TRW & Co · Commercial contracts
Limitation of Liability Clauses: Drafting for Enforceability
A limitation of liability clause caps or excludes what a party must pay for breach of contract. English courts usually enforce such clauses between businesses, but some liabilities cannot be excluded, standard-terms exclusions must be reasonable under UCTA, and unclear wording is read against the drafter's expectations. Here is how to draft one that works.
Key pointMost liability disputes turn on interpretation, not reasonableness: excluding 'indirect or consequential loss' may not exclude ordinary lost profit, and an undefined 'negligence' carve-out can remove most claims from the cap.
At a glance
Cannot exclude
Liability for death or personal injury caused by negligence cannot be excluded under UCTA section 2(1), and a party cannot exclude liability for its own fraud.
Reasonableness test
Exclusions in one party's written standard terms, and of negligence liability for other loss, must be fair and reasonable when the contract was made.
Burden of proof
The party relying on the clause must prove it is reasonable; the court weighs bargaining power, insurance availability and resources to meet the liability.
Lost profit wording
Courts read 'consequential loss' narrowly, so lost profit, revenue, savings and wasted expenditure should each be named if they are meant to be excluded.
Recent case law
Triple Point, Soteria v IBM and Drax v Wipro show how carve-outs, loss categories and cap structure decide the value of real claims.
Swipe or scroll →
The short answer: will your limitation of liability clause hold?
A limitation of liability clause caps or excludes what one party must pay if it breaches a contract. Under English law, a well-drafted limitation of liability clause in a business contract will usually be enforced as written. Courts respect commercial bargains between parties of similar strength, especially where the contract was negotiated with legal advice.
Enforceability can fail in three ways. Some liabilities cannot be excluded at all, such as liability for death or personal injury caused by negligence. Other exclusions must pass a reasonableness test under the Unfair Contract Terms Act 1977, particularly where one party contracts on the other's standard terms. And clauses are read strictly: ambiguous wording may be interpreted in a way neither side expected, or may simply not cover the loss claimed.
The practical lesson is that drafting precision matters more than length. A cap that clearly states what it covers, how much, and over what period is far more valuable than a long clause with unclear carve-outs.
Caps, exclusions and other ways to limit liability
"Limitation of liability" covers several distinct tools, often combined in one clause:
- Financial caps: an aggregate cap over the life of the contract, a per-claim cap, or an annual cap, often set by reference to fees paid or payable.
- Exclusions of types of loss: commonly loss of profit, revenue, goodwill, data or anticipated savings, and "indirect or consequential loss".
- Time bars: a requirement to notify claims within a set period, shorter than the statutory limitation period.
- Exclusive remedies: provisions making service credits, repair or re-performance the sole remedy for certain failures.
- Carve-outs: liabilities to which the cap does not apply, such as fraud, death or personal injury, breach of confidentiality, data protection or IP indemnities.
Contractual time bars deserve particular care. A clause requiring claims to be notified within a short period, with specified details, can defeat an otherwise valid claim if the notice is late or incomplete. Courts treat such notice provisions as conditions to be complied with strictly where the wording is clear, so both parties should diarise them and the notifying party should follow the prescribed form exactly. Where a time bar appears in standard terms, it may also be tested for reasonableness under UCTA.
Each tool raises its own interpretation questions. Our guide to business terms and conditions explains how these clauses fit into standard terms more generally.
The legal framework: UCTA, the Consumer Rights Act and common law
Liabilities you cannot exclude
Under section 2(1) of the Unfair Contract Terms Act 1977 (UCTA), a business cannot exclude or restrict liability for death or personal injury resulting from negligence. The common law also prevents a party from excluding liability for its own fraud. Certain implied terms in sale of goods contracts, such as those about title, cannot be excluded either.
The reasonableness test
Other exclusions must satisfy the requirement of reasonableness where UCTA applies. That includes exclusions of liability for negligence causing other loss, and, under section 3, exclusions in contracts where one party deals on the other's written standard terms of business.
