No headliner, no problem: capping your exposure when the main act doesn’t deliver

Limitation of liability clauses set out how much one party can be held liable to pay if something goes wrong. Although they can appear straightforward, they are often heavily negotiated and can have a significant impact if a dispute arises.

Direct v consequential loss

A direct loss is the immediate and natural result of a breach — for example, the cost of replacing faulty goods. A consequential (or indirect) loss results from unusual circumstances, such as lost profits from a missed production run the supplier knew about.

The term ‘consequential loss’ often causes confusion. Under English law (Hadley v Baxendale), lost profits can be a direct loss if they arise in the ordinary course of things. Well-drafted contracts therefore list specific excluded losses, such as loss of profits, revenue, anticipated savings, goodwill and data, rather than relying solely on ‘consequential loss’.

Liability caps

Liability caps limit the maximum amount payable for breach. Common structures include:

• Multiples of fees (eg 100%–200% of contract value) — ties liability to commercial value but may be inadequate for low-value contracts
• Fixed sums (eg £500,000) — provides certainty, often used where potential loss exceeds contract value
• Per-incident v aggregate — a per-incident cap applies to each claim; an aggregate cap covers all claims combined. Per-incident caps can result in greater total exposure if multiple incidents occur.

Unfair Contract Terms Act and reasonableness

In business-to-business contracts, the Unfair Contract Terms Act 1977 (UCTA) allows courts to strike down unreasonable exclusion or limitation clauses. The court considers factors including bargaining power, whether the clause was negotiated, whether the customer understood it and the availability of insurance.

A clause is more likely to be struck down if it excludes liability the supplier controls, was not negotiated, sets a disproportionately low cap or excludes liability for wilful default. Clauses are more likely to survive if they are freely negotiated between parties of equal bargaining power and backed by insurance.

Liability for death or personal injury caused by negligence can never be excluded.

Practical guidance

Push back on:

• Blanket ‘consequential loss’ exclusions – ask for a list of specific excluded losses and ensure direct losses and indemnified claims are not caught
• Disproportionately low caps (eg 10% of fees for critical infrastructure or sensitive data)
• Exclusions for wilful default, fraud or gross negligence — these may be unenforceable
• Caps on IP or data protection indemnities where uncapped exposure is industry standard.

Generally acceptable:

• Mutual caps at 100%–200% of fees or a fixed sum reflecting the engagement’s scale and risk
• Exclusions for remote losses (eg loss of goodwill), provided foreseeable losses remain covered
• Carve-outs for death or personal injury, fraud and confidentiality breaches
• Per-incident caps for ongoing services, provided aggregate exposure remains sensible.

Conclusion

Simply excluding ‘consequential loss’ or choosing an arbitrary cap may not provide the protection expected and may not survive scrutiny under the UCTA.

Clean, specific wording and sensible risk allocation are far more likely to produce a clause that is both commercially effective and enforceable.