Limitation of Liability
What it means
A limitation of liability clause puts a ceiling on what one party can be made to pay the other if things go wrong. It answers the question "if this goes badly, how much is at stake?"
Most of these clauses do two separate things. First, they cap the total amount — commonly at the fees paid under the contract, sometimes at the fees paid in the preceding twelve months, occasionally at a fixed figure. Second, they exclude whole categories of loss, usually "indirect, incidental, consequential, special or punitive damages", and often lost profits and lost data by name.
That second part matters more than it looks. If a vendor's failure costs you three weeks of trading, that is lost profit — precisely the category most contracts exclude. So a clause can leave you technically able to sue while making the damage you actually suffered unrecoverable.
Read it in both directions. A clause that caps the other side's liability at the fees you paid them, while leaving your own liability uncapped through a separate indemnity, is not a mutual limitation however even-handed the wording sounds. The two clauses have to be read together, and they are often several pages apart.
Some carve-outs are standard and worth keeping: confidentiality breaches, indemnity obligations, and gross negligence or wilful misconduct usually sit outside the cap.
Why it matters for your business
The cap is the number that tells you your worst case. A cap set at "fees paid in the last twelve months" on a service you have used for two months means the other side's maximum exposure is two months of fees, whatever the damage.
See it in action
ContractClerk pulls out the cap, the excluded categories of loss, and the carve-outs, and tells you what your realistic worst case looks like — including when the cap protects the other side far more than it protects you.
Related terms
- Indemnification — This is the clause most likely to cost you more than the contract is worth.
- Liquidated Damages — This is a number you agree to owe before anything has gone wrong.
- Warranty Disclaimer — This clause plus the liability cap is your entire remedy if a product does not do what you bought it for.
Is there a limitation of liability clause in your contract?
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Review your contract free →This is general information about how limitation of liability clauses usually work. It is not legal advice, and how a clause applies depends on the rest of the document and on where you are. For a high-stakes agreement, talk to an attorney.