What is a typical liability cap?

The most common cap is the total fees paid under the contract over the preceding 12 months. Higher-risk deals use a multiple of fees, and many carve data-breach liability out under a separate, larger supercap.

What damages does a limitation of liability clause exclude?

Most clauses exclude indirect, incidental, consequential, special, and punitive damages, which often capture lost profits and lost business. Direct damages usually remain recoverable up to the cap.

What is a waiver of consequential damages?

A waiver of consequential damages is the part of a limitation of liability clause where each party gives up the right to recover indirect, incidental, special, and consequential losses, the categories that usually capture lost profits, lost business, and lost data. It is typically mutual and carved back for confidentiality breaches, indemnities, and willful misconduct.

Are limitation of liability clauses enforceable?

Generally yes, between sophisticated commercial parties. Most courts will not enforce an attempt to cap liability for gross negligence, fraud, or willful misconduct, and consumer-facing limitations face tighter limits.

What is the difference between a limitation of liability clause and an indemnification clause?

A limitation of liability clause caps what one party can recover from the other for claims between them. An indemnification clause shifts the cost of certain claims, often third-party claims, from one party to the other. Indemnities are frequently carved out of the liability cap.

What are common carve-outs from a limitation of liability clause?

Confidentiality breaches, indemnification obligations, data protection and security failures, IP infringement, and gross negligence or willful misconduct.

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Clauses

Limitation of Liability Clause

A contractual provision that caps the amount and types of damages one party can recover from the other.

Reviewed by

GC AI Solutions Team

•

Updated

June 2026

Definition

A limitation of liability clause is a contractual provision that caps the amount or types of damages one party can recover from the other for losses arising under the contract. It usually combines a monetary ceiling, often tied to the fees paid, with an exclusion of categories of damages such as indirect, incidental, and consequential losses. Standard carve-outs preserve full liability for breaches of confidentiality, indemnification obligations, gross negligence, and willful misconduct. Courts generally enforce these clauses between sophisticated commercial parties, but most will not enforce an attempt to disclaim liability for gross negligence, fraud, or willful misconduct.

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.

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.

When You'll See It

“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...”

Source

Negotiate

If you're the customer

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.

If you're the supplier

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

Related Clauses

Indemnification

A contractual provision in which one party agrees to cover specified losses or third-party claims that the other party incurs.

Force Majeure

A contractual provision that excuses performance when an extraordinary event prevents one or both parties from fulfilling their obligations.

Liquidated Damages

A contractual provision setting a fixed sum payable on a specified breach, agreed in advance as a reasonable estimate of the resulting loss.

Confidentiality

A contractual provision requiring one or both parties to keep specified information secret and use it only for an agreed purpose.

Arbitration

A contractual provision that requires the parties to resolve disputes through binding arbitration instead of court litigation.

This content is for informational purposes only and does not constitute legal advice.

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