Limitation of Liability Clauses: What the Cap Really Covers in Plain English

In 2022 the Court of Appeal ordered IBM to pay £80,574,168 to the insurer it had been supplying with a new IT system. IBM’s contract excluded “loss of profit, revenue, savings (including anticipated savings) … (in all cases whether direct or indirect)”. The insurer was claiming money it had already spent on the failed project, and the court held that wasted spending was none of those things (Soteria Insurance Ltd v IBM United Kingdom Ltd [2022] EWCA Civ 440).

That exclusion reads like thousands of clauses signed every week. It is also the clause negotiated hardest: World Commerce & Contracting’s 2024 report again put limitation of liability, price and indemnities at the top of its most negotiated terms (WorldCC, Most Negotiated Terms 2024).

This article takes one typical clause, 223 words long, and works through it phrase by phrase. It shows what each part really covers, where the money is decided, and how to say the same thing in 116 words. It is written by reference to English law, which many international contracts choose; other common law systems start from similar principles but have their own statutes.

1. Common Types of Liability

Liability is a legal responsibility to pay for, or put right, a loss. In a commercial contract it can arise in several ways, and one failure can trigger more than one of them.

Type	When It Arises	What the Claimant Usually Gets
Contract	A party breaks an express or implied term of the contract.	Damages that put the claimant where it would have been if the contract had been performed.
Tort, mainly negligence	A party owes a duty of care, fails to take reasonable care and causes loss.	Damages that put the claimant where it would have been if the wrong had not happened.
Misrepresentation	A false statement of fact, made before signing, persuaded the other party to sign.	Rescission (undoing the contract), damages, or both, depending on whether the statement was fraudulent, negligent or innocent.
Breach of statutory duty	A statute imposes a duty and gives a right to compensation for breaking it.	Compensation on the statute’s terms. Under the UK GDPR, art 82, a person who suffers damage from an infringement can claim compensation from the controller or processor.
Restitution	One party has been enriched at the other’s expense, for example by fees paid for services never delivered.	Return of the benefit received, rather than compensation for loss.
Indemnity	The contract itself promises to cover specified losses, often third-party claims.	The losses the indemnity covers, on the terms it sets (Section 2).

The routes overlap. A supplier that performs a services contract carelessly can be liable in contract and in negligence at the same time. In Henderson v Merrett Syndicates Ltd [1995] 2 AC 145, the House of Lords held that the claimant can choose whichever route suits it best, unless the contract excludes or limits the claim in tort (briefing).

Claims rarely come in one form. In Drax, discussed in Section 4.3, the largest single claim, about £31 million, was for misrepresentation (summary). Some routes also carry their own statutory rules. A term that excludes or restricts liability for misrepresentation must pass the reasonableness test, and the party relying on it must prove that it does (Misrepresentation Act 1967, s 3) (legislation).

That is why the clause in Section 3 lists contract, tort, breach of statutory duty, misrepresentation and restitution. It is also why the plain English version in Section 5 says “however a claim arises”. A clause that speaks only of liability “under this Agreement” risks leaving the other routes uncapped.

2. What a Limitation of Liability Clause Does

A limitation of liability clause decides how much one party can recover from the other when the contract goes wrong. Most clauses do three jobs, usually in this order.

Exclude types of loss. Some losses cannot be claimed at all, however large. Indirect loss and lost profits are the usual candidates.
Cap the rest. Whatever can still be claimed is limited to a sum, often worked out from the fees.
Leave alone what the law protects. Liability for death or personal injury caused by negligence, for fraud, and for anything else the law does not allow to be limited.

An indemnity is different. An indemnity creates a liability, usually to cover a third party’s claim; a limitation clause restricts one. The two have to be read together, because an uncapped indemnity can carry exactly the losses the cap was meant to stop.

3. The Clause As Usually Drafted

Here is a typical supplier-friendly clause. It is the clause shown on the home page of this site, and it is 223 words long.

14. Limitation of Liability

14.1. Notwithstanding any other provision of this Agreement, in no event shall the Supplier be liable to the Customer, whether in contract, tort (including negligence), breach of statutory duty, misrepresentation, restitution or otherwise howsoever arising, for any indirect, special or consequential loss or damage of whatsoever nature, or for any loss of profits, loss of revenue, loss of business, loss of anticipated savings or loss of or damage to goodwill, in each case whether direct or indirect, arising out of or in connection with this Agreement, even if the Supplier has been advised of the possibility of such loss or damage.