Under section 11, the term must have been fair and reasonable given the circumstances known or contemplated when the contract was made. For a cap at a specified sum, the court considers the resources available to meet the liability and how far insurance cover was available. The party relying on the clause must prove it is reasonable. Schedule 2 lists further guidelines, including relative bargaining power and whether the customer knew of the term.
International and consumer contracts
UCTA's controls do not apply to certain international supply contracts for goods under section 26. Consumer contracts are governed instead by the Consumer Rights Act 2015, which applies a fairness test and contains its own bans on excluding liability for negligently caused death or personal injury.
| Liability | Can it be excluded or capped? | Source |
|---|---|---|
| Death or personal injury caused by negligence | No | UCTA section 2(1) |
| Fraud or fraudulent misrepresentation | No, for a party's own fraud | Common law |
| Other loss caused by negligence | Only if reasonable | UCTA sections 2(2) and 11 |
| Breach of contract on one party's written standard terms | Only if reasonable | UCTA sections 3 and 11 |
| Breach of a fully negotiated bespoke contract | Generally yes, subject to clear wording | Freedom of contract and interpretation rules |
| Misrepresentation | Only if reasonable | Misrepresentation Act 1967 section 3, applying the UCTA test |
How courts interpret a limitation of liability clause: recent case law
Courts now apply ordinary principles of contractual interpretation to exclusion and limitation clauses between commercial parties, reading the words in their context. But they still start from the position that parties do not lightly give up valuable rights, so clear words are needed to exclude a remedy the law would otherwise provide.
Carve-outs can swallow the cap
In Triple Point Technology v PTT [2021] UKSC 29, a software contract capped the supplier's liability but stated that the cap did not apply to liability resulting from "fraud, negligence, gross negligence or wilful misconduct". The Supreme Court gave "negligence" its natural meaning, including negligent breach of contract, which removed from the cap the customer's damages for breach of the duty of skill and care. The court also held that liquidated damages for delay accrued before termination remained recoverable.
Wasted expenditure is not lost profit
In Soteria Insurance v IBM [2022] EWCA Civ 440, the Court of Appeal held that a clause excluding loss of profits, revenue and savings did not exclude a claim for wasted expenditure on a failed IT project. Clear words would be needed to exclude that type of claim. The result allowed the customer's wasted expenditure claim to proceed, subject to the contractual cap.
Single cap or multiple caps
In Drax Energy Solutions v Wipro [2023] EWHC 1342 (TCC), the parties disagreed whether a clause created one aggregate cap or a separate cap for each claim. The court found a single aggregate cap, but accepted the other reading was possible. The drafting cost both sides a trial on a point that a few clear words would have settled.
"Consequential loss" means less than many assume
English courts have traditionally read "indirect or consequential loss" as covering only losses within the second limb of the remoteness rule in Hadley v Baxendale: losses arising from special circumstances known to both parties. Ordinary lost profits flowing naturally from the breach are often direct losses. A clause that aims to exclude lost profit should say so expressly.
The most common surprise in liability disputes is not that a cap failed the reasonableness test. It is that the words did not mean what one party assumed they meant.
Negotiating the clause: supplier and customer positions
A limitation of liability clause is a price term in disguise. The supplier wants exposure that its margin and insurance can bear; the customer wants a remedy that matches the damage a failure could cause. Understanding both positions helps reach a clause that survives a dispute.
What suppliers typically seek
- An aggregate cap linked to fees, often for a twelve-month period.
- Express exclusion of lost profit, revenue, data, goodwill and wasted expenditure.
- Service credits and liquidated damages counting towards the cap and acting as the sole remedy for the failures they cover.
- Short contractual time bars for notifying claims.
What customers typically seek
- A higher cap, or a fixed minimum, reflecting the real cost of failure rather than the contract price.
- Recovery of wasted expenditure, remedial costs and the cost of procuring a replacement service.
- Uncapped or separately capped liability for data protection breaches, confidentiality, IP infringement and wilful abandonment of the contract.
- Clarity that indemnities sit outside the general cap.
The outcome often depends on bargaining power, but a clause that reflects a genuine negotiation is far more likely to be upheld as reasonable if it is ever challenged. Where data is involved, the allocation of regulatory risk deserves particular attention, as fines and claims can exceed the contract value; our guide to SaaS agreements covers this in more detail.
