What follows are our general observations and opinions about limitation of liability clauses in California commercial contracts. This is not legal advice, it is not a definitive statement of California law, and every agreement depends on its own terms.
A limitation of liability clause caps what one side can recover from the other when things go wrong. It is the provision that most often decides the real economics of a commercial dispute, and it is frequently the last thing negotiated and the least well understood.
Most clauses do two separate jobs at once, and it is worth reading them as two. The first excludes whole categories of loss — typically consequential, indirect, special and incidental damages, and often lost profits by name. The second imposes a monetary ceiling on whatever survives that exclusion, commonly expressed as fees paid over some preceding period. Either can be decisive on its own.
The consequential damages exclusion does the heavy lifting
In our experience this is where the money usually goes. Direct damages in a services or supply relationship are often modest — a refund, the cost of getting the work redone. The loss that actually hurts is the downstream loss: the customers lost while a system was down, the contract missed because a delivery did not arrive, the profit that never materialised.
Excluding consequential damages removes precisely that. The distinction between direct and consequential loss is also genuinely slippery, and reasonable people argue about which side of the line a given loss falls on. Where a particular category of loss matters to you, we think it is far better to name it explicitly — as recoverable or as excluded — than to leave it to that argument.
One drafting point worth watching: an exclusion of lost profits, read literally and broadly, can swallow the core benefit of the bargain in a contract whose entire purpose was to generate profit. Whether that is intended is a commercial question, but it should be an intended one.
What California will not let you disclaim
Our reading of Civil Code section 1668 is that a contract cannot exempt a party from responsibility for their own fraud, wilful injury to another, or violation of law, whether wilful or negligent. That sets an outer boundary regardless of how the clause is drafted.
Beyond that statutory floor, our general understanding is that ordinary negligence can be limited between commercial parties, but that clarity is required — a clause intended to cover a party’s own negligence should say so rather than rely on general language. Attempts to disclaim liability for gross negligence or wilful misconduct sit on much shakier ground, which is why well-drafted clauses usually carve those out expressly rather than testing the point.
The carve-outs are the negotiation
Almost every meaningful limitation clause has exceptions, and the list is where the real bargaining happens. The ones we see most often excluded from the cap are indemnification obligations, breaches of confidentiality, infringement of intellectual property, gross negligence and wilful misconduct, breach of data protection commitments, and payment obligations.
The interaction with indemnity deserves particular care. If the indemnity is carved out of the cap, the limitation does not constrain what is frequently the largest exposure in the agreement. That may be the correct commercial outcome — a capped intellectual property indemnity is often worth little — but it should be a decision reached deliberately, not a by-product of two templates being merged.
Whether the cap is worth anything
A cap expressed as “fees paid in the twelve months preceding the claim” behaves very differently depending on when the problem surfaces. In month two of a new relationship that figure may be trivial. On a long-running arrangement it may be substantial. If the risk you are worried about is front-loaded — a botched implementation, a failed migration — a trailing-twelve-months cap gives you very little.
Alternatives worth considering are a fixed dollar figure, a multiple of annual fees, or a cap tied to the insurance actually carried. That last one has the merit of being fundable: a cap far exceeding the counterparty’s insurance and assets is a number on a page rather than a recovery.
Mutuality, and reading the clause in company
Limitation clauses often arrive one-sided in the drafting party’s favour. Sometimes that reflects genuine risk allocation — a vendor charging modest fees cannot sensibly accept unlimited exposure. Often it is simply whose template was used. Where the risks are broadly mutual, we generally push for the limitation to run both ways.
And as with indemnity, this provision cannot be assessed alone. The limitation, the indemnity and the insurance requirements form a single risk-allocation package. We have seen agreements where the limitation was negotiated hard, the indemnity was carved out of it entirely, and the net effect was a cap that constrained almost nothing that mattered.
Talk to us
If you are negotiating a limitation of liability, or trying to work out what one you already signed actually leaves you with, call us at (310) 556-9692. Contract review and drafting is transactional work, so we handle it on an hourly or flat-fee basis rather than on contingency, and we will give you a cost estimate before we start.
Related reading: our contract review and drafting resources, plus what an indemnity clause actually commits you to, business purchase and sale agreements, and commercial lease negotiation.
This article reflects our own general views and opinions and is offered for information only. It is not legal advice, it is not a definitive statement of California law, and reading it does not create an attorney-client relationship between you and our firm. If a limitation of liability provision affects an agreement you are in, please speak with a lawyer about your particular contract.
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