Limitation of liability
A clause that caps how much one party can owe the other if something goes wrong, and often excludes certain types of damages entirely.
What it means
A limitation of liability clause sets the maximum amount a party can be made to pay for claims under the contract. The cap is often tied to fees, such as “the amounts paid in the 12 months before the claim,” or set as a fixed dollar figure. It usually sits next to an exclusion of indirect or consequential damages, such as lost profits.
A small agency builds a website for $20,000, and a bug takes the client’s online store down for a week. Without a cap, the client might claim far more than the fee. With a cap equal to fees paid, the agency’s exposure stops at $20,000, whatever the client’s actual loss.
Caps usually favor the party providing the service or product, since it has the most to lose. Most caps have carve-outs, claims the cap does not apply to, such as indemnities, confidentiality breaches, gross negligence, willful misconduct, or unpaid fees. US courts generally enforce negotiated caps between businesses, but many states will not let a party limit liability for fraud or intentional harm, some extend that to gross negligence, and consumer contracts face stricter rules.
What to watch for
- Check whether the cap is mutual or protects only one side.
- Compare the cap amount to your realistic worst-case loss, not just the contract value.
- Look at the carve-outs, because if indemnities or data breaches sit outside the cap, the real exposure may be unlimited.
- Check whether the cap counts fees “paid” or “payable,” and over what period, since a cap measured early in the term can be close to zero.
- Confirm that the cap does not limit your right to collect unpaid fees.
Example clause
Except for a party’s indemnification obligations or breach of Section 7 (Confidentiality), neither party’s total liability under this Agreement will exceed the fees paid or payable by Client in the 12 months before the event giving rise to the claim.
Most claims are capped at a year’s worth of fees, but indemnity and confidentiality claims can exceed that.