Liability Cap
A liability cap clause limits the total amount one party can be required to pay the other for losses arising under the contract.
What it does
Without a cap, a party that breaches a contract is liable for the losses that flow from the breach, subject to the general limits most legal systems apply. For a supplier, that can mean liability far beyond the value of the deal. A liability cap puts a ceiling on that exposure.
The cap is usually expressed as a fixed amount, or as a multiple of fees paid or payable under the contract over a period, commonly the twelve months before the claim. Caps are often paired with a full exclusion of certain categories of loss, such as loss of profit, loss of business, or indirect and consequential loss.
Most clauses also carve out liabilities that cannot be limited. In most jurisdictions, liability for fraud, for death or personal injury caused by negligence, and often for wilful misconduct or gross negligence cannot be capped. The clause acknowledges this so the rest of it stays enforceable.
Example wording
Subject to the following sentence, each party’s total aggregate liability arising out of or in connection with this Agreement, whether in contract, tort (including negligence), or otherwise, shall not exceed the total fees paid or payable by the Customer in the twelve (12) months preceding the event giving rise to the claim. Nothing in this Agreement limits or excludes either party’s liability for fraud, for death or personal injury caused by negligence, or for any other liability that cannot be limited by applicable law.
Risks for SMBs
The cap is far below the real exposure. A supplier whose failure could take a customer offline for a week, with a cap of three months’ fees, leaves the customer carrying almost all the risk. Compare the cap to the damage a failure could realistically cause, not to the contract value.
The cap is one-sided. Supplier templates often cap the supplier’s liability while leaving the customer’s liability uncapped. There is sometimes a reason, since the customer’s main obligation is to pay, but be aware of the asymmetry.
Fees-based caps are tiny early on. “Fees paid in the preceding twelve months” is close to zero in month one. A minimum floor amount fixes this.
Consequential loss exclusions swallow the cap. If the losses an SMB would actually suffer, such as lost revenue from downtime, are excluded as consequential, the cap is irrelevant because nothing is recoverable. What counts as consequential loss varies by jurisdiction. Name the loss types that matter to you and state whether they are recoverable.
Carve-outs are missing or too broad. A cap that also limits liability for breach of confidentiality, data protection, or indemnities may leave you under-protected where it matters most. Equally, a supplier facing uncapped liability for any data protection breach is taking unlimited risk on a routine SaaS deal.
Common variants and negotiation points
- Cap amount. A common middle ground for services and software is 100% of annual fees, with a minimum floor. Higher multiples are negotiated where the risk warrants it.
- Super caps. A separate, higher cap for specific risks such as data breaches, instead of uncapped liability, gives both sides a known ceiling.
- Mutual caps. Ask for the cap to apply to both parties, with any customer-side exclusion limited to payment of fees.
- Aggregate or per claim. Clarify whether the cap applies to all claims combined over the life of the contract, per claim, or per contract year. The difference is large.
Related clauses
- Indemnification: often carved out of, or subject to, the cap.
- Insurance: a cap is only useful if the other side can pay up to it.
- Warranty: the promises whose breach the cap limits.
- Data processing: data liability is one of the most negotiated carve-outs.
This page is general information about a common contract clause. It is not legal advice and does not account for your jurisdiction, industry, or the specific contract in front of you. Talk to a qualified lawyer before relying on it.
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