A limitation of liability clause sets the maximum amount one party can be forced to pay the other if something goes wrong. It is, clause-for-clause, the single most consequential provision in most commercial contracts — and one of the most commonly misread.
What the clause actually does
Without a limitation of liability clause, a party in breach can in principle be liable for the full, uncapped consequences of that breach — direct losses, and in many jurisdictions, foreseeable indirect and consequential losses too. A limitation clause caps that exposure, typically to a multiple of fees paid (commonly 12 months' fees), and typically excludes indirect or consequential damages entirely.
The three things to check
- Is there a cap at all? Some contracts — particularly ones drafted by the counterparty in their own favour — leave your liability uncapped while capping theirs. Check both directions.
- What is carved out of the cap? Most caps exclude certain categories from the limit entirely: confidentiality breaches, IP infringement, gross negligence, and death or personal injury are common carve-outs. A cap with too many carve-outs is barely a cap.
- Is the cap amount realistic? A cap set at "12 months' fees" sounds standard, but if fees are small relative to potential damages (e.g. a low-cost software tool embedded in a high-value process), the cap may not reflect real risk on either side.
Why "market standard" isn't always the right answer
Lawyers often describe a 12-month-fees cap, with standard carve-outs, as "market standard" — and for many commercial contracts it is. But market standard for a mid-size SaaS deal is not automatically appropriate for a contract with much higher potential losses (e.g. a data-processing agreement handling sensitive personal data) or much lower ones (a short, low-value engagement). The right cap depends on the actual risk in the deal, not a template default.
Enforceability varies by jurisdiction
Whether a liability cap is enforceable — and against what, exactly — depends on the law governing the contract. Some jurisdictions restrict the ability to exclude liability for negligence; others allow broad exclusions freely between commercial parties. A cap that looks airtight under one governing law may be partly unenforceable under another. This is why a liability clause should always be reviewed against the contract's actual governing law, not assumed to be valid everywhere — see our limitation of liability enforceability breakdown for how this plays out across specific jurisdictions.
Where this shows up
Limitation of liability is a top-flagged clause across nearly every contract type we review — see our checklists for MSA review, SaaS agreement review, and vendor agreement review.
For the quick reference version, see the limitation of liability entry in our legal glossary.
