Harper James advises start-ups, scale-ups and established businesses on negotiating limitation of liability clauses under the laws of England and Wales. These clauses allocate financial risk when a contract is breached, rather than removing responsibility for poor performance altogether.
A well-drafted clause deals with several separate issues: the overall financial cap, excluded types of loss, liability that remains unlimited, and the period or process for bringing claims. In a business-to-business contract, the Unfair Contract Terms Act 1977 requires certain exclusions and limits to be reasonable. Liability for death or personal injury caused by negligence, fraud, and some statutory obligations cannot simply be excluded. The wording also needs care around “indirect” or “consequential” loss, since those terms do not always produce the outcome a party expects.
Cyber incidents, data breaches, service outages and failures in supply chains have made liability discussions more detailed. Customers increasingly seek higher or uncapped liability for confidentiality, data protection, intellectual property infringement and security obligations. Suppliers often propose a separate cap for those risks, linked to available insurance or a multiple of the annual contract value. SaaS agreements also commonly combine a liability cap with service credits, support commitments and specific recovery rights. Further guidance on commercial contract risk allocation provides a useful starting point for reviewing these provisions.
First, identify the losses the business can realistically suffer, including remediation costs, replacement suppliers, lost data and regulatory investigation expenses. Next, compare each risk with the relevant insurance policy and the value of the contract. Then check whether the cap applies per claim or in aggregate, whether related claims are combined, and whether the exclusion wording unintentionally removes the right to recover foreseeable direct losses. Finally, align the clause with indemnities, warranties, service levels, confidentiality obligations and termination rights. A limitation that looks acceptable in isolation can be inconsistent with the rest of the agreement.
The right position depends on bargaining strength, contract value, operational dependency and risk appetite. A supplier providing a non-critical service needs a different allocation from a provider hosting sensitive data or operating a core platform. Recording the commercial assumptions in the negotiation, and checking the final drafting against them, gives directors and procurement teams a clearer basis for accepting the residual risk.