Do I Need a Limitation of Liability Clause in My Contract?
You're near the end of a contract, everything's looked fine so far, and there's no section capping what either side could owe if things go badly wrong. You ask about it and get told "don't worry, it's pretty standard not to have one" or "the cap's in there, it's fine." Neither answer tells you what you actually need to know: what happens, financially, if this relationship goes wrong.
Here's what a limitation of liability clause does, what a reasonable one looks like, and the handful of things it should never be allowed to exclude.
What a limitation of liability clause actually does
In plain English: it sets a ceiling on how much either party can be made to pay if something goes wrong, no matter how large the actual loss turns out to be.
Without one, if you breach a contract and it causes the other party a large loss, you could in theory be liable for the full amount — sometimes far more than the contract was ever worth to you. A limitation of liability clause puts a number on that exposure in advance, for both sides.
Why contracts have them at all
Nobody wants open-ended risk. A freelancer taking on a £3,000 project doesn't want theoretical exposure to a client's £300,000 loss if something goes wrong. A client doesn't want to be on the hook for unlimited damages either. The clause exists so both sides know, before they sign, roughly what the worst case actually looks like — which is also why it's one of the more important things to read properly rather than skim.
The number that actually matters: what is it capped at
This is the part worth finding and reading twice. Common structures include a cap set at:
- The total fees paid under the contract
- Fees paid in the preceding 12 months (common in ongoing service contracts)
- A fixed sum stated in the contract
- The amount covered by the relevant party's insurance
None of these is automatically "correct" — but they produce very different numbers. A cap set at "fees paid in the last 12 months" on a long-running contract can be a meaningful figure. The same cap on a contract that just started might be close to zero.
What a cap should never remove (the carve-outs)
Under UK law, some liabilities can't be limited or excluded at all — most importantly, liability for death or personal injury caused by negligence, and liability for fraud. A clause that tries to exclude these anyway isn't just aggressive, it's likely unenforceable, which is itself a signal about how carefully (or carelessly) the rest of the contract was drafted.
Beyond the legal minimum, well-drafted contracts often carve out a few other things from the general cap, meaning they're either uncapped or capped separately:
- Breach of confidentiality
- Intellectual property infringement
- Data protection breaches
- Indemnity obligations elsewhere in the contract (see below)
If none of these are carved out, it usually just means the contract wasn't drafted with much care — worth a question, not necessarily a dealbreaker.
Where you'll typically see this
- Freelance and consultancy agreements
- SaaS and software contracts
- Supplier and service agreements
- Agency and marketing contracts
Basically anywhere one party is taking on an ongoing obligation to the other. If a contract has no limitation of liability clause at all, that's not neutral — it usually means whoever's exposed to more risk (often the smaller party) is carrying it unlimited.
Is it mutual, or one-sided?
The same question that matters for indemnity clauses matters here: does the cap apply to both parties equally, or only to one? It's common — and not automatically unreasonable — for a larger counterparty's standard terms to cap their own liability tightly while leaving yours less protected. It's worth noticing, and worth asking for the same cap to apply both ways.
How this interacts with indemnity clauses
We covered indemnity clauses in a previous guide — the short version is that an indemnity is a specific promise to cover certain losses, separate from general contract liability. The two clauses need to be read together: sometimes an indemnity is deliberately drafted to sit outside the liability cap, meaning it isn't limited by the number you just found. If a contract has both an indemnity clause and a limitation of liability clause, check explicitly whether one says it applies "notwithstanding" the other.
Red flags worth pausing on
- No cap at all, on a contract where the risk clearly isn't small
- A cap that's asymmetric — tight for them, open-ended for you
- A cap so low relative to the actual risk that it's effectively meaningless (a cap at the price of a low-cost service, attached to a high-risk obligation)
- Language trying to exclude liability for death, personal injury, or fraud
Before you sign anything with a liability clause in it
- Find the cap and work out what it's actually based on (total fees, annual fees, fixed sum)
- Check what's excluded from the cap
- Check it applies to both parties, not just one
- Check how it interacts with any indemnity clause in the same contract
- If there's no cap at all, ask why — sometimes there's a good reason, sometimes it's just an oversight
FAQs
Can a company legally exclude all liability? No. Liability for death or personal injury caused by negligence, and liability for fraud, can't be excluded or limited under UK law, regardless of what the contract says. A clause attempting this is generally unenforceable.
What's a reasonable cap for a small business contract? There's no fixed rule, but a cap tied to fees paid — either total contract value or the last 12 months — is a common, defensible starting point. What matters more than the exact structure is whether it's proportionate to the actual risk involved.
Does a limitation of liability clause protect me, or the other party? Potentially both, or just one — depends entirely on the wording. Read it as "who does this cap apply to" rather than assuming it automatically protects you just because it's there.
What if there's no limitation of liability clause at all? Then, in principle, liability is uncapped for whatever loss the breach causes, subject to normal contract law rules about what's foreseeable. For a small business or freelancer, that's usually worth raising before signing rather than after.
This article is general information for UK small businesses and isn't legal advice for your specific contract. If you've got a clause you're unsure about, get in touch with LawLynq (/plans) or speak to a qualified solicitor.