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Risk and liability

Limitation of liability clause: meaning and sample wording

A limitation of liability clause caps how much one party can recover from the other, and usually excludes whole categories of loss, such as lost profits and indirect or consequential damages.

When to use it

Almost every commercial contract has one. It matters most for service providers and software vendors, whose fees are small compared with the losses a customer could claim if something goes wrong.

Sample limitation of liability clause

Nothing in this Agreement limits or excludes any liability that cannot be limited or excluded by law, including liability for fraud or for death or personal injury caused by negligence.

Subject to the paragraph above: (a) neither party shall be liable to the other for any indirect, special or consequential loss, or for any loss of profits, revenue, business, data or goodwill, however arising; and (b) each party's total aggregate liability arising out of or in connection with this Agreement, whether in contract, tort (including negligence), breach of statutory duty or otherwise, shall not exceed the total fees paid or payable under this Agreement in the twelve (12) months immediately preceding the event giving rise to the claim.

What to check

  • The size and basis of the capTwelve months of fees is common for services. A fixed amount gives certainty on a long contract; a multiple of fees suits higher-risk work.
  • What is carved outTypical carve-outs are fraud, death or personal injury, breach of confidentiality, data protection breaches, intellectual property indemnities and unpaid fees. Each one removes protection, so negotiate them one by one.
  • Mutual or one-sidedA cap that only protects the supplier is common in standard terms but is often pushed back to a mutual cap in negotiation.
  • EnforceabilityCourts in many countries test limitation clauses for reasonableness or fairness, and consumer protection laws restrict them further. Very low caps are the most likely to fail.

Make the variable parts fill themselves in

In a Word template, replace the details that change with {tags} and wrap optional wording in a section. Clausery turns them into questions, so each document only includes the parts that apply:

Each party's total aggregate liability under this Agreement shall not exceed {#has_fee_based_cap}the fees paid or payable in the {cap_months} months before the event giving rise to the claim{/has_fee_based_cap}{^has_fee_based_cap}{liability_cap_amount}{/has_fee_based_cap}.

Paste this into your own template, then check it with the free template tag checker or read the template syntax.

Questions

What is a typical liability cap?

In service agreements, the fees paid in the previous twelve months is the most common starting point. Higher-risk contracts often use a multiple of annual fees or a fixed amount linked to insurance cover.

Can a contract exclude all liability?

Generally no. Most legal systems do not allow a party to exclude liability for fraud, and many prohibit excluding liability for death or personal injury caused by negligence. A clause that tries to exclude everything risks being struck down entirely.

Can I use this sample wording as it is?

It is a general starting point. Contract law differs between countries and states, and the right wording depends on the deal, so have it reviewed before you rely on it.

Free templates that use it

Related clauses

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This page is general information, not legal advice. Laws differ between countries and states; have wording reviewed for your situation before you rely on it.