Most limitation-of-liability clauses are negotiated as a number. The customer wants the cap at twice the annual fees, the vendor wants it at the fees paid in the last twelve months, and the deal closes somewhere in between. Then, years later, something goes wrong and the clause is argued about not as a number but as a sentence. In our experience three phrases decide more of those fights than the number does.
“Arising out of” or “related to”
Many caps limit liability “arising out of or related to this Agreement.” The second half of that phrase does a great deal of work. Courts tend to read “related to” broadly, as reaching claims with some connection to the contract even when they are not claims for breach of it. That can bring tort claims, statutory claims and sometimes misrepresentation claims under the cap.
Whether that helps depends on which side you are on. A vendor usually wants the widest possible reach. A customer that may one day need to sue for something other than breach, for example a claim that it was misled into signing, should consider whether “arising out of this Agreement” is the better phrase, and should say expressly which claims the cap does not cover.
A cap is negotiated as a number and litigated as a sentence.
“Paid” or “payable”
The most common cap is tied to fees: the fees paid under the agreement in the twelve months before the claim. Read that from the point of view of a customer whose vendor has stopped performing. If you withheld payment because the service was failing, the fees “paid” in that window may be far smaller than the contract value. The cap shrinks at exactly the moment you need it.
“Paid or payable” fixes most of that. So does a fixed-dollar floor: “the greater of the fees paid or payable in the preceding twelve months and $500,000.” Vendors should read the same clause from the other side. A cap measured only by fees paid can be large in the third year of a contract and almost nothing in the second month.
“The claim”
“In the twelve months preceding the claim” sounds precise until you try to apply it. Is the claim made when the customer first complains by email, when a lawyer sends a demand letter, or when a complaint is filed? In a real dispute those dates can be a year or more apart, and in a growing account the fees in each window can differ by multiples.
The fix is a defined trigger. We usually pin the window to the first written notice of the claim delivered under the notices clause, so that both sides can calculate the cap on the day the dispute starts rather than arguing about it at the end.
What the cap leaves out
The words around the cap matter as much as the cap itself. Most agreements carve some liabilities out, leaving them unlimited or subject to a separate, higher cap. The usual candidates are:
- Indemnification obligations, especially for third-party intellectual property claims.
- Breach of confidentiality and data protection obligations, often under a separate “super-cap”.
- Gross negligence, fraud and willful misconduct.
- Fees owed for services already performed.
Each carve-out deserves the same care as the cap. “Breach of confidentiality” can swallow the whole clause if most of what the vendor does involves your data, and a carve-out for “indemnification obligations” means little if the indemnity is itself drafted to cover almost everything.
The second limit: consequential damages
Most caps sit next to a waiver of consequential, indirect or special damages, often with lost profits listed as an example. Whether a claim for lost profits is direct or consequential depends on the facts and on the law that governs the contract, and the answer is not always the one the parties assumed. If lost profits are the main loss you would suffer from a breach, say expressly whether they are recoverable instead of relying on the label.
Will a court enforce it?
Courts in Illinois, as in most states, generally enforce negotiated limitations of liability between commercial parties, particularly sophisticated ones advised by counsel. There are limits. Public policy usually prevents a party from capping its liability for its own fraud or intentional misconduct, and an ambiguous clause is likely to be read against the party that drafted it. That last point is the practical one: the clearer the three phrases above, the less there is to argue about.
A ten-minute review before signing
Read the clause once as the party that will be sued and once as the party that will sue. Then ask four questions:
- Which claims does the cap reach, and is that what you intended?
- What would the cap be if the dispute started in the second month of the contract, and in the last?
- On what date is the cap calculated, and could both sides work it out on the same day?
- Which liabilities sit outside the cap, and are those carve-outs drafted as tightly as the cap itself?
None of these questions takes long at signature. In litigation, each of them is a motion.
