What Is a Limitation of Liability Clause?
A limitation of liability clause caps the amount one or both parties can owe if something goes wrong under the contract — often set at the fees paid, a fixed dollar amount, or a multiple of fees. It usually also excludes certain damage types, like lost profits or "consequential" damages.
Why it matters
Without a cap, a small contract can carry outsized exposure: the money you could owe isn't limited by the money you were paid. The clause matters in both directions — a cap that protects only the other side leaves the imbalance fully on you.
What to watch for
- One-way caps: their liability is capped; yours isn't mentioned.
- A cap far above (or below) the deal's value — either can be wrong depending on which side you're on.
- Carve-outs that swallow the cap: if indemnification obligations are excluded from the cap, the cap may not cover the risk that matters most.
- Missing entirely: in many templates the clause simply isn't there — which means no ceiling at all.
A realistic example
A consultant takes a $6,000 project under a contract with no liability cap. A data mix-up during the engagement triggers a client claim for downstream losses far beyond the fee. With a mutual cap at fees paid, the worst case would have been bounded at $6,000; without one, it's open-ended.
What to ask for
- A mutual cap — commonly total liability limited to the fees paid under the contract.
- Symmetry with indemnification: if you indemnify, make sure that obligation sits under the cap, not outside it.
- Exclusion of indirect damages for both parties, not just one.
Related terms: indemnification · governing law Related guide: Most common risky contract clauses
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Not legal advice. This is an educational definition of a common contract term. Details vary by jurisdiction — this page explains common U.S. usage. For high-stakes agreements, have a lawyer review the final version.