Limitation of Liability Clause: How to Protect Your Business
What a Limitation of Liability Clause Does
It caps how much one party can be forced to pay the other if something goes wrong. Without it, a $10K web development contract could result in a $500K lawsuit if the site goes down during a Black Friday sale. The clause protects both parties from catastrophic, disproportionate losses.
The 4 Parts of a Good Liability Clause
1. Cap on direct damages: "Total liability shall not exceed total fees paid under this Agreement." This is the industry standard. 2. Exclusion of indirect/consequential damages: "Neither party shall be liable for lost profits, lost revenue, or business interruption." These are the damages that can 10x the contract value. 3. Exceptions: Carve out: breach of confidentiality, IP infringement, gross negligence, willful misconduct — these should not be capped. 4. Insurance requirement: Require each party to carry professional liability insurance covering the cap amount.
How to Negotiate an Unfair Cap
If the client proposes "Liability capped at $5,000" on a $150,000 project: "The liability cap should reflect the project value. I propose cap at total fees paid, which is standard in our industry. A $5,000 cap on a $150,000 engagement means you are asking us to accept 30x asymmetric risk." If they push back: propose a tiered cap — $X for general claims, $Y (up to total fees) for breach of core obligations.
Consequential Damages — The Multiplier Trap
Direct damages: the cost to fix the broken thing. Consequential damages: everything else the broken thing caused. Example: Your software has a bug. Direct damage = $20K to fix the code. Consequential = the client missed a $200K sales deadline. ALWAYS include mutual waiver of consequential damages. The clause should read: "Neither party shall be liable to the other for any indirect, incidental, special, consequential, or punitive damages."
Checklist: Is Your Liability Clause Fair?
- Is the cap mutual or does it only protect one side?
- Is the cap a fixed dollar amount or tied to contract value?
- Are indirect/consequential damages excluded (for both parties)?
- Are there carve-outs for IP, confidentiality, and gross negligence?
- Does the cap survive contract termination?
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