Limitation of Liability
Also called: Liability Cap · Limitation of Liability Clause
A limitation of liability clause sets the maximum amount one party can be required to pay the other if something goes wrong. It typically caps total liability at a fixed sum or a multiple of fees paid, and excludes indirect or consequential losses entirely.
In more detail
Without a limitation of liability clause, a party in breach can in principle be liable for the full consequences of that breach — including, in many legal systems, foreseeable indirect and consequential losses. A liability cap converts that open-ended exposure into a known, bounded number.
The most common structure caps aggregate liability at the fees paid over the preceding 12 months, and separately excludes categories like lost profits, lost data, and business interruption. Certain liabilities are usually carved out of the cap entirely — confidentiality breaches, intellectual property infringement, and death or personal injury are the standard exceptions.
A cap is only as good as its carve-outs. A clause that caps liability at 12 months of fees but then carves out most realistic failure modes provides far less protection than the headline number suggests.
A software vendor charges ₹40,000/month. A 12-month cap limits their total liability to ₹4,80,000 — even if an outage causes the customer ₹50,00,000 in losses. If the contract also carves out data-breach liability from the cap, that particular exposure remains uncapped.
Enforceability differs materially between legal systems. Some jurisdictions restrict the ability to exclude liability for negligence; others allow broad exclusions freely between commercial parties. A cap that is airtight under one governing law may be partly unenforceable under another.
What our lawyers check
- Whether a cap exists at all — and whether it applies to both parties or only one
- The cap amount relative to the real commercial risk in the deal, not just "market standard"
- Which liabilities are carved out of the cap, and whether those carve-outs swallow the protection
- Whether indirect and consequential loss exclusions are drafted clearly enough to be enforceable
Contracts where this clause matters
Related terms
This definition is general information about commercial contracting practice, not legal advice. How a clause operates depends on the specific wording of your agreement and the law that governs it. For advice on your contract, have it reviewed by a lawyer.
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