Limitation of Liability Clauses Explained

What liability caps do

A liability cap sets a maximum dollar amount one party can recover from the other. The most common formula: fees paid in the 12 months before the claim. A $1,000/month SaaS contract with a 12-month cap means maximum recovery is $12,000 — even if an outage cost you $500,000 in lost revenue.

Direct vs. consequential damages

Direct damages are the immediate, foreseeable losses from a breach — like the cost to fix defective work. Consequential damages (also called indirect or special damages) are downstream losses — lost profits, business interruption, reputational harm. Most B2B contracts exclude consequential damages for both parties.

• Direct damages: usually recoverable up to the cap
• Consequential damages: typically excluded entirely
• The exclusion is mutual in fair contracts — neither party can claim the other's lost profits

Common carve-outs from the cap

Certain obligations are often excluded from liability caps because they're too important to limit: confidentiality breaches, IP infringement indemnification, gross negligence or willful misconduct, and data breach liabilities. These carve-outs mean unlimited exposure for specific bad behavior.

What's negotiable

Cap amount, cap formula, and carve-out list are all negotiable in most B2B deals. Buyers often push for higher caps or carve-outs for data security. Vendors push for lower caps and broad consequential damage exclusions. Meeting in the middle — mutual caps at 12 months fees with confidentiality and IP carve-outs — is standard market practice.

Missing caps are a red flag

If a service contract has no limitation of liability at all, the provider has uncapped exposure — or they're using a template that wasn't reviewed. For the customer, no cap on the vendor means you might recover more in a dispute — but vendors without caps often carry insurance limits that function as practical caps anyway.