Limitation of liability clauses: how to cap your contract risk

Quick answer: A limitation of liability clause caps the total amount one party can recover from the other, often at the fees paid in the last 12 months, and usually excludes indirect or consequential losses. Most caps carve out fraud, wilful misconduct and certain indemnities. Check that the cap is mutual, proportionate to the deal, and consistent with any liquidated damages clause.

Without a cap, a small contract can carry a very large risk.

How does a liability cap work?

A typical clause says something like: "Each party's total liability under this agreement shall not exceed the fees paid or payable in the twelve months before the claim." Anything above that amount can't be recovered (subject to carve-outs).

Excluded losses

Clauses often exclude indirect or consequential losses, loss of profit, loss of business, and loss of data. Courts read these words carefully, so define them where possible.

Common carve-outs (not capped)

• Fraud and wilful misconduct.
• Death or personal injury caused by negligence.
• Breach of confidentiality.
• Intellectual property indemnities.
• Data protection breaches (sometimes with a separate, higher cap).
• Unpaid fees.

Liquidated damages (Section 74)

Many contracts fix an amount payable on a specific breach, such as a delay. Under Section 74 of the Indian Contract Act, courts award reasonable compensation not exceeding the amount named, so the figure should be a genuine pre-estimate of loss, not a penalty.

What to negotiate

1. Mutual cap: both sides should be capped.
2. The right amount: fees in 12 months, total contract value, or a fixed figure.
3. Carve-outs that are fair to both sides.
4. Consistency with [indemnity clauses](/blog/indemnity-clause-explained-india) and insurance.
5. Clear definitions of excluded losses.

Frequently asked questions

What is a typical liability cap in Indian contracts?

Many commercial contracts cap liability at the fees paid in the 12 months before the claim, or the total contract value. Higher-risk deals may use a fixed amount or insurance limits.

Are limitation of liability clauses enforceable in India?

They are generally enforced between commercial parties of equal bargaining power, though courts may scrutinise clauses that are unconscionable or exclude liability for fraud.

What are consequential losses?

Losses that don't flow directly from the breach, such as lost profits from other deals. Contracts often exclude them; definitions matter.

Check your caps

April's [review](/features/review) flags missing or one-sided caps and suggests balanced wording, and your company's [playbook](/blog/contract-playbook-guide) can set the cap you usually accept.

This article is general information, not legal advice.