What is a Limitation of Liability Clause?
What is a Limitation of Liability Clause?
A Limitation of Liability clause is often one of the most heavily negotiated provisions in a contract because it determines the maximum financial exposure each party will face if a dispute arises in the future.
The clause typically does two things:
Caps liability by setting a maximum amount that one party can be required to pay.
Excludes certain types of losses for which a party will not be responsible. These are typically indirect, consequential damages and are waived to avoid being liable for events that are completely out of the control of the parties.
Without a limitation of liability clause, a business may be exposed to claims far exceeding the value of the contract, potentially resulting in substantial financial losses.
What is a Liability Cap in Limitation of Liability Clause
What is a liability cap? Liability caps limit the financial liability of the party by establishing the maximum amount it can be liable for in case of a breach.
Example of liability cap in a contract
Contract Language for Liability Cap | How does it work? Example |
"The Supplier's total liability shall not exceed the fees paid under this Agreement." | A software vendor receives $20,000 for a project.Due to an error, the customer claims $500,000 in losses.The liability cap in the contract can limit the vendor's exposure to $20,000 - total fee for the project. |
Common Types of liability caps in a contract
(a) Fixed amount cap: liability is capped at a fixed monetary amount in the contract regardless of the damages.
Example: The Supplier's total liability shall not exceed $100,000.
(b) Fees Paid Cap: Liability is capped at the fees paid under the contract.
Example: Liability shall not exceed the fees paid by Customer during the 12 months preceding the claim.
(c) Contract Value Cap: Liability is capped at the total value of the contract.
Example: Liability shall not exceed the total amount payable under this Agreement.
(d) Unlimited Liability (no cap on liability): The party's liability is not subject to any monetary limit. If a claim arises, the liable party may be responsible for the full amount of the loss suffered.
Typical Market Positions for Liability Cap in LOL Clause in a contract
Contract Type | Common Liability Cap |
SaaS Agreement | 12 months' fees paid |
Software License | 1–2x fees paid |
Professional Services | Fees paid or 1–2x fees |
What Are Liability Exclusions?
Purpose of LOL clause | Example Contract Language | How does it work? Example |
Caps liability | "The Supplier's total liability shall not exceed the fees paid under this Agreement." | A software vendor receives $20,000 for a project. Due to an error, the customer claims $500,000 in losses. The liability cap in the contract can limit the vendor's exposure to $20,000 - total fee for the project. |
Excludes indirect or consequential losses | "Neither party shall be liable for any indirect, incidental, consequential, or special damages." | A website outage causes a retailer to lose future sales opportunities. The retailer cannot claim those lost future profits if consequential damages are excluded. |
Excludes loss of profits | "Neither party shall be liable for any loss of profits or revenue." | A consultant's mistake delays a product launch. The client claims $1 million in lost profits, but the clause prevents recovery of those profits. |
Excludes loss of data | "The Supplier shall not be liable for any loss or destruction of data." | A cloud service experiences a technical issue and some customer files are lost. The provider is not liable for the value of the lost data. |
Excludes business interruption losses | "Neither party shall be liable for losses arising from business interruption." | A software failure causes a company to suspend operations for two days. The resulting operational losses cannot be claimed. |
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