Limitation of Liability Clauses: What They Mean for You

What Is a Limitation of Liability Clause?

A limitation of liability clause caps the maximum amount of damages one party can recover from the other if something goes wrong. These clauses are common in commercial contracts, software licenses, service agreements, and consulting contracts.

How They Work

Limitation of liability clauses typically operate in two ways:

• Damage caps: Setting a maximum dollar amount (often tied to fees paid under the contract, e.g., "liability shall not exceed the total fees paid in the prior 12 months")
• Exclusion of damage types: Barring recovery of certain categories of damages, most commonly consequential, indirect, incidental, or punitive damages, as well as lost profits

Common Structures

• Mutual caps: Both parties face the same liability limit — generally considered fair
• One-sided caps: Only one party's liability is limited while the other faces unlimited exposure — a red flag
• Tiered caps: Different limits for different types of breaches (e.g., a higher cap for data breaches, lower for service failures)
• Carve-outs: Certain obligations are excluded from the cap, such as breaches of confidentiality, IP infringement, or gross negligence

When Liability Limitations May Be Unenforceable

Courts may refuse to enforce a limitation of liability clause when:

• The limitation covers gross negligence or intentional misconduct
• It violates public policy (e.g., limiting liability for personal injury in consumer contracts)
• It is unconscionable — so one-sided that no reasonable person would agree to it
• It is not conspicuous enough in the contract (in some jurisdictions)

Red Flags

• One-sided liability caps that only protect the other party
• Exclusion of all consequential damages when those are the most likely type of harm you would suffer
• No carve-outs for willful misconduct, fraud, or confidentiality breaches
• Caps set unreasonably low relative to the potential risk

When to Consult a Lawyer

Consider consulting an attorney if the liability limitation significantly restricts your ability to recover damages in a breach, or if the cap seems disproportionately low compared to the risks involved. Negotiating appropriate carve-outs and caps is a standard part of contract review.

This article is for informational purposes only and does not constitute legal advice. Consult a licensed attorney for guidance specific to your situation.