Drafting an enforceable limitation of liability clause: step by step
- Map the risks. Identify the realistic ways the contract can go wrong and the losses each party would suffer, including lost profit, wasted spend, regulatory fines and third-party claims.
- Check insurance. Align the cap with available professional indemnity, product or cyber cover. Insurance availability is a statutory factor in reasonableness.
- Set the cap clearly. State whether it is aggregate, per claim or per year, what it is measured against (fees paid, fees payable, a fixed sum), and the period.
- Name excluded losses expressly. List the heads of loss excluded, such as loss of profit, rather than relying on "indirect or consequential loss".
- Draft carve-outs precisely. Decide which liabilities sit outside the cap and whether each is unlimited or subject to a separate, higher cap. Avoid broad words such as "negligence" unless intended.
- Address interaction with other clauses. Make clear whether indemnities, liquidated damages and service credits count towards the cap.
- Record the negotiation. Keep evidence of the negotiation, alternative pricing offered and legal advice, which can support reasonableness if challenged.
A cap tied to "fees paid in the twelve months preceding the claim" can be very low early in a contract and very different from the parties' expectations. Consider a floor, such as the greater of a fixed sum and fees paid, so that the limitation of liability clause works at every stage of the relationship.
Illustrative scenario: an IT services contract
This scenario is illustrative only and does not describe any real party or case.
A mid-sized UK retailer signs a supplier's standard terms for a new e-commerce platform. The terms cap liability at fees paid in the preceding twelve months and exclude "indirect or consequential loss, including loss of profit". The platform goes live late and crashes during the peak sales season.
The retailer claims lost sales, the cost of emergency fixes and its wasted spend on the failed project. The supplier relies on the cap and exclusion. Because the contract is on the supplier's written standard terms, section 3 of UCTA applies and the supplier must show the cap is reasonable. The retailer argues that it had no real chance to negotiate and that the supplier could have insured.
Even if the cap stands, the exclusion of loss of profit does not obviously cover wasted expenditure, following the approach in Soteria. The retailer's position on remedial costs and wasted spend is materially stronger than its claim for lost sales. A clearer clause, negotiated at the outset, would have avoided much of the argument.
Risks and common drafting mistakes
Relying on "indirect or consequential loss" to exclude lost profit
Because English courts tend to read consequential loss narrowly, a clause excluding only indirect or consequential loss may leave the supplier exposed to ordinary lost profit claims. If the parties intend to exclude lost profit, revenue, savings or wasted expenditure, each should be listed expressly. Equally, a customer negotiating the clause should consider which of those heads it genuinely needs to preserve, and say so.
Unclear aggregate versus per-claim caps
Phrases such as "in respect of each claim" combined with "in aggregate" in the same sentence invite disputes about whether one cap or many apply. The difference can multiply exposure. Draft the cap as a single sentence stating that total aggregate liability under or in connection with the contract shall not exceed a defined amount, and define how claims arising from the same event are treated.
Carve-outs that are too broad
Carving out "negligence", "breach of law" or "wilful default" without definition can remove most realistic claims from the cap, as Triple Point illustrates. Each carve-out should be tested by asking which realistic claims it would capture. Where a carve-out is necessary, consider a separate, higher cap instead of unlimited liability, and define terms such as wilful default precisely.
Ignoring reasonableness on standard terms
Suppliers who contract on their own standard terms must be ready to prove that their limitation of liability clause is reasonable. Very low caps, caps that leave the customer with no meaningful remedy, or exclusions buried in small print are vulnerable. Offering customers a choice, such as a higher cap at a higher price, and reviewing caps against insurance cover both strengthen the position.
Cross-border contracts
Many international contracts choose English law precisely because English courts enforce commercial bargains predictably. Where a contract with a party in Bangladesh, the Gulf or Asia is governed by English law, the cap will usually be interpreted under English principles even if enforcement happens abroad.
Two points need care. First, UCTA has provisions on choice of law, and the exemption for international supply contracts applies only to contracts that meet its specific conditions. Second, a cap that is valid in England may be treated differently by a foreign court applying its own mandatory rules. Our team advising on English law contracts with Bangladeshi parties considers both.
