What is Limitation of Liability?
Definition
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. This matters because even when the other party is clearly at fault, this clause restricts your recovery to the capped amount, no matter how large your actual losses are. In B2B contracts and SaaS agreements, these clauses appear in nearly every deal and are a primary tool for managing risk exposure. 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. 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.
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