Limitation of Liability: The One Clause That Saves or Destroys Every Contract

The Limitation of Liability (LoL) clause is the single most negotiated provision in US commercial contracts — and the most frequently botched. Get it right, and exposure is capped. Get it wrong, and a $50K contract can generate $5M in liability.

Direct vs. Consequential Damages

Under the UCC and common law, direct damages flow from the breach itself; consequential damages are ripple effects — lost profits, business interruption. Most LoL clauses waive consequential damages. But Delaware courts increasingly treat certain lost profits as direct when they were "foreseeable at the time of contracting."

Three Critical Elements

1. Cap Amount

The standard cap: "fees paid in the 12 months preceding the claim." For the buyer, negotiate a higher fixed-dollar cap or tie to total fees paid over the contract life.

2. Carve-Outs

Standard carve-outs: fraud, confidentiality breach, IP infringement, personal injury, payment obligations. If your LoL lacks carve-outs, it is incomplete. A blanket cap covering IP infringement means a vendor could steal your source code and you would recover at most one year of fees.

3. Cross-References

Always cross-reference the indemnity section so the two provisions work together. If you see "in no event" without "except as set forth in Section X," the clause may be too broad to enforce.