Limitation of liability clause: example and legal limits

A limitation of liability clause allocates the risk of things going wrong. It does two related jobs: it caps the total amount one party can be liable for, often by reference to fees paid or a fixed sum, and it excludes certain types of loss altogether, commonly indirect or consequential loss, loss of profit and loss of data.

The commercial logic is that a supplier charging £50,000 for a project cannot sensibly accept unlimited exposure for a failure that might cause a customer millions in downstream losses. The clause makes the risk proportionate to the deal, which is legitimate, and expected, in business-to-business contracts.

Most limitation clauses are assembled from the same four components. Reading one means checking each.

• The overall cap. A figure or a formula, frequently the total fees paid in the twelve months preceding the claim. Watch whether it is aggregate (one cap for everything) or per claim.
• Excluded losses. Categories carved out entirely: indirect and consequential loss, loss of profit, revenue, goodwill, data. The precise words matter; consequential loss has a narrower legal meaning than most people assume.
• Carve-outs from the cap, sometimes called the super-cap or unlimited items. Liabilities deliberately left uncapped, typically breach of confidentiality, data protection breaches, IP infringement, and the items the law will not let you limit.
• Mutuality. Whether the cap applies to both parties or just one. A one-sided cap is a red flag worth challenging.

Consequential loss is it. Under English law it has been read narrowly, as losses falling under the second limb of the old Hadley v Baxendale rule, so excluding consequential loss often does not exclude the direct loss of profits a party actually cares about. If you mean to exclude lost profits, say loss of profit expressly; do not rely on consequential.

Illustrative only, to show the structure, not for use as a precedent:

"Subject to clause [X.1], each party's total aggregate liability arising under or in connection with this Agreement, whether in contract, tort (including negligence) or otherwise, shall not exceed [the total Charges paid in the 12 months preceding the event giving rise to the claim]. Neither party shall be liable for any loss of profit, loss of revenue, or loss of data, or for any indirect or consequential loss. Clause [X.1]: Nothing in this Agreement limits or excludes liability for death or personal injury caused by negligence, for fraud or fraudulent misrepresentation, or for any liability that cannot lawfully be limited or excluded."

That final carve-out clause is not optional politeness: it is doing legally required work, as the next section explains.

This is where limitation clauses fail, and where a lot of drafting is quietly non-compliant. In the UK, you cannot exclude or limit certain liabilities, and other limitations only stand if they are reasonable.

• You cannot exclude liability for death or personal injury caused by negligence. Under the Unfair Contract Terms Act 1977, this is void. Every well-drafted clause carves it out expressly.
• You cannot exclude liability for fraud or fraudulent misrepresentation. The law will not enforce an attempt to contract out of your own fraud.
• Business-to-business limitations are subject to a reasonableness test. The Unfair Contract Terms Act 1977 subjects many exclusions and limitations to a requirement of reasonableness, and a clause found unreasonable is unenforceable, potentially leaving the party with no protection at all. A cap that is derisory relative to the contract value, or buried and never negotiated, is vulnerable.
• Consumer contracts are stricter still. The Consumer Rights Act 2015 governs terms with consumers, and many limitations that work business-to-business will not survive against a consumer.

The practical consequence: an over-aggressive clause can be worse than a moderate one, because failing the reasonableness test can strike the limitation down entirely rather than reading it down to a reasonable level.

The position depends on which side of the table you sit.

• If you are the supplier: push for an aggregate cap tied to fees, exclude indirect loss and name loss of profit expressly, and keep the super-cap items as narrow as the deal allows, while always carving out the non-excludable liabilities so the clause stays enforceable.
• If you are the customer: challenge a one-sided cap, negotiate the quantum up (a twelve-month-fees cap can be trivial against real exposure), and insist on uncapped or higher-capped liability for confidentiality, data protection and IP breaches.
• If you are reviewing at speed: check three things first. Is death, personal injury and fraud carved out? Is the cap mutual? Does consequential loss carry the weight someone thinks it does?

What is a limitation of liability clause? A clause that caps the total amount a party can be liable for and excludes certain types of loss, allocating the risk of things going wrong so exposure is proportionate to the deal.

Can you exclude all liability in a contract? No. Under UK law you cannot exclude liability for death or personal injury caused by negligence, or for fraud, and many other limitations only stand if they are reasonable under the Unfair Contract Terms Act 1977.

What does consequential loss actually exclude? Less than most assume. Under English law it has been read narrowly, so excluding consequential loss may not exclude the direct loss of profit a party cares about. Name loss of profit expressly if that is the intention.

What is a typical liability cap? Commonly the total fees paid over a set period (often twelve months) or a fixed sum, sometimes with higher or unlimited super-caps for confidentiality, data or IP breaches. There is no universal figure; it is negotiated against the deal's value and risk.

Can an over-aggressive limitation clause backfire? Yes. If a limitation fails the reasonableness test under UCTA, it can be struck down entirely, potentially leaving the party with no protection rather than a reduced one. A defensible, moderate clause can be safer than an aggressive one.

On a share purchase, the target's liability caps are scattered across every customer and supplier contract it has signed, and the ones that matter are the ones with no cap, a one-sided cap, or a cap that forgot to carve out fraud. LegalAI Space's Document Review grid takes those contracts as rows and asks each the same questions: what is the cap, is it mutual, what is excluded, and what is carved out. Each cell carries the answer, the passage it was taken from, and a link that opens the contract at that clause, so a column that reads not addressed eight times is eight agreements with no cap, visible on the first pass.

The grid reports what the clause says; whether it is reasonable under UCTA in the particular commercial context is a judgement it does not make, and the consequential loss trap is exactly the kind of thing to verify by opening the passage rather than reading the summary. The Document Review page describes the grid and its playbooks, and the workflow Review the warranties and limitations in a share purchase agreement shows caps and carve-outs being read across a transaction. Both are linked below.