Guide
Limitation of liability clauses explained
The limitation of liability clause decides how much you could lose if something goes wrong, and how much you could get back. Here’s how caps and exclusions work, what’s usually left uncapped, and what to ask for.
In short
A limitation of liability clause sets the most each party can be made to pay if a contract goes wrong, usually through a cap (often the fees paid or payable in the previous 12 months) and a list of losses that can’t be claimed at all, such as indirect loss and lost profit. Check that the cap applies to both sides, that it’s a figure you could actually pay or insure, and which liabilities are carved out and left uncapped, especially indemnities. The law sets limits too: in the UK, liability for death or personal injury caused by negligence can’t be excluded or limited, and liability for fraud can’t be excluded.
What is a limitation of liability clause?
A limitation of liability clause sets the most each party can be made to pay if something goes wrong under a contract, and lists kinds of loss that can’t be claimed at all. It’s usually headed “Limitation of liability” or just “Liability”, and in US contracts it’s often printed in capital letters so that it stands out.
Most versions have three parts:
- What isn’t limited. Liabilities the law doesn’t allow to be limited, plus any others the parties agree to leave out.
- What’s excluded. An exclusion clause removes liability for certain kinds of loss altogether, typically indirect or consequential loss and loss of profit.
- The cap. A liability cap is the maximum either side can be made to pay for everything else.
12.1 Nothing in this Agreement limits either party’s liability for death or personal injury caused by its negligence, for fraud, or for anything else that cannot be limited by law.
12.2 Subject to clause 12.1, neither party shall be liable for any indirect or consequential loss, or for any loss of profit, revenue or goodwill, whether direct or indirect.
12.3 Subject to clause 12.1, each party’s total aggregate liability arising out of or in connection with this Agreement shall not exceed the Charges paid or payable in the twelve (12) months preceding the event giving rise to the claim.
What does unlimited liability in a contract mean?
Unlimited liability means there’s no ceiling on what you could be made to pay if you break the contract. Your exposure is set by the general law on damages, not by the size of the deal.
That’s the position when a contract has no limitation clause at all, or says your liability “shall not be limited”. The general law has limits of its own: broadly, the loss must be caused by the breach and not be too remote (roughly, outside what the parties could have had in mind when they made the contract), and the other side is expected to take reasonable steps to keep it down. Even so, a claim can be many times the value of the work. If a £5,000 website build fails in a client’s busiest week, the claim could include the cost of putting it right and, potentially, the sales lost.
Unlimited liability for you and a cap for them is the first entry in our list of contract red flags.
How is a liability cap set?
A liability cap is usually set in one of four ways: a fixed sum, the fees paid or payable over a period, a multiple of the fees, or a figure linked to insurance.
| Type of cap | Example wording | What to check |
|---|---|---|
| A fixed sum | “shall not exceed £250,000 in aggregate” | Whether it relates to the value of the contract and the losses that could realistically arise. |
| Fees over a period | “the Charges paid or payable in the 12 months preceding the claim” | “Paid” on its own can make the cap tiny early in the contract, or while invoices are unpaid. “Paid or payable” is steadier. |
| A multiple of the fees | “150% of the Charges paid or payable in the relevant Contract Year” | Whether it’s a multiple of one year’s fees or of the whole contract. |
| Linked to insurance | “the amount recovered under the insurance required by clause 15” | What happens if the insurer doesn’t pay, and whether the policy limit is shared with other claims. |
Two details can change a cap a lot: whether it applies in aggregate (one total for all claims) or per claim, so that several claims can add up to more; and whether it takes “the greater of” two figures, which sets a floor, or “the lesser of”, which sets a ceiling.
What is a reasonable liability cap?
There’s no legal standard figure for a reasonable liability cap. It usually reflects the value of the contract, the losses that could realistically follow if it goes wrong, and the insurance each side carries. Caps are often set at the fees paid or payable in the previous 12 months, but that’s a convention, not a rule, and higher-risk work often comes with higher caps.
In the UK, where a cap has to pass the reasonableness test in the Unfair Contract Terms Act 1977 (see the table below), the Act tells courts to consider in particular the resources the party could expect to have to meet the liability, and how far it could have covered itself by insurance. That’s a useful test for any cap: could the party it protects actually pay up to it, or insure it?
Mutual limitation of liability or a one-sided cap?
A mutual limitation of liability applies the same cap and exclusions to both parties; a one-sided clause protects only one of them, usually the one that drafted it. Look at who the clause names: “each party” or “neither party” is mutual, while “the Customer” or “the Company” on its own isn’t.
