# Liability limitation

Source: https://contracko.com/glossary/liability-limitation

# Liability limitation

A contract clause that caps or excludes the damages one party can recover from the other.

## Definition

Liability limitation restricts, by contract, the amount and types of damages a party must compensate. This is done through a financial cap, exclusion of consequential loss, a time bar on claims, or a combination of these. Under Dutch law such limitations are generally valid between businesses, but a court may set one aside where relying on it would be unacceptable by standards of reasonableness and fairness, or in cases of intent or gross negligence.

## Example

> An IT supplier caps its liability at the annual contract fee and excludes all consequential damages such as lost profit.

## Why this is a business risk

A liability cap that looks reasonable when a contract is signed can become grossly inadequate when an incident actually occurs, leaving you holding losses far beyond what you can recover. Accepting a poorly worded cap without checking whether it covers all damage categories means consequential losses such as lost profit or business interruption may be entirely excluded. Businesses that manage a large portfolio of supplier contracts risk inconsistent cap levels, with some contracts carrying exposure that dwarfs the contract value.

## How to manage it

- Before signing, identify which categories of loss you could actually suffer and check whether each is covered or excluded by the cap.
- Negotiate a cap level that reflects the realistic downside of a failure, not just the annual contract fee.
- Check whether your counterparty's professional indemnity or cyber insurance covers the losses the contractual cap does not.
- Keep a record of the agreed cap level in each contract so you can benchmark exposure across your portfolio at renewal.
- Review cap levels whenever contract scope, fees or risk profile change significantly, as the original figure may no longer be appropriate.

### How Contracko helps

Contracko's AI review extracts liability caps and exclusion carve-outs from every contract and surfaces them as structured metadata, so you can see at a glance whether a cap is set as a fixed sum, a multiple of fees, or unlimited. The reporting layer lets you compare cap levels across your supplier portfolio and flag contracts where the ceiling is disproportionate to the risk.

## Legal references

- [BW 6:248 Dutch Civil Code: reasonableness and fairness Dutch law](https://wetten.overheid.nl/BWBR0005289)
- [BW 6:95 Dutch Civil Code: extent of damages Dutch law](https://wetten.overheid.nl/BWBR0005289)

Unless marked otherwise, references are to Dutch law (Burgerlijk Wetboek, the Dutch Civil Code); EU instruments such as the GDPR apply across the EU. This is general information, not legal advice. Other jurisdictions treat these concepts differently. Verify the current text and your situation with a qualified lawyer.

## Relevant for

[IT Services](https://contracko.com/industries/it-services)[Software & SaaS](https://contracko.com/industries/software-saas)[Consulting](https://contracko.com/industries/consulting)

## Related clauses

- [Limitation of Liability Clause](https://contracko.com/clause-library/limitation-of-liability)
- [Indemnification Clause](https://contracko.com/clause-library/indemnification)

## Related terms

- [Exoneration clause](https://contracko.com/glossary/exoneration-clause)
- [Consequential damages](https://contracko.com/glossary/consequential-damages)
- [Direct damages](https://contracko.com/glossary/direct-damages)
- [Liability](https://contracko.com/glossary/liability)

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## Frequently asked questions

Common questions about this term.

- **Q:** Can a liability cap always be enforced?
  **A:** Not always. A court can set the cap aside where invoking it is unacceptable by standards of reasonableness and fairness, particularly in cases of intent or gross negligence.

- **Q:** What is the difference with an exoneration clause?
  **A:** Liability limitation is the broad concept of capping recoverable damages; an exoneratiebeding is the specific contractual clause that excludes or limits that liability.

- **Q:** Does a liability cap also limit indemnity obligations?
  **A:** Only if the contract expressly says so. Indemnities are often carved out of liability caps, which means they can create open-ended exposure unless they are separately capped or linked to the overall ceiling.

- **Q:** Can a liability cap be set below the contract value?
  **A:** Yes, and it often is in supplier terms. Whether such a low cap is enforceable between businesses depends on whether relying on it is acceptable by standards of reasonableness and fairness given the nature and scale of the damage.

- **Q:** How does a time bar on claims interact with the liability cap?
  **A:** They are separate mechanisms: the cap limits the amount recoverable, while a time bar extinguishes the right to claim at all if notice is not given within a set period. Both are common in the same contract, and both are subject to the reasonableness test.

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