Liability cap negotiations are protracted, emotional and surprisingly disconnected from actual risk. Yet the underlying objective is usually straightforward: most organisations are not trying to eliminate risk, they are trying to allocate it in a way that is commercially acceptable and insurable.
So, what is “market” when it comes to liability caps?
(Please note, the norms described below reflect primarily English law and UK commercial practice, though the principles are broadly applicable across many jurisdictions.)
The general liability cap
In a typical technology or commercial contract, the supplier’s total liability is capped at a multiple of the fees. Common benchmarks include:
- 100% of fees paid in the previous 12 months – the most widely used starting point.
- 125% to 150% of annual fees – a common customer ask.
- 200% of annual fees – seen in higher-risk or business-critical services.
- 100% of total contract value – more common in shorter contracts but for multi-year deals this can represent a significantly higher exposure than an annual fee cap, so the distinction matters.
The appropriate level depends on contract value, criticality of the service, the supplier’s bargaining position and the availability of insurance. What is generally not market is a cap that bears no reasonable relationship to the contract value or the risks being assumed.
An often-overlooked point is whether the cap applies in aggregate across all claims or separately to individual claims. A 100% annual fee cap applied on a per-claim basis can create dramatically greater exposure than the same cap applied in aggregate.
Enter the supercap
Rather than applying a single cap to every potential claim, parties increasingly agree that certain categories of risk deserve a higher level of protection. This is the supercap.
Common supercap categories include data protection breaches, confidentiality breaches, intellectual property infringement and cybersecurity incidents. Regulatory fines are also sometimes raised in this context but, whilst such clause are not automatically unenforceable, the ability to recover regulatory fines from another party remains uncertain and highly fact-dependent. Crucially, enforceability depends on whether the party seeking to recover the fine was itself blameless or partly culpable for the regulatory breach. Public policy concerns about undermining the deterrent effect of regulatory penalties may render such clauses unenforceable where the claiming party committed its own wrongdoing but exceptions exist for strict liability offences where the party incurred liability without fault through another’s actions.
The supercap structure is often easier to negotiate precisely because it distinguishes between ordinary commercial failures and genuinely high-impact events. Rather than fighting for blanket unlimited liability, targeted supercaps tend to achieve better practical protection with less resistance.
As a practical matter, the most successful liability structures are often those that broadly align with available insurance coverage. A liability position that cannot realistically be insured is often difficult to negotiate and sustain commercially.
The unlimited liability question
Many organisations instinctively push for unlimited liability on issues they consider fundamental. In practice, unlimited liability is rarely accepted in mainstream technology and commercial agreements since unlimited exposure is difficult to quantify, difficult to insure and often disproportionate to the economics of the deal.
Where unlimited liability does commonly appear is for:
- Death or personal injury caused by negligence
- Fraud or fraudulent misrepresentation
- Wilful misconduct or deliberate breach
The first two categories cannot be excluded or limited as a matter of English law. Wilful misconduct is a matter of contract rather than statute but courts will scrutinise any attempt to limit liability for deliberate wrongdoing.
Intellectual property infringement and/or breach of confidentiality are sometimes subject to unlimited liability but many suppliers will instead seek a separate supercap rather than accepting unlimited exposure.
Beyond these categories, unlimited liability is generally more aspiration than reality.
The battle over excluded losses
Caps are only part of the story. Equally important are the categories of loss excluded altogether.
Suppliers typically seek to exclude indirect and consequential losses, including indirect loss of profit, loss of revenue, loss of business opportunity and loss of anticipated savings. Customers resist because many of their most significant potential losses fall into these categories.
The key drafting point, often overlooked, is that loss of profit and loss of revenue are not automatically indirect losses. Under English law, they may be direct losses depending on the circumstances. Whether they are recoverable therefore depends heavily on the drafting.
Many contracts exclude only indirect loss of profit, leaving direct loss of profit recoverable. A well-advised customer should push for exactly that distinction.
The typical compromise: exclude indirect and consequential losses, preserve direct losses and create specific carve-outs where the risk profile justifies it. The drafting matters enormously. Two clauses that appear similar can produce very different outcomes in practice.
The question that matters most
Instead of asking “Can we get a higher cap?”, the more productive question is:
“What specific risk are we trying to protect against, and is the current liability structure adequate for that risk?”
That shift in thinking transforms a difficult negotiation into a constructive discussion about risk allocation.
The best limitation of liability clauses are not the ones that transfer all risk to the other party, they are the ones that allocate risk in a way that both parties can understand, manage and ultimately live with.
Further information
If you have any questions regarding this blog, please contact Christopher Perrin in our Corporate, Commercial & Finance team.