14.2. Subject to Clause 14.1 and Clause 14.3, the Supplier’s total aggregate liability to the Customer in respect of any and all claims arising out of or in connection with this Agreement, howsoever arising, shall in no circumstances exceed an amount equal to the total Charges paid or payable by the Customer to the Supplier hereunder during the period of twelve (12) months immediately preceding the date on which the event giving rise to the first such claim occurred.

14.3. Nothing in this Agreement shall be construed so as to limit or exclude the liability of either party for death or personal injury caused by its negligence, or for fraud or fraudulent misrepresentation, or for any other liability which cannot lawfully be limited or excluded.

Each sub-clause is a single sentence with every exception folded inside it. Nothing in it is wrong, but almost every phrase hides a decision worth money. The next section takes them one at a time.

4. Line by Line: What Each Part Really Covers

4.1. “Indirect, Special or Consequential Loss” Covers Less Than It Sounds

English law sorts contract losses using Hadley v Baxendale (1854). First-limb losses arise in the usual course of things. Second-limb losses arise from special circumstances that both parties knew about when they signed.

The courts have long read “consequential loss” as second-limb loss only: Croudace Construction v Cawoods (1978) and British Sugar plc v NEI Power Projects Ltd [1997] EWCA Civ 2438. Profit the contract itself would have earned is usually first-limb loss: Hotel Services Ltd v Hilton International Hotels (UK) Ltd [1997] EWCA Civ 1822 (summary). So a clause that excludes only “consequential loss” often leaves the biggest likely claim untouched.

Context can change the meaning. In Star Polaris LLC v HHIC-Phil Inc [2016] EWHC 2941 (Comm), “consequential or special losses” in a shipbuilding contract was read in its everyday cause-and-effect sense, and the buyer recovered nothing beyond the builder’s repair obligation (summary). Neither side should rely on the label. Name the losses you mean.

4.2. Lost Profits Need Their Own Words, and So Does Wasted Spending

That is why Clause 14.1 lists loss of profits, revenue, business, anticipated savings and goodwill, and adds “whether direct or indirect”. Without those last four words, a court could read the list as excluding only indirect lost profit.

A list cuts both ways. In Soteria v IBM, the clause named almost every type of financial loss except money already spent. The Court of Appeal held that wasted expenditure is a different kind of loss from lost profit, revenue or savings, and the insurer recovered £80,574,168 (summary).

The example clause has the same gap. A supplier that wants to exclude wasted expenditure has to say so. A customer should notice when it is said.

4.3. One Cap for All Claims, or One per Claim?

Clause 14.2 caps the Supplier’s “total aggregate liability … in respect of any and all claims”. That is one pot for the whole contract, and every claim draws on it.

The difference is not academic. In Drax Energy Solutions Ltd v Wipro Ltd [2023] EWHC 1342 (TCC), the cap was 150% of the charges paid or payable in the twelve months before “the claim first arose”. Drax’s claims totalled about £62.5 million and it argued for a cap on each claim. The court held there was a single aggregate cap of about £11.5 million (summary and clause).

If you mean one pot, say “aggregate” and “all claims”. If you mean a cap per claim, say “each claim” and define what counts as one claim.

4.4. “Paid or Payable” and the Twelve-Month Look-Back

Three small choices in Clause 14.2 move the number.

Paid, or paid or payable. A customer in dispute often stops paying invoices. A cap based only on charges “paid” then shrinks. “Paid or payable” counts the unpaid invoices too, which favours the customer.
Which twelve months. The look-back runs from the event behind the first claim. A failure in month two gives a cap of two months’ charges. The Drax clause dealt with this: a first-year claim was measured against an estimate of a full year’s charges.
Charges, or a fixed figure. A fixed sum, or “the greater of £X and the charges for the previous twelve months”, removes the arithmetic altogether.

4.5. Carve-Outs: What the Cap Must Leave Alone

Some liabilities cannot be capped. Under the Unfair Contract Terms Act 1977, s 2(1), nobody can exclude or restrict liability for death or personal injury caused by negligence (legislation). Nor can a party exclude liability for its own fraud: HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6 (summary).

