Limitation of liability
Also known as: Liability cap, Exclusion of damages
A clause that caps or excludes the types and amounts of damages one party can recover from the other.
What it is
A limitation of liability clause does two things at once. First, it excludes categories of damages — usually indirect, consequential, incidental, or lost-profits damages — that would otherwise be recoverable under general contract law. Second, it caps the remaining direct damages at a set amount, commonly tied to fees paid over a recent period such as twelve months. Most clauses also list carve-outs: things like death or personal injury, fraud, gross negligence, confidentiality breaches, and indemnification obligations often sit outside the cap.
Why it matters
This clause is where contracts quietly allocate catastrophic risk. A cap at "fees paid in the last 12 months" on a low-fee contract can turn a significant service failure into a near-zero recovery. Jurisdictions vary in how far they allow liability to be excluded, especially for negligence, statutory rights, or consumer protection, so the same wording can be enforceable in one country and partially struck down in another. Reading the cap together with the indemnities is the only way to understand the real exposure.
Typical language
An example of how this clause often reads — illustrative only, not a template:
Except for liability arising from a party's indemnification obligations, breach of confidentiality, or gross negligence or willful misconduct, neither party shall be liable for any indirect, incidental, special, consequential, or punitive damages, or for loss of profits, revenue, or data, and each party's total aggregate liability under this Agreement shall not exceed the fees paid or payable by the Customer to the Supplier in the twelve (12) months preceding the event giving rise to the claim.
Common pitfalls
- Caps that are too low to meaningfully compensate realistic harm, especially for critical infrastructure or high-value data.
- Excluding "consequential" damages without realizing some jurisdictions interpret the word very differently.
- Forgetting to carve out the things you negotiated hard for — such as a specific indemnity — so they get silently capped.
- Mixing "per-claim" and "aggregate" caps without making it clear which applies when.
- Attempting to exclude liabilities that local law does not permit to be excluded, making the clause partially void.
Related clauses
Draft a contract with this clause
Open the drafting canvas with a starter prompt for limitation of liability. You can edit every line before anything is saved.
This explainer is general information and is not legal advice.