14.2 The Company’s total liability under this Agreement shall not exceed the fees paid by the Company in the three (3) months preceding the claim. The Consultant shall be liable for all Losses arising from any breach of this Agreement.
Even a mutual cap can be one-sided in practice. If the liabilities left uncapped are ones only you are likely to incur, such as a breach of data protection law or an indemnity (a promise to cover their losses from claims about your work), the cap protects them more than it protects you.
One difference is normal: the cap usually doesn’t limit the customer’s obligation to pay the fees, and many contracts say so. If you’re the supplier, that protects your right to be paid in full.
Excluding consequential loss and loss of profit
A consequential loss exclusion stops one or both parties claiming “indirect or consequential” losses, and it’s common in business contracts. What it actually excludes depends on the exact words and on the law that governs the contract.
In English law, “indirect or consequential loss” has traditionally been read narrowly, by reference to the second limb of Hadley v Baxendale (1854). The first limb covers losses that arise naturally from a breach, in the usual course of things. The second covers losses arising from special circumstances that both parties knew about when they made the contract. Because “consequential loss” has usually been read as meaning only the second kind, excluding it may not exclude lost profits that flow directly from a breach.
That’s why many contracts name “loss of profit” separately, often alongside loss of revenue, business, goodwill or data, and sometimes add “whether direct or indirect”. US courts draw a similar line between direct and consequential damages, and whether lost profits count as direct or consequential can depend on the contract and the state.
12.2 The Customer shall not be liable to the Supplier for any indirect or consequential loss, or for any loss of profit, revenue or goodwill. The Supplier shall be liable for all Losses suffered by the Customer, including loss of profit.
If you’re the supplier, read a mutual exclusion of “loss of profit” carefully. If the customer ends the contract early without the right to, what you lose is mostly the profit you’d have made, and depending on the wording, the exclusion could be argued to cover it. Some suppliers ask for a line saying the exclusions don’t reduce the charges due under the contract.
Carve-outs, uncapped liability and super-caps
A carve-out is a liability that the cap, and usually the exclusions, don’t apply to. Some are required by law; others are negotiated, and they often decide how balanced the clause really is.
Liabilities commonly left uncapped include:
- death or personal injury caused by negligence (in the UK, this can’t be limited anyway);
- fraud;
- anything else the law doesn’t allow to be limited or excluded;
- by agreement, often: breach of confidentiality, indemnities for third-party intellectual property claims, deliberate breach or abandonment of the contract, the customer’s obligation to pay the fees and, especially in US contracts, gross negligence and wilful misconduct.
A super-cap is a separate, higher cap for particular risks, used instead of leaving them unlimited. It’s often used for data protection, confidentiality and security breaches, and is usually a fixed sum or a multiple of the fees, such as three times the annual charges. Check whether it sits on top of the general cap or counts towards it.
Watch for a list of carve-outs so long that little is left under the cap:
12.6 The limits in clause 12.3 shall not apply to any breach by the Supplier of clauses 6 to 11, or to any Losses arising under clause 14 (Indemnities).
How the cap interacts with indemnities and insurance
An indemnity that sits outside the cap can make the cap largely irrelevant, so check every indemnity against the limitation clause. Then check that the cap is a figure your insurance would actually pay.
An indemnity is a promise to cover the other side’s losses from specified events, often claims by third parties. Words like “subject to clause 12” mean the cap applies to it; “notwithstanding any other provision of this Agreement”, or a carve-out naming the indemnity clause, means it doesn’t. If a broad indemnity is uncapped, a loss that would have been capped as an ordinary claim for breach may be claimed under the indemnity instead. Our guide to indemnity clauses covers this in more depth.
Insurance is usually what pays if a claim against you succeeds, so compare the cap with the limits on your professional indemnity, public liability or cyber cover, and check whether those limits apply per claim or in total for the year. Insurance may not cover liability you’ve taken on under a contract beyond what you’d owe anyway, so check with your insurer or broker before agreeing to a cap above your cover, or to an uncapped indemnity.
