Limitation of Liability Clauses: How They Protect (or Expose) You
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A limitation of liability clause sets the maximum amount one party can recover from the other if something goes wrong. Getting this wrong can mean unlimited financial exposure.
What Is a Limitation of Liability?
A limitation of liability (LoL) clause caps the total damages one party can claim from the other under the contract. Common structures include: a fixed dollar amount, a cap tied to fees paid (e.g., "total liability shall not exceed the fees paid in the 12 months preceding the claim"), or a multiple of fees. Most commercial contracts also exclude indirect, consequential, incidental, and punitive damages.
Carve-Outs and Exceptions
Most LoL clauses include carve-outs — exceptions where the cap does not apply. Common carve-outs include: breaches of confidentiality, intellectual property infringement, indemnification obligations, willful misconduct or fraud, and data breaches. These carve-outs are critical because they determine what risks remain uncapped.
Negotiation Tips
Ensure the cap is mutual (applies to both parties equally). Push for a cap that reflects the potential risk — 1x-2x annual fees is standard for most SaaS and service contracts. Negotiate specific carve-outs for your highest-risk areas. Reject clauses that exclude all liability for data breaches or confidentiality violations.