How Much Should Your Liability Cap Be?

There is no number that is correct in the abstract. A cap that is sensible for a $2,000-a-year subscription may be inadequate for a contract where a failure could take the customer’s operations offline for a week.

The useful question is not only “what is normal?” It is: if this goes wrong in a plausible way, how much of the resulting exposure would this contract leave with each party? Contract price is one input. The scale and type of potential loss may be another.

Key takeaways: A liability cap should not be evaluated by its number alone. Read the monetary cap, damages exclusions, carve-outs, insurance, and other remedies together. The appropriate allocation depends on the transaction, plausible failure scenarios, and governing law. A negotiated cap may be treated differently from a complete release of liability, and some laws restrict limits involving particular conduct or statutory duties.

What a Limitation of Liability Provision Can Do

Contracts can limit liability in more than one way, and the provisions are frequently confused.

A monetary cap sets a ceiling. The ceiling may apply in the aggregate or separately by claim, event, year, order, statement of work, or another defined unit.

A damages exclusion removes specified categories of damages from recovery. The agreement may address consequential, incidental, special, or indirect damages and may separately name lost profits, lost revenue, loss of use, or lost data.

Those provisions may appear together or separately. A damages exclusion may also have a larger practical effect than the stated cap if it addresses the losses a party considers most significant. Whether a particular loss falls within an excluded category can itself become disputed.

Read the Cap and the Exclusions Separately

Read the agreement looking for both:

1. The cap itself — What is the ceiling? What is it measured against? Does it apply in the aggregate or to each claim, event, year, order, or statement of work?
2. The damages exclusions — Which categories of loss does the agreement say are unavailable before the cap is considered?

A contract can have a comfortable-looking cap and still exclude losses most likely to exceed it. That may reflect a deliberate allocation of risk rather than a drafting error.

Carve-Outs: Exceptions to the General Cap

Negotiated contracts may place specified obligations or claims outside the general cap, leave them uncapped, or subject them to a separate cap. Depending on the agreement and the parties’ risk allocation, the list may address indemnification obligations, confidentiality breaches, intellectual-property claims, data-security incidents, payment obligations, or other specified risks. None of those categories is automatically required to be carved out merely because it appears on the list.

Two things are worth understanding:

They may cut both ways. A mutual carve-out may expand each party’s exposure. A one-way carve-out may allocate a particular risk to only one party.

They can narrow the cap substantially. Read the list and ask which plausible claims would remain subject to the general cap.

A payment-obligation exception may simply confirm that amounts already owed under the agreement are not reduced by the liability cap. It does not necessarily create uncapped damages liability.

Whether a limitation applies depends on its wording, the type of claim, the transaction, and the governing law. Courts may treat a negotiated cap differently from a complete release of liability, and some laws restrict attempts to limit responsibility for particular kinds of conduct.

For example, California law restricts contractual limits involving fraud, willful injury, and violations of law. That does not mean every California limitation clause is invalid; it means the clause and the claim must be analyzed together.

Mutual or One-Way?

A mutual cap limits both parties. A one-way cap limits only one.

Neither structure is automatically appropriate or inappropriate. A vendor providing a low-cost, high-volume service may seek a cap tied to the economics of the transaction. A customer relying on that service for a core business process may assess the exposure differently. The question is whether the allocation matches the parties’ obligations and the risks each is being asked to bear, not symmetry for its own sake.

When the Cap Does Not Match the Risk

Do not look only at contract price. Model plausible failure scenarios: an outage, a security incident, a missed deliverable, or an infringing component. Estimate the operational and financial effect on the business, then compare that exposure to the cap, the exclusions, the carve-outs, available insurance, and any other remedies.

If the cap is a fraction of the modeled loss, the contract may leave a substantial portion of that exposure with the business. That may still be an acceptable commercial decision, but it should be a deliberate one.

That comparison can also make a negotiation more concrete. “Your cap is too low” invites an abstract disagreement. A specific failure scenario and a reasoned estimate of its effect provide a basis for discussing the allocation.

What to Look at in Your Own Contract

• What is the cap measured against, and over what period?
• Is the cap aggregate, or does it reset by claim, event, year, order, or statement of work?
• Which damage categories are excluded before the cap applies?
• Which obligations or claims sit outside the general cap, and are they subject to a separate cap?
• Is the cap mutual, and if not, what risk allocation explains the difference?
• Does indemnification sit inside or outside the cap?
• Is there a separate cap for data-security or confidentiality matters?
• Are payment obligations excluded merely to preserve amounts already due?
• What law governs, and how does it affect the clause and the claims it may cover?

How Arizona, California, and Texas Can Differ

Governing law matters because states do not necessarily analyze every liability limitation in the same way.

Arizona: Arizona courts generally respect commercial risk allocation, but the wording, bargaining process, assent, and public policy still matter. In 1800 Ocotillo, LLC v. WLB Group, Inc., the Arizona Supreme Court held that the liability cap before it was not contrary to public policy; the decision did not make every liability limitation automatically enforceable.

California: California Civil Code section 1668 restricts contractual attempts to avoid responsibility for fraud, willful injury, and violations of law. In 2025, the California Supreme Court held that section 1668 invalidates damages limitations for willful injury to person or property, while distinguishing those claims from a pure breach of contract.

Texas: Texas strongly protects freedom of contract and generally enforces limitation provisions in commercial agreements. The analysis may differ when a provision operates as a prospective release of a party’s own negligence, and the exact wording and presentation can matter.

This is only a high-level comparison. The clause, claim, transaction, and governing law must be reviewed together.

How Accord & Shield Legal Helps

Accord & Shield Legal reviews and negotiates commercial contracts and technology agreements for businesses in Arizona, California, and Texas, including the risk-allocation provisions that determine what remedies may remain available when performance fails. For software-specific agreements, see our SaaS and software agreement practice.

Nadine Deeb is admitted in Arizona, California, and Texas. Before private practice, she served as the sole in-house legal resource at a California technology company, supporting a workforce operating across nineteen states.

This article is general information from Accord & Shield Legal, PLLC and is not legal advice. Reading it does not create an attorney-client relationship. For guidance on your specific situation, please consult a qualified attorney.