The limitation of liability clause is often the most negotiated part of a commercial contract, and one of the least read by the people signing it. It decides how much one party can recover from the other if things go wrong, and which kinds of loss can’t be claimed at all. This guide explains what the usual wording means and what to push for, whichever side you’re on. Whether a court will actually uphold a particular clause is a separate question, covered in our guide to when courts enforce liability limits.
What a limitation of liability clause does
Most clauses do two things. They exclude certain types of loss entirely (typically indirect or consequential loss, and often lost profits or lost data), and they cap the total that can be claimed for everything else. A simple example: “Each party’s total liability arising under or in connection with this agreement shall not exceed the fees paid in the 12 months before the claim arose.” If you’ve paid £10,000 in that period, that is the most you can recover, even if the breach cost you £100,000.
Look at how widely the clause is drawn. Wording such as “whether in contract, tort (including negligence), breach of statutory duty or otherwise” is meant to catch every route to a claim, so you can’t get around the cap by suing in negligence instead of contract.
Why the clauses exist
Suppliers need to know their maximum exposure to price their work and buy insurance. A software company selling a £20,000 licence can’t sensibly accept unlimited responsibility for a customer’s entire business. Caps and exclusions are therefore normal and often fair. The detail, though, can shift a lot of risk from one party to the other.
How caps are usually expressed
The common formats are a fixed sum (“£250,000”), a figure linked to fees (“the charges paid or payable in the 12 months preceding the claim”), a multiple of fees (“150% of the annual charges”), or the greater of two figures (“the greater of £100,000 and the charges paid in the previous 12 months”). Check whether the cap applies per claim, per year or across the whole life of the contract. An aggregate cap for the whole term can be used up by one early claim, leaving nothing for later problems.
Fee-based caps need particular care. Say a contract is worth £100,000 over two years and the cap is “the fees paid in the month in which the breach occurred”. If something goes badly wrong in month three, your claim may be limited to one month’s fees, a little over £4,000. A cap based on fees already paid is also very low at the start of a contract, when you’ve paid little but may be most exposed. Asking for “paid or payable” and a fixed-sum minimum deals with both problems.
What sits outside the cap
Some liabilities can’t be limited at all. The Unfair Contract Terms Act 1977 (and, for consumer contracts, the Consumer Rights Act 2015) prevents a business excluding or restricting liability for death or personal injury caused by negligence, and under the general law a party can’t exclude liability for its own fraud. Well-drafted clauses say so expressly.
Other carve-outs are commercial choices, and this is where most negotiation happens. Common ones are claims under an intellectual property indemnity, breach of confidentiality, data protection breaches, and wilful default or deliberate breach. Each can be fair, but each also creates uncapped exposure. Wilful default in particular is rarely defined, which leaves room for argument later. A middle route is a separate, higher cap (sometimes called a super-cap) for specific risks such as data protection, rather than removing the limit altogether. Also check that the clause doesn’t cap the customer’s obligation to pay the fees; suppliers normally carve that out.
Indirect and consequential loss
Almost every clause excludes “indirect or consequential loss”. In English law these words have traditionally been read narrowly, to mean losses that don’t arise naturally from the breach but only because of special circumstances. Lost profits that flow directly from a breach may therefore not be excluded by those words alone, which is why suppliers usually add a list: “loss of profits, loss of revenue, loss of business, loss of goodwill, loss of data”. Courts have not always read these phrases the same way, so it pays to say precisely which losses you mean rather than rely on labels.
If you’re the customer, resist a blanket exclusion of lost profits where they are the main loss you’d suffer. Ask for costs you’d actually incur to be recoverable, such as the cost of restoring lost data, buying replacement services, and wasted expenditure. If you’re the supplier, a clear list protects you better than general wording.
Mutual clauses that aren’t really mutual
A clause saying “neither party’s liability shall exceed the fees paid” looks balanced. But the customer’s main obligation is paying the fees, which is usually carved out anyway, so in practice the cap mainly protects the supplier. That isn’t necessarily wrong, but you should see it for what it is. Watch also for clauses where the supplier’s liability is capped while the customer gives uncapped indemnities, for example for misuse of the software or for data the customer provides.
How low can a cap go?
There is no legal minimum. Where the clause is in one party’s written standard terms, or restricts liability for negligence, it has to meet the reasonableness test in the Unfair Contract Terms Act 1977, and a very low cap is more likely to fail. In a genuinely negotiated contract between businesses the parties have more freedom. Rather than aim for a particular percentage, ask what the realistic loss would be if the supplier failed badly, whether the supplier carries insurance that could meet a higher cap, and how much it would cost you to replace the service.
What to ask for
If you’re buying a critical service, where failure would stop your business or lose your customers’ data, push for a higher cap, a fixed-sum minimum, a super-cap for data and security breaches, and recoverability of the specific costs you’d incur. If the service is low-value and easily replaced, a lower cap may be perfectly sensible. If you’re the supplier, keep the cap tied to something you can insure, list the excluded losses clearly, and resist carve-outs that leave you with open-ended exposure.
Read the clause alongside the indemnities, the warranties and any time limit for bringing claims, because together they decide who really carries the risk. If you’d like a second view on a particular clause, a QuickLegalCheck review sets out what is capped, what is excluded and where the balance falls.
Related: what the contract review covers, and a complete sample report.