claim."
This means if you paid $50,000 in fees over the past year and suffer $500,000 in damages from the other party's breach, the most you can recover is $50,000.
Common Liability Cap Structures
- Fixed dollar amount — "Liability shall not exceed $100,000."
- Tied to fees paid — Capped at total fees paid in a specific period (common in SaaS and service agreements).
- Multiple of fees — Capped at 2x or 3x the fees paid.
- Insurance limits — Capped at the amount of the responsible party's insurance coverage.
What Is Typically Excluded from Caps
Most well-drafted liability caps include carve-outs (exceptions) for:
- Intellectual property infringement
- Confidentiality breaches
- Willful misconduct or gross negligence
- Indemnification obligations for third-party claims
- Payment obligations (fees owed under the contract)
If these carve-outs are missing, the cap may shield a party even for their worst behavior.
Red Flags to Watch For
- Caps that are disproportionately low compared to potential damages
- One-sided caps that only protect one party
- No carve-outs for fraud, willful misconduct, or IP infringement
- Caps that include consequential damages exclusions on top of the dollar limit
When to Consult a Lawyer
Liability caps can dramatically affect your ability to recover losses. Before signing any agreement with a liability cap, consider having an attorney review whether the cap is reasonable and whether adequate carve-outs are included.
This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.