What Does a Limitation of Liability Clause Actually Limit?

A limitation of liability clause sets boundaries on what one party may have to pay if something goes wrong. It can set a financial cap, exclude certain losses or leave some liabilities outside the cap.

This explanation focuses on business-to-business contracts in England and Wales.

Lowdown

A contract might cap total liability at a fixed sum or a percentage of the charges. It can also set different caps for different risks or exclude particular types of loss.^[1]

Why It Matters

There are legal limits on how far an exclusion or cap can go. Under the Unfair Contract Terms Act 1977, liability for death or personal injury caused by negligence, meaning a failure to take reasonable care, cannot be excluded or restricted.^[2]

A contract also cannot exclude or limit a party's liability for its own fraud. This is another important legal limit, even where the contract contains a broad financial cap.^[4]

The Act also requires certain other exclusions and caps to be reasonable. This applies to some negligence liabilities and contractual terms, including certain provisions used on written standard business terms. It does not apply in the same way to every business contract.^[2]

Where the reasonableness test applies, the circumstances at the time the contract was made matter. For financial caps, factors include the resources available to meet the liability and whether insurance was available.^[2]

Check the total cap, whether it applies to each claim or overall, which losses are excluded and which liabilities sit outside it. Government contract terms show that different risks can be treated differently.^[1][3]

Our Conclusion

A limitation clause can control both the amount of liability and the types of loss that can be claimed. Read the whole clause, not just the headline cap.

Sources

[1] GOV.UK / Government Commercial Agency, Mid-Tier Contract: Guidance for Buyers — Liabilities

[2] Unfair Contract Terms Act 1977, section 2: Negligence liability, section 3: Liability arising in contract and section 11: The reasonableness test

[3] UK Health Security Agency, Terms and conditions for the supply of goods and/or services

[4] Chambers and Partners, Commercial Contracts 2025 — England and Wales