Clause primer
Limitation of liability cap
The clause sets a maximum amount one or both parties can be required to pay for claims under the agreement.
Legal information, not legal advice. What a clause does depends on its exact words, the rest of the agreement and the governing law.
Also called: liability cap, aggregate liability limit, cap on damages. Where you find it: Services, SaaS, technology, supply and vendor agreements, and many licensing and consulting contracts.
SAMPLE CLAUSE (INVENTED FOR THIS PRIMER)
Except for Excluded Claims, each party's total aggregate liability arising out of or relating to this Agreement, whether in contract, tort (including negligence) or otherwise, will not exceed the fees paid and payable by Customer under this Agreement during the twelve months before the event first giving rise to liability. "Excluded Claims" means a party's indemnification obligations under Section 10, its breach of Section 8 (Confidentiality), its fraud, gross negligence or willful misconduct, and Customer's obligation to pay fees when due. The parties agree that this limit reflects an allocation of risk on which the fees are based.
How it works
Scope of covered claims
Applying the cap to claims in contract, tort or otherwise aims to prevent a party from avoiding the limit by recasting a contract claim as negligence. Whether that works can depend on governing law.
Cap amount and lookback
The cap is measured by fees paid and payable in the twelve months before the event giving rise to liability. Check whether it is paid, payable or both, and how it applies early in the term when little has been paid.
Aggregate versus per claim
"Total aggregate" means one pool for all claims over the life of the agreement. A per-claim or annual cap can produce a very different result.
Exclusions
The Excluded Claims sit outside the cap, often with unlimited exposure. Some agreements instead use a higher separate cap for data or confidentiality claims, sometimes called a super cap.
Why it is there
The cap lets each party price and insure the deal by limiting exposure to a known amount. It most often protects the provider, whose fees are modest compared with the losses a customer could suffer. Customers accept a cap in exchange for price and rely on the exclusions for the risks they cannot absorb. The risk-allocation sentence supports enforceability by showing the limit was part of the bargain.
How it works with other clauses
- Consequential damages exclusion: the two usually appear together, and the exclusions from each should be read side by side.
- Indemnification: whether indemnity is inside or outside the cap is often the main negotiated point.
- Insurance: the cap amount is often compared with the provider's coverage limits.
- Fees and service credits: check whether unpaid fees and credits count against the cap.
Negotiating it
Who it protects: Usually the provider or the party with the larger potential exposure.
If it protects you
- Keep the cap aggregate and tied to a defined fee period.
- Limit exclusions to a short, defined list.
- Keep the risk-allocation statement.
If it runs against you
- Standard ask: make the cap mutual and add a minimum dollar floor.
- Standard ask: exclude confidentiality, data and indemnity claims, or place them under a higher super cap.
- Fallback: a longer lookback or a multiple of annual fees.
Escalate before accepting: A one-way cap protecting only the provider, set at a nominal amount, with no exclusion for confidentiality, data or indemnity claims.
What AI explanations get wrong
- Reporting the cap as mutual without checking. Check: confirm the limit says "each party".
- Missing that indemnity sits inside the cap. Check: compare the exclusions list with the indemnity section.
- Misreading paid versus payable. Check: compute the cap at several points in the term.
- Treating gross negligence or fraud as automatically excluded. Check: read the exclusions and consider governing law.
Where the law varies
Courts generally enforce negotiated caps between businesses, but many will not apply them to fraud, willful misconduct or some gross negligence claims. The standards and some consumer or statutory limits vary by state.
TOOLS
Need a primer like this for a clause in front of you? The Clause Primer Kit, included in All-access, produces one in this format inside the AI tool you already use, with checks built in. For reviewing whole agreements, see the SaaS and Vendor Agreements Pack.