Go beyond those minimums with care. In Triple Point Technology Inc v PTT Public Company Ltd [2021] UKSC 29, the cap did not apply to liability for “fraud, negligence, gross negligence or wilful misconduct”. The Supreme Court held, by three to two, that “negligence” included careless performance of the contract itself (press summary). In a services contract, most claims are about careless performance, so a one-word carve-out can remove most claims from the cap.

4.6. Will the Clause Pass the Reasonableness Test?

Under English law, a clause restricting liability for negligence, or one in a party’s written standard terms of business, must satisfy the reasonableness test (Unfair Contract Terms Act 1977, ss 2(2), 3 and 11). Reasonableness is judged at the date of the contract. For a cap set at a fixed sum, the court looks at the resources available to pay and whether insurance was available (s 11(4)). The party relying on the clause has to prove it is reasonable (s 11(5)).

International contracts are treated differently. The Act’s limits do not apply to international supply contracts (s 26). Where English law applies only because the parties chose it, ss 2 to 7 do not apply at all (s 27(1)) (legislation).

Other common law systems have their own rules. Singapore, for example, has its own Unfair Contract Terms Act (Singapore Statutes Online). Check the governing law before relying on any of this.

5. The Same Clause in Plain English

Here is the clause rewritten in 116 words. It keeps the same allocation of risk, gaps included.

14. Limitation of Liability

14.1. The Supplier is not liable for indirect, special or consequential loss, or for loss of profits, revenue, business, anticipated savings or goodwill, whether that loss is direct or indirect.

14.2. The Supplier’s total aggregate liability for all claims under or in connection with this Agreement is capped at the Charges paid or payable in the twelve (12) months before the event that gave rise to the first claim.

14.3. Clauses 14.1 and 14.2 apply however a claim arises, including in contract, negligence or misrepresentation. They do not limit or exclude liability for death or personal injury caused by negligence, for fraud or fraudulent misrepresentation, or for anything else the law does not allow to be limited or excluded.

This is a rewrite, not a renegotiation. It does not close the wasted expenditure gap or the early-claim problem. Section 6 deals with changing the deal.

5.1. What Changed and Why

As Usually Drafted	Plain English	Why
“Notwithstanding any other provision of this Agreement”	Deleted	A judgement call. It overrides clauses nobody has checked, such as an indemnity. If the cap must apply to an indemnity, say so in the indemnity.
“in no event shall the Supplier be liable to the Customer”	“The Supplier is not liable”	Same meaning. “In no event” adds emphasis, not effect.
“whether in contract, tort (including negligence), breach of statutory duty, misrepresentation, restitution or otherwise howsoever arising”	“however a claim arises, including in contract, negligence or misrepresentation” (now in 14.3)	Said once for both clauses. “Including” keeps the list open. Negligence is named so nobody can argue it was left out.
“indirect, special or consequential loss or damage of whatsoever nature”	“indirect, special or consequential loss”	“Loss” covers damage. “Of whatsoever nature” adds nothing.
“loss of profits, loss of revenue, loss of business, loss of anticipated savings or loss of or damage to goodwill”	“loss of profits, revenue, business, anticipated savings or goodwill”	Same list, with “loss of” said once. A judgement call on goodwill: add “or damage to” back if you want no argument about partial loss.
“in each case whether direct or indirect”	“whether that loss is direct or indirect”	Kept. These words do the real work (Section 4.2).
“arising out of or in connection with this Agreement” (in 14.1)	Dropped from 14.1	A judgement call made for brevity. Clause 14.2 keeps the words because they set the reach of the cap. Add them back to 14.1 if you want the two to match exactly.
“even if the Supplier has been advised of the possibility of such loss or damage”	Deleted	The exclusion works whatever the Supplier knew. Knowledge decides which Hadley limb a loss falls in, not whether an express exclusion applies.
“Subject to Clause 14.1 and Clause 14.3”	Deleted	Clause 14.3 now says how the clauses fit together.
“total aggregate liability to the Customer in respect of any and all claims arising out of or in connection with this Agreement, howsoever arising”	“total aggregate liability for all claims under or in connection with this Agreement”	Same single cap (Section 4.3). “Howsoever arising” moves to 14.3.
“shall in no circumstances exceed an amount equal to the total Charges paid or payable by the Customer to the Supplier hereunder”	“is capped at the Charges paid or payable”	Same figure. “Charges” is a defined term, so who pays whom is already clear.
“during the period of twelve (12) months immediately preceding the date on which the event giving rise to the first such claim occurred”	“in the twelve (12) months before the event that gave rise to the first claim”	Same trigger, eight fewer words.
“Nothing in this Agreement shall be construed so as to limit or exclude the liability of either party for”	“They do not limit or exclude liability for”	A judgement call. The plain version speaks only to Clauses 14.1 and 14.2. If the Customer’s liability is capped elsewhere in the contract, keep the wider wording.
“any other liability which cannot lawfully be limited or excluded”	“anything else the law does not allow to be limited or excluded”	Same meaning in everyday words.

