Limitation of Liability
A limitation of liability clause caps the maximum amount one party can be required to pay the other under a contract, and usually excludes indirect or consequential losses entirely.
In plain English
The clause normally has two limbs: a monetary cap (often expressed as fees paid in the preceding 12 months, or a multiple of them) and an exclusion of categories of loss such as loss of profit, revenue, goodwill or data. Certain liabilities are conventionally carved out and left uncapped — fraud, wilful misconduct, death or personal injury, and often IP indemnity and breach of confidentiality.
Why it matters
This is the clause that determines your worst-case financial exposure on the entire contract. A cap set at "fees paid in the last 12 months" on a contract in month two means an effective cap near zero — a detail frequently missed in review.
Example
"Each party’s aggregate liability shall not exceed the total Charges paid in the twelve (12) months preceding the claim." On a three-year contract this looks reasonable; in month one of year one, it caps liability at a single month of fees.
Under Indian law
Section 74 of the Indian Contract Act, 1872 governs liquidated damages and penalty clauses, and Indian courts award reasonable compensation not exceeding the stipulated amount. Liability caps themselves are generally upheld between commercial parties dealing at arm’s length.
How LexVio handles it
LexVio surfaces the cap basis, checks whether indemnities and confidentiality breaches are carved out, and scores one-sided caps as clause-level risk.
LexVio — AI Contract ReviewCommon questions
What is a typical liability cap?
In B2B services, caps commonly sit at 1x the fees paid in the preceding 12 months, though 2x or the total contract value appear in higher-risk engagements. There is no universal standard — it is a negotiated commercial position.
Which liabilities are usually excluded from the cap?
Fraud, wilful misconduct, death or personal injury, and liabilities that cannot lawfully be limited. IP infringement indemnity, confidentiality breach and data protection breach are often carved out as well.