limitations of liability
Definition
A limitations of liability clause is a section in a contract that caps how much money one party can owe the other if something goes wrong. For example, a contract might say that even if a vendor's mistake costs you $500,000, you can only sue them for a maximum of $10,000. Businesses use these clauses to protect themselves from catastrophic financial exposure when deals go sideways.
Example
You hire a software company to build your online store, and their system crashes on your busiest shopping day, costing you $200,000 in lost sales, but their contract limits their liability to the $5,000 you paid them for the project.
Watch Out
Before signing any contract with a limitations of liability clause, make sure you understand the cap amount, because if a vendor causes serious damage to your business, that ceiling could leave you absorbing most of the financial pain yourself.
See which terms appear in your contract?
This definition is for informational purposes only and does not constitute legal advice. Please consult with a licensed attorney for legal guidance.