Limitation of liability clauses explained (caps, carve-outs, traps)
What is a limitation of liability clause?
This clause sets a ceiling on damages — often a multiple of fees paid, or fees over the prior 12 months — and usually excludes 'indirect' or 'consequential' damages. It's the counterweight to indemnification: one caps exposure, the other creates it.
Why it matters
The interplay between the cap and its carve-outs determines your real worst-case exposure. A reasonable-looking cap riddled with carve-outs (indemnity, confidentiality, data) can leave you effectively uncapped where it matters most.
Red flags to watch for
- Cap applies to one party only
- An unusually low cap (e.g. one month of fees) versus the value at stake
- Broad carve-outs that swallow the cap (everything important is 'excluded')
- Exclusion of direct damages, not just indirect/consequential
- No cap at all on the other side's obligations
Safer language to ask for
Aim for a mutual cap tied to 12 months of fees, exclude only genuinely uncontrollable indirect damages, and keep carve-outs narrow and reciprocal.
Example: before & after
Risky
In no event shall the Provider's liability exceed the fees paid in the preceding month, and the Provider excludes all liability to the maximum extent permitted by law.
Safer
Each party's total liability under this Agreement is capped at the fees paid in the 12 months preceding the claim, excluding indirect or consequential damages.
FAQ
What's a typical liability cap?
Commonly 12 months of fees, sometimes 1–2x annual contract value. Anything far below the value at stake is worth negotiating.
What are carve-outs?
Categories excluded from the cap (e.g. IP, confidentiality, indemnity). The more carve-outs, the weaker the cap's real protection.
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