Limitation of Liability in Contracts: What You Must Know

Today’s post focuses on one of the most important—and often overlooked—clauses in English-language contracts: the Limitation of Liability clause. Alongside indemnification, this clause can significantly shift the balance of risk in a commercial agreement.

Even a single sentence in this clause can either drastically reduce a party’s liability or, conversely, expose them to unlimited risk. For technology startups and software/SaaS vendors contracting with large enterprise clients, the precise language used here can lead to risk differentials worth millions.

This post outlines key contract language that frequently appears during negotiations and highlights red-flag provisions that startups and developers should watch out for.

What Is a Limitation of Liability Clause?

The Limitation of Liability clause defines the scope of liability each party is willing to accept if legal claims arise under the agreement. In short, it allows a party to say: “Even if something goes wrong, here’s the maximum amount I will be liable for.”

For instance, if a delivered software product has defects and causes losses, and the contract says, “liability shall not exceed 100% of the fees paid,” the party’s exposure is capped accordingly.

Common Forms of Limitation of Liability

Cap on Damages
Limits total liability to a specified amount, such as the total contract value or insurance coverage.
Example: “In no event shall either party’s liability exceed the total amount paid under this agreement.”

Exclusion of Certain Damages
Explicitly excludes liability for indirect, incidental, or consequential damages, including lost profits.
Example: “Neither party shall be liable for indirect, incidental, or consequential damages.”

Time Limitation for Claims
Restricts the time period during which a party may bring a claim.
Example: “No claim may be brought more than one year after the cause of action arises.”

Carve-Outs (Exceptions)
Exceptions often include willful misconduct, gross negligence, IP infringement, or data breaches. These remain outside the scope of the liability cap.

Interaction with Indemnification Provisions
The Limitation of Liability clause often overlaps with the Indemnification clause. For example, if the indemnity provision includes “without limitation to amount,” it could override the liability cap.

To maintain contractual balance, risks like IP infringement or data breaches should be carved out from the Limitation clause as well if they are subject to uncapped indemnification. Always review these two provisions together.

Red Flags to Watch For

• “without limitation to amount”
  Signals uncapped liability. Always propose a monetary cap or multiple of contract value.

• “including but not limited to attorneys’ fees, settlements, and judgments”
  Can impose broad financial responsibility—including legal costs—without control over legal strategy.

• “any and all claims arising from use of the product”
  Overly broad. May include user misuse or issues outside your control.

• “will indemnify, defend, and hold harmless”
  The inclusion of “defend” may trigger the obligation to pay defense costs before any fault is determined.

Alternative Approaches You Can Propose

• Set a clear liability cap (e.g., 1x or 2x contract value)

• Exclude consequential or indirect damages (e.g., lost profits)

• Carve out specific exceptions like IP claims with separate caps

• Propose mutual limitations for both parties

• Tie liability limits to available insurance coverage

Conclusion

The Limitation of Liability clause may only span a few lines in a contract, but its impact during a dispute can be enormous—especially for startups, developers, and technology service providers. Before signing, be sure to carefully review this clause and develop a negotiation strategy that aligns with your business’s risk profile.

LexSoy Legal LLC offers tailored legal counsel to assess contract risks and propose practical, business-oriented solutions. For English-language contract support, contact sc@lexsoy.com.

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