What Is a 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. Without it, liability could theoretically be unlimited — if a software bug causes a client to lose millions in revenue, you could be on the hook for the full amount.
These clauses typically do three things: (1) cap total liability at a dollar amount (often the fees paid), (2) exclude certain types of damages (consequential, indirect, lost profits), and (3) carve out certain types of claims from the cap (confidentiality breaches, IP infringement, gross negligence).
Direct vs. Consequential Damages
Direct damages flow naturally from the breach — if you don't deliver a website, the client's direct damages are the money they paid you. Consequential damages (also called indirect or special damages) are the knock-on effects — the client's lost sales because the website wasn't live, or damage to their reputation. Most limitation clauses exclude consequential damages because they can be unpredictable and vastly exceed the contract value.
Liability Cap Structures: Three Common Approaches
Liability is limited to the total amount paid under the contract (e.g., last 12 months of fees). If the contract is worth $50K, liability is capped at $50K.
Most common in SaaS, services, and consulting agreements. This is the market standard for B2B contracts.
Liability is capped at a multiple of contract value (typically 2-3×). A $50K contract would have a $100K-$150K liability ceiling.
Common in enterprise agreements where the vendor has leverage. Acceptable if the contract value is substantial relative to potential damages.
Liability is either capped at an extremely high amount (e.g., $5M on a $50K contract) or has no cap at all. You could lose everything from one contract.
Sometimes required by large enterprises or government contracts. Only acceptable with strong insurance coverage and for specific carve-outs (IP infringement, confidentiality breaches).
Standard Carve-Outs: What's Normally Excluded from the Cap
Not all liability is capped — these items are standard exceptions
Liability Cap Amounts & Carve-Outs
Liability caps range from conservative (fees paid) to risky (no cap). The carve-outs — what's NOT capped — matter just as much as the cap amount itself.
How to Negotiate Liability Limits
If the other party insists on unlimited liability for you but caps their own, push for: mutual language (same cap applies to both parties), higher cap multiples (3x-5x fees instead of 1x), a minimum cap floor (e.g., the greater of fees paid or $50,000), and clear carve-outs only for the genuinely serious issues (IP, confidentiality, gross negligence) rather than blanket exclusion. For a broader view, see what to check before signing any contract — liability is just one of 10 critical areas.
💡 Tip: Limitation of liability is among the most negotiated clauses in commercial contracts. Before signing, run your contract through ContractRev to see whether the liability provisions are fair, mutual, and reasonable.