Limitation of liability (liability cap)
A contract clause that caps how much one side can owe the other for damages, often at the fees paid over a set period, and excludes some kinds of loss.
A typical clause has two parts: a cap, such as the fees paid in the last twelve months, and an exclusion of indirect losses such as lost profit. Carve-outs list what the cap does not cover, commonly breach of confidentiality, data protection, indemnities and intentional misconduct. In Polish law liability for damage caused intentionally cannot be excluded in advance (Article 473 § 2 of the Civil Code). For a software vendor the cap decides whether one bad incident ends the company.
Related terms
- MSA and SOW (master services agreement, statement of work): The master services agreement sets the legal terms once; each statement of work adds one project: scope, deliverables, timeline and price.
- Indemnity (indemnification): A promise that one side will defend the other and cover its costs if a third party sues over something the first side is responsible for.
- Liquidated damages (contractual penalty): A sum agreed in advance that one side pays for a specific breach, such as a missed deadline, without having to prove the actual loss.
- SLA (service level agreement): A contract that defines availability, response and fix times per priority, and what happens when they are missed.
