Question 1

Are limitation of liability clauses enforceable?

Accepted Answer

Generally yes, in commercial contracts between businesses. Courts respect the freedom of sophisticated parties to allocate risk. They're less likely to be enforced in consumer contracts, when the limitation is unconscionable, or when it tries to cover gross negligence or intentional misconduct. For B2B contracts, they almost always hold up.

Question 2

What should be excluded from the liability cap?

Accepted Answer

Standard carve-outs include: IP infringement, confidentiality breaches, indemnification obligations, willful misconduct, and data security breaches. These are excluded because the potential harm is disproportionate to the contract value. If your contract caps everything with no carve-outs, you've given the other party a very cheap insurance policy against major failures.

Question 3

How is the liability cap usually calculated?

Accepted Answer

The most common formulas: total fees paid in the prior 12 months, total contract value, or a fixed dollar amount. For ongoing service contracts, the 12-month lookback is standard. For one-time projects, it's often the total project fee. Some high-risk contracts use a multiple (2x or 3x fees). Negotiate for what matches your actual risk.

Question 4

Can you have different caps for different types of claims?

Accepted Answer

Yes — this is called a 'tiered liability' structure and it's smart drafting. Standard claims might be capped at 12 months of fees. IP indemnification might be capped at 2x fees. Data breaches might have a higher cap or no cap at all. Tiering lets you match the cap to the severity of different claim types.

Question 5

What does 'exclusion of consequential damages' mean?

Accepted Answer

It means the other party can't claim lost profits, lost business opportunities, or other indirect damages — only direct, out-of-pocket losses. If a vendor's software failure costs you $10,000 in wasted work (direct) and $200,000 in lost customers (consequential), you can only recover the $10,000. This exclusion is standard in most tech and services contracts.

Limitation of Liability

Definition

In Practice

Common in these contract types

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Frequently asked questions about limitation of liability

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