What Is a Limitation of Liability Clause?
A limitation of liability clause caps the amount one party can recover from the other if something goes wrong. It typically sets a maximum financial ceiling — often linked to the contract value or a fixed sum — and may also exclude certain types of loss entirely, such as loss of profit or indirect damages.
These clauses are standard in commercial contracts and generally enforceable between businesses — but they are subject to statutory controls, primarily under the Unfair Contract Terms Act 1977 (UCTA) and, in consumer contracts, the Consumer Rights Act 2015.
The UCTA Reasonableness Test
Under UCTA 1977, a business-to-business limitation of liability clause must satisfy a "reasonableness" test to be enforceable. UK courts assess reasonableness at the time the contract was entered into, not with hindsight. Relevant factors include the bargaining strength of each party, whether the excluding party offered any alternatives, and whether the party knew or ought to have known of the limitation.
What Cannot Be Excluded Under UK Law
Regardless of what a contract says, certain liabilities cannot be limited or excluded in UK law:
- Death or personal injury caused by negligence
- Fraud or fraudulent misrepresentation
- Breach of implied terms under the Sale of Goods Act or Consumer Rights Act (in consumer contracts)
- Liability under certain financial services regulations
Common Red Flags in Liability Clauses
- Cap set at a token amount — such as £1 or one month's fees — that bears no relationship to actual potential loss
- Blanket exclusion of all indirect or consequential loss, even where such loss was foreseeable at the time of contracting
- Indemnity obligations carved out of the liability cap, creating unlimited exposure through the back door
- Cap applies asymmetrically — protecting only one party
- No carve-out for wilful misconduct or gross negligence
How to Negotiate a Liability Cap
A fair liability cap is typically set at the total contract value or 12 months' fees — whichever is greater. Push back against caps set below this threshold, particularly where you are delivering a service that could cause significant downstream loss if it fails. Ensure wilful misconduct and gross negligence are carved out of any cap, and that the cap is mutual rather than one-sided.