Liability cap
A contract term that limits the maximum financial exposure of a party for claims arising from the contract — typically expressed as a multiple of the contract value or fees paid. A reasonable cap is one of the most important protective clauses for individuals and small businesses.
A liability cap sets a ceiling on how much one party can be made to pay if the other party makes a claim under the contract. Without a cap, financial exposure is potentially unlimited — which is rarely what either side actually wants, even when the contract is silent.
Typical patterns:
- 1× annual contract value — common in SaaS contracts. Conservative but reasonable for most services.
- 12 months of fees paid — common in services contracts where payment is recurring.
- Multiple of fees — for high-stakes work (e.g. consulting on a regulated project), 2-3× fees paid may be appropriate.
- Uncapped — only acceptable when liability is genuinely bounded by some other mechanism (e.g. only direct damages, no consequential losses).
Common carve-outs from the cap (which leave you exposed even with a cap in place):
- IP infringement claims
- Confidentiality breaches
- Gross negligence or willful misconduct
- Indemnification obligations
Each carve-out is a clause-by-clause judgment. Some carve-outs are reasonable (gross negligence usually is); others are aggressive (carving out all of indemnification effectively removes the cap).
For a freelancer or startup, an uncapped liability with no carve-out review is one of the highest-risk clauses to sign — a single dispute can wipe out years of work.