What is Liability Limitation Clause?

Almost every commercial contract contains a liability limitation clause. Suppliers draft these clauses as narrowly as possible: liability is limited to direct losses only, never to indirect or consequential damages, and the maximum is set equal to the order value or the annual contract amount.

This sounds reasonable until you consider what is actually at stake. Suppose a software supplier delivers a defective update that takes down your point-of-sale system for three days. The direct value of the update may be nil; the revenue loss over three days is substantial. With liability capped at the contract value, you have little legal recourse.

When assessing a liability limitation clause, three questions matter. What is covered: direct losses only, or also consequential losses? What is the cap: is the maximum realistic in relation to the risk you carry? Are there carve-outs: intentional misconduct and gross negligence typically cannot be limited by law, but this should be stated explicitly in the contract.

For critical services — IT systems, security, equipment with direct revenue impact — it is worth negotiating a higher liability cap. Suppliers will not always agree, but the conversation is worth having on large contracts.

Insurance is an additional layer of protection: ask whether the supplier holds professional liability insurance and for what amount.

A liability limitation clause drafted primarily in the supplier's favour transfers the residual risk to you as the buyer. When something goes wrong with significant consequential harm, you bear that cost yourself.

For SMBs the practical advice is straightforward: assess the liability limitation in relation to the risks you actually carry. For suppliers managing critical systems or processes, a cap of a few thousand pounds is inadequate. Negotiate a realistic figure, or cover the residual risk through your own insurance.