Four rows are judgement calls rather than pure tidying, and the table says so. Everything else changes the words, not the risk.

6. How to Negotiate the Cap

Most of the argument is about four things: how big the cap is, what sits outside it, which losses are excluded, and how the cap is measured. Each side wants something different on each.

6.1. If You Are the Supplier

Link the cap to what you earn. A cap measured by the charges keeps your risk in proportion to your reward. In Drax, the parties chose 150% of a year’s charges.
Exclude wasted expenditure by name, if that is the deal. After Soteria, a list of lost profits, revenue and savings will not do it. Expect resistance, because wasted spending is often the customer’s main loss when a project fails.
Keep the carve-outs to the legal minimum. Avoid a bare “negligence” carve-out (Triple Point). If you agree to carve out gross negligence or wilful misconduct, define both terms.
Check the cap against your insurance. A cap above your professional indemnity cover is uninsured exposure. For a fixed-sum cap, the cover available also counts towards reasonableness (Section 4.6).
Say whether indemnities sit inside the cap. An uncapped indemnity can do more damage than the claims the cap was meant to limit.

If you want wasted expenditure excluded, Clause 14.1 can say so in a few extra words:

14.1. The Supplier is not liable for indirect, special or consequential loss, or for loss of profits, revenue, business, anticipated savings, goodwill or wasted expenditure, whether that loss is direct or indirect.

6.2. If You Are the Customer

Put a floor under the cap. A twelve-month look-back gives a small cap for early failures. Ask for a fixed minimum, or the Drax approach of estimating a full year’s charges.
Keep “paid or payable”. Without “payable”, the cap falls each time you withhold an invoice in a dispute.
Name the losses you must be able to recover. Typical candidates are the cost of buying replacement services and the cost of restoring lost data. Make them recoverable direct losses, so the exclusion cannot reach them.
Ask for a separate, higher cap for your biggest risks. Data protection and confidentiality breaches can cost far more than a year’s charges. A separate cap, often called a super-cap, deals with this without removing the main cap.
Resist a wasted expenditure exclusion. If the project fails, money you have spent may be the only loss you can prove.

A floor and a list of recoverable losses might read like this:

14.2. The Supplier’s total aggregate liability for all claims under or in connection with this Agreement is capped at the greater of [one hundred thousand pounds (£100,000)] and the Charges paid or payable in the twelve (12) months before the event that gave rise to the first claim.

14.4. The following losses are recoverable as direct losses and are not excluded by Clause 14.1, but count towards the cap in Clause 14.2:

14.4.1 the reasonable cost of buying replacement services for the remaining term of this Agreement; and

14.4.2 the reasonable cost of restoring or recreating lost or corrupted Customer data.

The figure in square brackets is a placeholder. Set it by reference to the realistic size of a claim, not the size of the fees.

6.3. Compromises Worth Offering

Neither side gets everything. These trade-offs can unlock a stalled negotiation:

a cap set at a multiple of annual charges, with a fixed floor for early claims;
a super-cap for data protection and confidentiality claims, in place of unlimited liability;
wasted expenditure recoverable, but inside the cap; and
a short, defined list of recoverable losses, in exchange for a broad exclusion of everything else.

7. Checklist Before You Sign

Read the limitation clause against these questions. If the contract itself does not answer one, the clause needs work.

