Question 1

Can you eliminate all liability in a contract?

Accepted Answer

You can try, but courts won't always enforce it. Clauses that attempt to eliminate liability for gross negligence, willful misconduct, or fraud are generally unenforceable. You can limit liability for ordinary negligence and exclude consequential damages in most jurisdictions. Total liability waivers are suspicious and often get thrown out.

Question 2

What's a reasonable liability cap?

Accepted Answer

A common cap is the total fees paid (or payable) under the contract in the 12 months preceding the claim. For larger deals, it might be a multiple of fees (2x or 3x). For smaller contracts, it might be the total contract value. The 'right' cap depends on the deal size, the potential for harm, and what's at stake for each party.

Question 3

What's the difference between direct and indirect liability?

Accepted Answer

Direct liability covers the immediate losses from a breach — you paid $5,000 for a service that wasn't delivered. Indirect (consequential) liability covers the downstream effects — you lost a $50,000 client because the service wasn't delivered. Most contracts allow recovery of direct damages but exclude consequential damages.

Question 4

Does insurance cover contract liability?

Accepted Answer

Professional liability insurance (E&O insurance) can cover claims arising from your services — like a consulting recommendation that causes losses. General liability insurance covers bodily injury and property damage. Neither covers intentional breaches or fraud. If your contracts have large liability exposure, carry appropriate insurance.

Question 5

Can liability extend beyond the contract term?

Accepted Answer

Yes. Liability for breaches that occurred during the contract term can be pursued after the contract ends, subject to the statute of limitations (typically 3–6 years). Some obligations — like confidentiality, IP indemnification, and representations — survive termination and carry their own liability windows.

Liability

Definition

In Practice

Common in these contract types

Related terms

Frequently asked questions about liability

Create a contract with proper liability clauses