What Is a Limitation on Liability?

A limitation on liability clause caps the maximum amount one party can recover from the other in the event of a breach or dispute arising out of the agreement. Limitation of liability provisions are among the most heavily negotiated terms in any commercial contract because they directly define each party’s maximum financial exposure.

Russo Law LLC drafts, reviews, and negotiates limitation of liability provisions throughout New York and New Jersey, including in master services agreements, vendor agreements, distribution agreements, and asset purchase agreements.

How Limitation of Liability Clauses Work

• Cap on total damages – limits total recoverable damages to a specified ceiling, often expressed as a multiple of fees paid or a fixed dollar amount
• Exclusion of certain damages categories – eliminates recovery of consequential damages, indirect damages, lost profits, loss of business, and punitive damages entirely

These two mechanisms often appear together. The practical effect is that even where a party has a valid claim, its recovery may be significantly limited by how the clause is drafted.

Relationship to Indemnification

Limitation of liability provisions and indemnification provisions are typically negotiated together. Indemnification provisions create obligations to compensate the other party for specified losses. Limitation of liability provisions then cap or exclude portions of that exposure. Understanding how the two provisions interact is essential to evaluating true risk allocation.

Frequently Asked Questions

Are limitation of liability clauses enforceable in New York and New Jersey?

Limitation of liability clauses are generally enforceable between sophisticated commercial parties in both states, provided they are clearly and conspicuously drafted and do not limit liability for gross negligence, fraud, or intentional misconduct. Whether a specific clause is enforceable requires a review of the language, context, and applicable law. See also: Cornell LII: Limitation of Liability.

What is the difference between a limitation of liability and an exclusion of liability?

A limitation caps the amount recoverable – damages up to the cap are recoverable, damages above it are not. An exclusion eliminates a category of damages entirely regardless of amount. Many contracts include both: a cap on total direct damages combined with a complete exclusion of consequential or lost profits damages.

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The information on this page is general in nature and does not constitute legal advice. Every situation involves unique facts, and no specific strategy or recommendation can be made without a full review of your circumstances.