What It Does
A limitation of liability clause fixes, in advance, the maximum financial exposure each party accepts if the contract goes wrong. For in-house counsel, it is often the most consequential economic term in the agreement: it caps what you can recover when a vendor fails, and what you owe when you do. Two mechanisms carry the weight, and they have to be read together. The first is a cap on total damages. The second is, in practice, a mutual waiver of consequential damages: an exclusion of the indirect, incidental, special, and consequential losses where lost profits, lost business, and lost data usually sit. It is the most negotiated line in the clause, because those excluded categories are often the largest real-world losses when a deal fails. A generous-looking cap means little if that waiver strips out the losses you would actually claim.
Caps the total damages one or both parties can recover, often at the fees paid over a defined period
Excludes categories of damages, typically indirect, incidental, consequential, and punitive
Carves out claims that stay uncapped, such as confidentiality breaches, indemnities, and willful misconduct
Sets whether the cap is mutual or one-sided, and whether it applies in the aggregate or per claim
Allocates catastrophic and hard-to-foresee risk between the parties before any dispute arises
Separate, higher “supercaps” for data-breach and security liability have become a common feature of SaaS contracts negotiated since 2020.
When You'll See It
A limitation of liability clause appears in nearly every commercial contract that carries performance risk: SaaS and software agreements, master service agreements, vendor and supply contracts, professional services engagements, licensing deals, and investment management agreements. It sits alongside the indemnification and warranty provisions, because the three together define the contract's whole risk allocation. The terms are negotiated hardest in SaaS and outsourcing, where the potential downstream losses, like data loss or business interruption, dwarf the contract fees. See also: indemnification, warranty disclaimer, and insurance.
Examples
Virpax Pharmaceuticals, Inc.
Chaudhry U Consulting Inc., Independent Contractor Agreement
Excludes consequential
Mutual
2024
“Neither party shall be liable for indirect, incidental, or consequential damages, except in cases of gross negligence or willful misconduct.”
Bloom Energy Corporation
SK ecoplant Co., Ltd., Second Amendment to the Amended and Restated Preferred Distributor Agreement
Excludes lost profits
Mutual
2023
“In the event of termination by either Party in accordance with any of the provisions of this Agreement, neither Party shall be liable to the other, because of such termination, for compensation, reimbursement or damages on account of the loss of prospective profits (except for Distributor’s liability under Section 2(e)(i)(1) or Section 2(e)(i)(4)) or anticipated sales or on account of expenditures, inventory, investments, leases or commitments in connection with the business or goodwill of either Party.”
Verb Technology Company, Inc.
SW Direct Sales, LLC, Asset Purchase Agreement
Tiered cap
One-Sided
2023
“the aggregate Liability of the Seller for Losses under this Article 7 will not exceed a dollar amount equal to $712,500, except for Losses under this Article 7 related to: (i) a breach of Section 3.13 (Intellectual Property), in which case Seller’s aggregate Liability shall not exceed $1,425,000 and (ii) a breach of the Seller Fundamental Representations, in which case Seller’s aggregate Liability shall not exceed the total amount of the Consideration. Furthermore, nothing in this Agreement will limit the Liability of the Seller for claims relating to intentional or willful misrepresentation of material facts which constitute common law fraud.”
Klaviyo, Inc.
Velocity Global, LLC, Master Services Agreement
SaaS, super-cap carve-out
Mutual
2020
“IN NO EVENT SHALL EITHER PARTY BE LIABLE FOR ANY INDIRECT, INCIDENTAL, SPECIAL OR CONSEQUENTIAL DAMAGES OF ANY TYPE OR NATURE ARISING OUT OF OR ASSOCIATED WITH THIS AGREEMENT EVEN IF SUCH PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, EXCEPT TO THE EXTENT THAT SUCH ARISES FROM A PARTY’S BREACH OF SECTION 6...”
FibroGen, Inc.
Consultant, Consulting Agreement
Excludes consequential, gross-negligence carve-out
Mutual
2023
“In no event shall either party be liable for any indirect, incidental, special or consequential damages arising out of or in connection with the Services... Moreover, in no event shall either party be liable for any claims for personal injury or for property damage... In any event, except to the extent of a party’s gross negligence, willful misconduct, each party’s liability pursuant to this Section...”
Negotiate
You want to preserve recovery
Push the cap above 1x fees. A common compromise is 2x to 3x the trailing 12 months of fees.
Carve data breach, confidentiality, and IP infringement out of the cap, or give them a separate, higher supercap.
Keep indemnification obligations outside the cap entirely.
Resist any exclusion of direct damages. Only indirect and consequential damages should be excluded.
Make the cap mutual, so it does not protect the vendor alone.
You want predictable exposure
Cap aggregate liability at the fees paid in the prior 12 months.
Exclude indirect, incidental, consequential, and punitive damages.
Resist supercaps; if one is unavoidable, fix it at a defined multiple rather than leaving it open.
Make the cap apply in the aggregate rather than per claim.
Tie carve-outs to a closed list rather than open-ended categories.
The cap and the carve-outs are negotiated together. Winning a high cap and conceding the carve-outs is a false victory.
Red Flags
A cap set below the fees the customer will pay, so the remedy is smaller than the spend.
An exclusion that reaches “direct” damages, beyond the usual indirect and consequential, which guts the remedy.
A one-sided cap that protects the drafter only.
Carve-outs that look protective but are folded back under the same low aggregate cap.
A single aggregate cap that absorbs indemnification, confidentiality, and data-breach claims into one low ceiling.
FAQs
This content is for informational purposes only and does not constitute legal advice.
