What is Limitation of Liability?

What it is

A limitation of liability clause caps the maximum amount one party can recover from the other in a dispute. The cap is often set at the total fees paid under the contract during the preceding 12 months, which may be a fraction of the actual harm suffered.

Why it matters in your deal

For self-funded ETA buyers and acquisition counsel, limitation of liability matters because it can change economics, leverage, closing certainty, post-close exposure, or the attorney questions that need to be answered before capital is committed. Risk signal: High if asymmetric. Often limits only what you can recover, not what you owe.

Real example

For example, if you pay a vendor $5,000 per year for data hosting and a security breach exposes your customer records, the liability cap could limit your recovery to $5,000, even if the breach costs you $200,000 in remediation and lost business.

Red flags to watch

• •Watch for asymmetric liability caps where the other party's exposure is capped but yours is not, and for clauses that exclude indemnification obligations from the cap, creating hidden unlimited exposure.
• •One-sided language that gives the other party discretion while limiting your consent, notice, cure, or remedy rights.
• •Undefined dollar caps, timing rules, notice methods, survival periods, territory, or trigger conditions.
• •Cross-references that move the real obligation into an exhibit, schedule, FDD item, lease addendum, or outside policy.
• •Terms that conflict with the self-funded ETA buyers and acquisition counsel diligence plan, financing assumptions, operating model, or counsel review checklist.

What to do

1. 1Quote the operative limitation of liability language and send the full surrounding section to counsel.
2. 2Tie the clause to economics, timing, remedies, assignment rights, consent requirements, and any closing condition it affects.
3. 3Ask for revisions that replace discretion with objective standards, defined notice periods, measurable caps, and clear cure rights.
4. 4Confirm the governing law, jurisdiction, and document cross-references before relying on the clause in negotiation.

Sources

1. Cornell Legal Information Institute - asset purchase agreement
2. Cornell Legal Information Institute - mergers and acquisitions
3. ABA Model Asset Purchase Agreement with Commentary