Key Takeaways

  • A liability clause defines the extent to which each party in a contract can be held financially responsible if something goes wrong.
  • Common approaches include limiting liability to fees paid, insurance coverage, or an agreed-upon cap.
  • Clauses must be clear, unambiguous, and conspicuous to stand up in court.
  • Courts may refuse to enforce liability clauses if they are unconscionable, against public policy, or negotiated under unequal bargaining power.
  • Different types of liability clauses address issues like negligence, gross negligence, consequential damages, and indemnification.
  • Businesses should carefully draft, negotiate, and highlight liability clauses to protect themselves from disproportionate risks.

Limitation of liability clauses in contracts are provisions that limit how much exposure a business faces if a lawsuit is ever filed against it. If enforceable, the limitation of liability clause can limit the amount of potential damages when a business is exposed.

What Is a Limitation of Liability Clause?

Limitation of liability clauses usually limit a company's liability to one of the following:

  • The fees and compensation paid under the contract
  • Available insurance coverage
  • An agreed upon amount
  • A combination of any of the above

Liability limited may apply to every claim that comes up during the contract's timeframe, or it may only apply to certain types of legal action against the company. Limitations on liability can also be used to limit damages stemming from a breach of contract.

Under common law, all parties involved in a contract are only responsible for foreseeable damages, not unforeseeable ones. In many cases, the liability limitations clause restates the common law principle to reaffirm that neither party is responsible for the unforeseeable damages or losses the other suffers.

More specific limitations can go a step further and limit not only foreseeable losses but also the disclosure of confidential information or infringement. There may also be a limit on the total amount of losses one party is responsible for.

Although the simplest version of the limitation of liability clause merely restates common law and is thereby considered redundant, it's still a common feature to include in contracts. Business owners and lawyers are so used to seeing the clause and including it in their agreements that most feel comfortable signing a contract featuring a limitation of liability clause.

Unlike an exclusion of liability clause, a limitation of liability limits your responsibility for certain types of breaches. As such, it might state specifically the monetary amount that the liability is limited to. The court system views these clauses as acceptable while exclusion clauses are not acceptable.

Common Types of Liability Clauses

Liability clauses can be structured in several ways depending on the nature of the contract and the risks involved:

  • Cap on liability – Limits exposure to a fixed dollar amount, such as the total contract value.
  • Carve-outs – Excludes certain claims (e.g., fraud, intellectual property infringement, or gross negligence) from the limitation.
  • Consequential damages waiver – Prevents recovery of indirect or special damages, such as lost profits.
  • Time limitations – Restricts how long after an event a claim can be brought.
  • Indemnity provisions – Shifts liability for certain claims (such as third-party lawsuits) from one party to another.

These distinctions help businesses allocate risk and protect themselves from unpredictable or disproportionate losses.

Benefits of Liability Clauses for Businesses

Including a liability clause in a contract offers several advantages:

  • Risk management – Establishes predictable financial exposure if disputes arise.
  • Encourages contract formation – Parties may be more willing to enter agreements knowing their liability is capped.
  • Insurance alignment – Liability limits can be structured around the scope of insurance coverage.
  • Fair allocation of risk – Prevents one party from bearing an unreasonable burden in case of breach or unforeseen events.

Ultimately, these clauses allow businesses to continue operations without the constant threat of catastrophic damages.

Are Limitation of Liability Clauses Enforceable?

There's been much debate about whether limitation of liability clauses are enforceable or not. Some states have posited that these clauses are not legally enforceable because neither party has an opportunity to negotiate them, which makes them void in terms of public policy.

Commercially, some states merely enforce limitation of liability clauses as they are written. In most cases, the law allows each party to discuss and negotiate contract clauses, but courts have decided not to enforce provisions where:

  • The provision is unconscionable or ambiguous
  • One or both party's intentions are not clearly stated or expressed
  • One party has a greater level of sophistication or unequal bargaining power
  • A statute or public policy exists that prohibits the provision's enforcement

When the parties involved in a contract are business entities that don't deal with each other directly, the limitation is reasonable as it relates to the design professional's fee. In this case, damages are solely economic, and most states enforce the clause. Others might hold the limitation of liability in varying degrees of unenforceability.

Certain states find these clauses unenforceable unless they are explicitly worded. Depending on the state, the clause might be unenforceable due to a variety of violations ranging from public policy concerns to anti-indemnity statutes. Some states are just more protective and will hold clauses void even if they don't go against public policy.

In order for a contract to limit damages and avoid a party's future negligence, the language must be:

  • Unambiguous
  • Clear
  • Conspicuous
  • Unmistakable

Having clear, unambiguous language in the contract also makes it easier for states to enforce. Since many courts heavily scrutinize limitation of liability clauses, it's best to err on the side of caution and make the clause unmistakable and conspicuous in the contract. You might consider using a different typeface or highlight the clause in the text to make it stand out.

Remember, limiting your business's potential liability is key, which is why you should carefully draft every contract. Retain all revision drafts made to the limitation of liability clause so you have proof of negotiations. Potential claimholders that pursue you for breach of contract can only go as far as the limitation of liability clause as it's explicitly stated, so be sure the other parties involved in the contracts understand the clause's existence.

Drafting and Negotiation Best Practices

For liability clauses to be effective, careful drafting is essential. Consider the following best practices:

  • Clarity and simplicity – Use plain language to avoid ambiguity.
  • Highlight the clause – Make it conspicuous in the contract, often through bold text, capitalization, or separate sections.
  • Balance of bargaining power – Ensure both parties have the chance to negotiate the provision. Courts often scrutinize clauses in contracts of adhesion (standard form contracts).
  • Tailor to industry risks – Technology contracts, construction agreements, and professional services contracts often require customized liability language.
  • Combine with indemnification clauses – Clearly distinguish between liability caps and indemnity obligations.

Well-drafted clauses provide enforceability and demonstrate good-faith negotiation.

When Liability Clauses May Not Apply

Even when clearly written, liability clauses are not absolute. Courts often invalidate or limit them when:

  • The clause attempts to exclude liability for intentional misconduct or fraud.
  • It seeks to limit responsibility for gross negligence.
  • Public policy or specific statutes (such as consumer protection or construction laws) prohibit enforcement.
  • The provision creates an unfair imbalance of rights and obligations.
  • The damages at issue are considered fundamental to the contract’s purpose.

In these cases, liability may be imposed despite the contractual limitation.

Frequently Asked Questions

1. What is the main purpose of a liability clause?

A liability clause defines the extent of financial responsibility each party accepts, helping businesses manage risk and avoid disproportionate losses.

2. Can a liability clause exclude all liability?

No. Courts generally reject clauses that exclude liability for fraud, gross negligence, or intentional misconduct.

3. What is the difference between a liability clause and an indemnity clause?

A liability clause limits financial exposure between contracting parties, while an indemnity clause shifts responsibility for third-party claims.

4. Are liability clauses standard in all contracts?

They are common in commercial agreements—particularly in technology, construction, and professional services—but not always included in consumer contracts.

5. How can I make sure my liability clause is enforceable?

Use clear and conspicuous language, allow negotiation, avoid overreaching exclusions, and align limits with insurance coverage.

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