Limitation of Liability Caps: What’s Fair (and What’s Dangerous)

Limitation of liability is where contracts decide the worst-case scenario. If something goes wrong, how bad can it get?

If you only read one section before signing, read the liability cap and indemnity clauses.

What a Liability Cap Is

A cap limits how much one party can owe the other.

Common language: "In no event shall either party be liable for amounts exceeding the fees paid under this Agreement."

Typical Cap Levels (What’s Normal)

Depending on the deal size and risk: - Fees paid in the last 12 months - Total fees paid under the contract - A fixed number (for smaller engagements)

Red Flags

1. No cap at all

If liability is unlimited, you are exposed to a number you cannot control.

2. A cap for them, not for you

If the company caps its liability but keeps yours uncapped, the risk is one-way.

3. The "carve-out list" removes the cap for everything

Look for carve-outs such as: - Confidentiality - IP infringement - Indemnification - Data breaches

Sometimes carve-outs are reasonable. The problem is when the list is so broad that the cap is meaningless.

Practical Negotiation (What to Propose)

• Add a cap: total fees paid.
• Narrow carve-outs: limit confidentiality carve-out to intentional misconduct.
• Add mutuality: whatever standard applies to you should apply to them.

Quick Answers (AEO)

What does "consequential damages" mean?

It refers to indirect losses like lost profits. Many contracts exclude these damages, which is common.

What is a reasonable liability cap?

For many service contracts, a cap equal to fees paid (or 1x to 2x fees) is a typical starting point.

If you are unsure whether the cap is real protection or just a paragraph that looks safe, paste the section into Clauze and Clauze reads it back with the real-world risk.