Limitation of Liability: Drafting Caps That Survive Negotiation

A liability cap is the most negotiated provision in commercial contracting and one of the most frequently drafted in a way that does not do what its author intended.

Aggregate or per claim — say which

“Liability shall not exceed the charges paid in the preceding twelve months” is ambiguous on its face. Aggregate across the term, aggregate per contract year, or per claim are three materially different bargains. State it. If aggregate, specify whether the twelve months runs from the claim or from the breach, because on a long-tail issue those are different numbers.

Super-caps for the risks that are not ordinary

Rather than fighting over whether data protection breaches sit inside or outside the general cap, a super-cap — a higher figure applying to a defined category — often closes the gap. Common categories: data protection and security incidents, breach of confidentiality, and IP infringement. A super-cap at three to five times the general cap is a familiar landing zone in mid-market deals.

Carve-outs and their asymmetry

Excluding a category from the cap entirely should be reserved for liabilities that cannot lawfully be limited — death or personal injury caused by negligence, fraud, and in some jurisdictions gross negligence — plus, commonly, payment obligations. Watch for carve-outs drafted as mutual where the underlying exposure is not: a confidentiality carve-out is a data breach for one party and a forwarded email for the other.

Exclusions of loss type

Excluding indirect and consequential loss is standard, but the categories are treated differently across jurisdictions, and “loss of profit” is frequently a direct loss on these facts. If loss of profit is genuinely intended to be excluded, say so expressly rather than relying on a label that a court may read narrowly.

The test to apply before you sign

Take the three worst realistic failures under this contract, estimate their cost, and check what the cap actually recovers. If the answer for all three is a fraction of the loss, the cap is not a risk allocation — it is a decision that you are self-insuring, which may be fine, but should be a decision rather than a discovery.