A limitation of liability clause limits the amount or types of damages a party may recover for certain contract-related claims.
It is a risk-allocation tool that can cap exposure or exclude categories of damages.
Why a limitation of liability clause matters
The clause can shape the real economic value of a contract. A party may have a valid claim but face a cap on recovery if the clause applies.
Businesses often use these provisions to price risk, avoid open-ended exposure, and define remedies before a dispute arises.
Where a limitation of liability clause appears
Limitation of liability clauses appear in software agreements, service contracts, purchase agreements, consulting agreements, leases, online terms, and commercial supply contracts.
They may be paired with exceptions for confidentiality, indemnity, payment obligations, fraud, gross negligence, or intellectual property claims.
How it differs from nearby terms
A limitation of liability clause limits recovery. An indemnification clause shifts responsibility for specified losses or claims.
A liquidated damages clause sets a predetermined damages amount, while a limitation clause caps or excludes recovery.
Practical example
A cloud services agreement states that either party’s total liability is capped at fees paid in the prior 12 months, except for confidentiality breaches and payment obligations.
Related Terms
Quick check
Question: Does a limitation of liability clause usually restrict recoverable damages?
Answer: Yes. It limits the amount or types of damages that may be recovered.