A limitation of liability clause caps how much one party can be forced to pay the other if something goes wrong. It is often the most negotiated clause in a commercial contract because it sets the ceiling on financial risk for both sides.
The two common forms
Most clauses do two things. First, they cap total liability at a set amount, often the fees paid in the prior 12 months. Second, they exclude certain categories of damages entirely, most commonly indirect, incidental, and consequential damages such as lost profits.
Why the cap matters
If a vendor’s failure costs you a major client, a cap set at “fees paid in the last 12 months” may be far less than your actual loss. Understand what the cap is tied to and whether it is proportionate to the risk you are taking.
Watch the carve-outs
Most clauses list exceptions that are not capped, such as indemnification obligations, confidentiality breaches, and gross negligence. Read these together with the indemnification clause, since an uncapped indemnity can undo the protection the cap seems to give.
Review it in context
A liability cap only makes sense alongside the rest of the risk terms. ContractsIQ surfaces the cap, the excluded damages, and the carve-outs so you can weigh them together. See our review checklist.
ContractsIQ provides software-based contract analysis and is not a law firm or a substitute for legal advice. For decisions with significant legal or financial consequences, consult a qualified attorney.