Limitation of liability in the UK, EU and US
Businesses can generally cap and exclude liability in the UK, the EU and the US, but each sets limits, and the law that governs the contract decides which apply. These are the main differences; for anything important, check current law with a lawyer.
| Question | UK | EU | US |
|---|---|---|---|
| What can’t be excluded or limited? | Under the Unfair Contract Terms Act 1977, liability for death or personal injury caused by negligence can’t be excluded or limited. Liability for fraud can’t be excluded. | There’s no single EU rule. In many member states, liability for deliberate wrongdoing can’t be excluded, and in some the same applies to gross negligence. | In many states, courts won’t enforce limits on liability for gross negligence, wilful misconduct or fraud. |
| Is there a fairness or reasonableness test? | Yes. Other exclusions and limits of negligence liability, and those in one party’s written standard terms, only stand if they’re reasonable. | Some countries, such as Germany, review standard business terms for fairness. | No general test. Courts generally enforce limitation clauses between businesses, though they can refuse to enforce unconscionable terms, a narrow exception. |
| What does “consequential loss” mean? | In English law, it has traditionally been read narrowly (the second limb of Hadley v Baxendale), so it may not cover lost profits that flow directly from a breach. | It depends on the country’s law. The English meaning doesn’t automatically carry over. | Courts distinguish direct from consequential damages, and lost profits can fall on either side, depending on the contract and the state. |
If the contract doesn’t say which law applies, or names one you don’t know, see our guide to governing law and jurisdiction clauses.
What to ask for in a limitation of liability clause
Ask for a cap on your own liability that applies to both sides, sits within your insurance and has few carve-outs. If you’re the customer, also check that their cap would cover what you could realistically lose.
- A cap on your liability, in aggregate, at a figure you could pay or insure.
- The same cap and exclusions for both parties.
- Indirect loss and loss of profit excluded for both sides, without reducing the fees you’re owed.
- Carve-outs limited to what the law requires and to risks you control.
- A super-cap, rather than unlimited liability, for data protection or confidentiality.
- Indemnities brought within the cap, or given a cap of their own.
- If you’re the customer: “paid or payable” wording or a minimum figure, so their cap can’t shrink to almost nothing.
If the sums are large, or the contract is governed by a law you don’t know, this is a clause worth a lawyer’s time. See how to brief a lawyer on a contract.
How LegalSling helps
LegalSling explains every clause of the contract you’ve been sent in plain English, including what the limitation of liability clause means for each party and which way it leans. It flags terms that are markedly one-sided or unusual, such as a cap that protects only one side, and highlights the exact words. You can ask whether a particular indemnity is capped and get an answer drawn only from the contract, with paragraph references. It takes the governing law from the contract’s own wording rather than guessing, and checks every quote it shows against the text. You can add your own notes and turn everything into a brief for your lawyer. It explains; it doesn’t give legal advice or tell you whether to sign. See how it works.
Questions people ask
Is a limitation of liability clause enforceable?
Between businesses, generally yes, within limits. In the UK, the Unfair Contract Terms Act 1977 means liability for death or personal injury caused by negligence can’t be excluded or limited, and some other exclusions only stand if they’re reasonable. Liability for fraud can’t be excluded. In the US, courts generally enforce these clauses, though in many states they won’t enforce limits on liability for gross negligence, wilful misconduct or fraud. In the EU, it depends on the member state’s law.
What happens if a contract has no limitation of liability clause?
Then neither side’s liability is capped. If one party breaks the contract, the other can claim its losses under the general law: broadly, losses the breach caused that aren’t too remote, less anything reasonable steps could have avoided. That can come to far more than the contract is worth, which is why business contracts so often include a cap.
What is a typical liability cap?
A common starting point is the fees paid or payable under the contract in the previous 12 months. Other contracts use a fixed sum, a multiple of the fees such as 150% of a year’s charges, or the level of insurance the supplier carries. There’s no legal standard figure: the right number depends on the value of the contract, what could realistically go wrong and what each side can insure.
Does a limitation of liability clause protect both parties?
Only if it says so. A clause that refers to “each party” or “neither party” usually applies both ways; one that names only “the Supplier” or “the Customer” protects that party alone. Check the carve-outs too: a cap can be mutual on paper but one-sided in practice if the liabilities left uncapped are ones only you are likely to incur, such as an indemnity for your work.
What is the difference between an exclusion clause and a limitation clause?
An exclusion clause removes liability for certain kinds of loss or events altogether, such as indirect loss or lost profits. A limitation clause caps liability at a maximum amount. Contracts usually combine the two in one section headed “Limitation of liability”. In the UK, the Unfair Contract Terms Act 1977 can apply to both: to terms that exclude liability and to terms that restrict it.
Does excluding consequential loss exclude loss of profit?
Not necessarily. In English law, “indirect or consequential loss” has traditionally been read narrowly, by reference to the second limb of Hadley v Baxendale (1854), so lost profits that flow directly from a breach may not be excluded. That’s why many contracts exclude “loss of profit” separately, sometimes “whether direct or indirect”. In the US, whether lost profits count as consequential damages can depend on the contract and the state.
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