Is the cap one pot for all claims, or one per claim? Does the wording say which?
Is the cap measured by charges paid, charges paid or payable, or a fixed sum?
What would the cap be for a claim in the first three months? Is there a floor?
Does “consequential loss” stand alone, or are lost profits named? Does the clause say “whether direct or indirect”?
Is wasted expenditure excluded by name? Is that what both sides intend?
Which losses must you be able to recover, and does the contract say they are recoverable?
What sits outside the cap? If negligence, gross negligence or wilful misconduct is carved out, is each term defined?
Do the indemnities sit inside or outside the cap?
Do service credits and liquidated damages count towards the cap? In Triple Point, the Supreme Court held that liquidated damages for delay fell within it.
Does the cap fit within the supplier’s insurance cover?
Are death, personal injury, fraud and fraudulent misrepresentation left outside the cap?
Which law governs the contract, and does a statute such as the Unfair Contract Terms Act 1977 apply?

If you would like a second pair of eyes on a limitation clause before you sign, a document review gives you every issue rated high, medium or low, with replacement wording for each clause that needs it.

Key Takeaways

Point	What It Means	What to Do
Liability has several routes	Contract, negligence, misrepresentation, statute and restitution can all arise from one failure.	Make the clause apply however a claim arises.
“Consequential loss” is narrow	Under English law it usually means second-limb Hadley loss only. Direct lost profit is not caught.	Name lost profits and other losses expressly, and add “whether direct or indirect”.
Lists are read as written	In Soteria, wasted expenditure was not lost profit, revenue or savings.	Name every loss you mean to exclude, or to keep recoverable.
“Total liability” points to one cap	In Drax, the court found a single aggregate cap, not one per claim.	Say “aggregate” or “each claim”, and mean it.
The measuring period moves the number	A twelve-month look-back gives a small cap for early claims. “Paid” alone shrinks when invoices are withheld.	Use “paid or payable” and a fixed floor.
Carve-outs can swallow the cap	In Triple Point, “negligence” covered careless performance of the contract.	Keep carve-outs to the legal minimum and define the rest.
Some liability cannot be capped	Death or personal injury from negligence (UCTA 1977, s 2(1)) and a party’s own fraud (HIH).	Keep these carve-outs in every version.
Reasonableness may apply	Under UCTA 1977, ss 2(2), 3 and 11, unless ss 26 or 27 take the contract outside.	Check the governing law and match the cap to the insurance.
Plain English costs nothing	The same risk allocation fits in about half the words.	Rewrite, then check each change against the original.

Frequently Asked Questions

Does “Consequential Loss” Exclude Lost Profits?

Usually not under English law, unless the clause says so. Profit lost as a natural result of the breach is normally direct loss (Hotel Services v Hilton). Name lost profits expressly and add “whether direct or indirect”.

Is a Limitation of Liability Clause Enforceable?

Between businesses, usually yes, if the wording is clear. It cannot cover death or personal injury caused by negligence, or a party’s own fraud. Where the Unfair Contract Terms Act 1977 applies, the clause must also be reasonable, and the party relying on it must prove that.

What is a Typical Liability Cap?

There is no single market figure. Caps are usually a percentage or multiple of the charges, a fixed sum, or the greater of the two; in Drax it was 150% of a year’s charges. Set the figure by the realistic size of a claim and the insurance behind it.

Can You Cap Liability for Negligence?

Yes, for financial loss and damage to property, subject to the reasonableness test where it applies (UCTA 1977, s 2(2)). No, for death or personal injury (s 2(1)). Name negligence expressly so nobody can argue the cap does not cover it.

What is a Super-Cap?

A super-cap is a separate, higher cap for particular risks, such as data protection or confidentiality breaches. It sits alongside the general cap. The contract should say whether claims under the super-cap also use up the general cap.

About the Author

Jasjit Gill was called to the Bar of England and Wales in 1988 and is a legal adviser at Gill Business Law. Jasjit spent eight years in corporate finance at RHB Investment Bank in Malaysia, then served as in-house lawyer and executive director of a Hong Kong listed group. Since 1996, Jasjit has advised founders, owner-managed companies and investors on contracts, company matters, fundraising and acquisitions, and has negotiated limitation clauses from the client side as well as the adviser’s.

General information only. This article is general information about English law as at 8 November 2026. It is not legal advice, and reading it does not make you a client. The right answer depends on your contract, its governing law and your facts, so take advice before relying on it. Gill Business Law provides unreserved legal consultancy and is not a law firm; see the regulatory information.