What to do next: a checklist
- Identify every limitation of liability clause, indemnity and liquidated damages clause in the contract and how they interact.
- Check whether the contract is on one party's written standard terms.
- Confirm the cap amount, structure and period, and test it against realistic loss scenarios.
- List the excluded heads of loss expressly and check carve-outs for unintended breadth.
- Align the cap with insurance cover and keep a record of negotiations.
- If a dispute has arisen, read our guide to breach of contract remedies before taking a position on the cap.
TRW & Co's commercial contracts lawyers in London draft and negotiate liability provisions, including for IT and outsourcing agreements, and our contract disputes team advises when caps are tested in litigation. To discuss a contract, contact our London office.
Frequently asked questions
01Are limitation of liability clauses enforceable in the UK?
Generally yes, between businesses. English courts respect negotiated allocations of risk and will enforce a clearly drafted cap or exclusion. The limits are that liability for death or personal injury caused by negligence and a party's own fraud cannot be excluded, and that certain exclusions, including those in one party's written standard terms, must satisfy the reasonableness test in the Unfair Contract Terms Act 1977. Consumer contracts are subject to the stricter fairness rules of the Consumer Rights Act 2015.
02What makes a limitation of liability clause reasonable under UCTA?
The question is whether the term was fair and reasonable given what the parties knew or contemplated when they contracted. For a cap at a specified sum, the court considers the resources available to meet the liability and whether insurance was available. Schedule 2 guidelines include relative bargaining power, whether the customer could have contracted elsewhere without the term, and whether it knew of the term. The party relying on the clause must prove it is reasonable.
03Does excluding consequential loss exclude loss of profit?
Not necessarily. English courts have traditionally interpreted 'indirect or consequential loss' as covering only losses arising from special circumstances, under the second limb of Hadley v Baxendale. Lost profits that flow naturally from a breach are often treated as direct loss and therefore not excluded. If the parties want to exclude loss of profit, revenue, savings or wasted expenditure, the clause should list them expressly.
04Can a liability cap apply to fraud?
No. Under English law, a party cannot rely on a contract term to exclude or limit liability for its own fraud or fraudulent misrepresentation. Most well-drafted clauses expressly carve fraud out of the cap. Whether a party can limit liability for the fraud of its employees or agents is more complex and depends on very clear wording, so this should be addressed specifically if it matters.
05What is the difference between an aggregate cap and a per-claim cap?
An aggregate cap limits total liability for all claims under the contract to a single amount. A per-claim cap applies separately to each claim, so total exposure rises with the number of claims. The difference can be very large in long-term contracts. Courts have had to decide which was intended where wording was unclear, as in Drax v Wipro. The clause should state expressly which structure applies and how related claims are grouped.
06Should liquidated damages count towards the liability cap?
That is a commercial choice, but the contract should say so expressly. In Triple Point v PTT, the Supreme Court had to decide whether accrued liquidated damages for delay were subject to a cap. Suppliers usually want liquidated damages to count towards the cap and to be the sole remedy for delay. Customers often want them outside the cap, or subject to a separate cap, so that general damages remain available for other breaches.
Sources and official materials
- Unfair Contract Terms Act 1977 — Statutory controls on exclusion and limitation clauses, including sections 2, 3 and 11
- Consumer Rights Act 2015 — Fairness rules for consumer contract terms
- Triple Point Technology v PTT [2021] UKSC 29 — Supreme Court on cap carve-outs and liquidated damages
- Soteria Insurance v IBM United Kingdom [2022] EWCA Civ 440 — Court of Appeal on wasted expenditure and loss of profit exclusions
- Drax Energy Solutions v Wipro [2023] EWHC 1342 (TCC) — High Court on single aggregate versus multiple caps
General information only, current as at 21 October 2026. It is not legal advice and does not create a solicitor–client relationship. It reflects the law of England and Wales unless stated otherwise; Scotland and Northern Ireland have separate legal systems, and the law changes frequently. Check current official sources and take advice on the facts of your matter.