Limitation of Liability
A contract clause capping the maximum damages one party can recover.
Definition
Limitation of liability clauses cap the maximum damages that one party can recover from another under a contract. They typically limit liability to the amount paid under the contract, or some multiple thereof. They may also exclude certain types of damages like consequential or indirect damages.
These clauses protect service providers from liability exposure disproportionate to contract value. A bug in $10,000 of software work shouldn't expose the developer to $10 million in damages.
Why It Matters
Liability limitations are crucial risk management. Without them, a service provider could face claims far exceeding their compensation—potentially bankrupting the business over a single engagement.
Clients may push back on liability limits, especially for critical systems. Negotiation often results in limits tied to contract value, insurance coverage, or specific carve-outs for certain types of harm.
Examples
- 1
A contract limits liability to "fees paid in the 12 months preceding the claim"—on a $5,000/month retainer, maximum liability is $60,000.
- 2
A clause excludes liability for "indirect, consequential, or punitive damages"—limiting claims to actual direct damages only.
- 3
Insurance-backed liability: "Provider liability limited to the greater of fees paid or provider's professional liability insurance coverage."
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