Capping Liability in Commercial Contracts: The Fundamentals

February 12, 2026

A supplier charges £50,000 for a services contract. A year later, a dispute arises and without a cap on liability, the client seeks £1 million in losses. It’s a familiar scenario, and one that could have been avoided with a simple, well‑drafted clause.

In commercial contracts, one of the most important tools for managing risk is the cap on liability. Put simply, this sets out how much one party may have to pay if something goes wrong, and the types of losses it will (and will not) be responsible for. When drafted well, liability caps bring certainty, help businesses price work sensibly, and reduce the chances of costly disputes. When drafted poorly, they can be unenforceable or leave a party unexpectedly exposed.

This article explains the basics: what liability caps are, why they matter, and the key things every business should understand before signing a contract.

    What Do We Mean by “Liability”?

    “Liability” is your legal responsibility to compensate someone if you breach the contract or act negligently (for example, through mistakes, delays, or failures in performance). In business‑to‑business contracts, parties generally can decide how much liability they want to accept, but there are some important legal limits, including:

    • You cannot cap or exclude liability for death or personal injury caused by negligence.
    • Any cap on liability for negligence or certain implied terms must be reasonable, only if you are contracting on your own standard terms.
    • Liability for fraud or fraudulent misrepresentation can never be excluded.
    • For everything else, clear drafting and commercial logic are key.
    Why Should Businesses Use Liability Caps?
    • Predictability and Better Pricing: A cap makes your exposure more predictable. This helps you budget, quote, and negotiate with confidence.
    • Insurance Alignment: Many insurers expect contracts to include liability caps. A reasonable cap can make it easier (and cheaper) to obtain cover.
    • Fewer Disputes: Clear caps reduce arguments over who pays what if a project goes off track.
    • Balanced Commercial Risk: Caps help ensure that one mistake doesn’t wipe out the value of an entire contract or worse, the business itself.
    Key Elements of a Liability Cap (and What to Watch Out For)

    The Amount of the Cap

    A key first step is to determine how the liability cap is intended to operate: does it apply as a single aggregate cap covering all claims for the duration of the contract, apply to a defined period, operate as an annual cap (whether by contract year or calendar year), or on a per‑claim basis? The distinction can be significant. For example, a £250,000 per‑claim cap could allow multiple claims of £250,000, whereas applying the same figure as an aggregate cap would significantly restrict the total amount recoverable.

    In longer‑term contracts, it is also common to see annual caps that reset each contractual year, while other agreements adopt a single, fixed cap for the entire term. The choice between these structures can materially shift the allocation of commercial risk and the parties’ overall exposure.

    Contracts commonly set this in one of three ways:

    • A fixed amount (for example: Liability shall not exceed £500,000). While this is simple, the amount must be proportionate to the deal value and risk to ensure it is not deemed unreasonable if challenged.
    • A multiple of the fees or contract value (for example: 100% or 200% of annual charges). This method scales naturally with the size of the project and so can be helpful when using the same terms for multiple different deals.
    • An amount equivalent to insurance limits or recoverable insurance. This approach must be carefully drafted but can be effective where insurance covers relevant loss areas.

    Small differences in wording can have a significant impact on the practical level of protection a business receives. A liability cap may appear generous at first glance, but once the overall value of the contract and the specific risk profile are taken into account, it may prove far too low to offer meaningful protection.

    What Is Not Covered by the Cap

    • Most contracts carve out certain liabilities that sit outside the cap. These liabilities are typically unlimited. These often include:
    • Death or personal injury (which cannot legally be limited)
    • Fraud or fraudulent misrepresentation
    • Intellectual property infringement
    • Breach of confidentiality or data protection laws
    • These carve‑outs should be clear and specific as courts do not rewrite vague clauses.

    Types of Losses Included (and Excluded)

    • Parties also often exclude specific heads of loss to narrow the scope of any liability. Common examples include:
    • Loss of profits
    • Loss of revenue
    • Loss of business or opportunity
    • Excluding these categories prevents claims for wide-ranging knock‑on effects and focuses compensation on more direct, measurable losses, such as the cost of repairing or re‑performing defective work.
    • It is important to note that these specific heads of loss are not the same as “indirect” or “consequential” losses under English law. The legal distinction between direct and indirect losses can be complex in practice, and losses like loss of profits may fall into either category depending on the circumstances. By listing out the types of losses the parties intend to exclude, the contract reduces ambiguity, avoids disputes, and strengthens the overall effectiveness of the liability cap.

    Time Limits for Bringing Claims

    • Many contracts include notice requirements for claims which are often between 12-24 months. These interact closely with liability caps and can be equally important in managing exposure. If the time limit is too short, you may lose the right to claim before the liability cap becomes relevant.
    • Furthermore, from a drafting perspective, one must be sure unusual time limits or procedures are clearly signposted; they may not be enforceable if hidden in the small print.

    Clear, Consistent Drafting

    • Following on the point above, courts are more likely to uphold liability caps that are:
    • Written in plain English
    • Presented clearly and logically
    • Highlighted if unusual or onerous
    • Ambiguity or overly complex provisions increase the risk of challenge. Where a liability cap matters to your business, clarity is your strongest protection.
    Common Pitfalls to Avoid

    Even where a liability cap is included, drafting issues or assumptions can significantly weaken the protection it provides. Building on the points above, here are some of the most frequent pitfalls to watch out for:

    Assuming your insurance automatically limits your liability. It’s a common misconception that your insurance cover sets the upper limit of what you will have to pay if something goes wrong. In reality, insurance does not cap your liability unless the contract clearly links the two.

    Using boilerplate caps without understanding them. Liability caps should reflect the size, structure and risk profile of the deal. A one‑size‑fits‑all clause is rarely appropriate. A liability cap must be reviewed in the context of what you are delivering, the potential impact of failure, and the commercial expectations of the parties.

    Relying on vague exclusions. Vague drafting can lead to disputes about what is included or excluded. Clear definitions, particularly for consequential or indirect loss, make the clause far more effective and enforceable.

    How We Can Help

    At Herrington Carmichael, we help businesses design liability caps that are commercially sensible, enforceable, and aligned with insurance requirements. Our services include:

      Contract reviews

      We identify where liability is uncapped, unclear, or unfavourable and recommend practical improvements.

      Drafting and negotiation

      We prepare liability provisions that reflect your risk appetite and industry norms, while giving clarity and protection.

      Strategic advice

      We advise on what’s market‑standard, when to push back, and how caps interact with insurance, indemnities, time limits, and project risks.

      Whether you’re negotiating a technology platform agreement, a manufacturing contract or a service‑based supply deal, we help ensure your contract manages risk, not creates it.

      Get in touch today to discuss how we can help you and your business.

      Cesare McArdle
      Partner, Commercial & Construction
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      This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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