How liability caps and exclusions work – and what to check before you sign
Every commercial contract allocates risk, and the limitation of liability clause is where most of that allocation happens. It is also the clause most often skimmed, partly because it is written in dense language and partly because its effect only becomes visible at the worst possible moment.
The consequences are not marginal. In one case a claim pleaded at many times the figure was held to be limited to a £1 million cap; in another, a claim for some £24.6 million was struck out, as formulated, by a single exclusion. Subject to the Unfair Contract Terms Act 1977, English law gives commercial parties wide freedom to allocate risk between themselves, and the courts will generally hold them to what they wrote – which makes reading the clause properly before signature the only reliable protection.
This article looks at how these clauses work in business-to-business contracts governed by the law of England and Wales, and at the points most worth checking.
The three moving parts
Almost every liability clause does three things, and it helps to read it in that order.
First, it excludes certain categories of loss altogether – typically loss of profit, loss of revenue, loss of business or goodwill, and “indirect” or “consequential” loss. Second, it caps whatever survives that exclusion, usually at a fixed sum or a figure tied to the charges paid under the contract. Third, it carves out liabilities that sit outside the exclusion and the cap, either because the law does not permit their exclusion or because the parties have agreed they should be uncapped.
A clause can look balanced in one part and be severely one-sided in another. The exclusions often matter more than the cap, because a well-drawn list of excluded losses can remove the very claim you would want to bring.
What cannot be excluded, however it is drafted
Some liabilities are off-limits. Under section 2(1) of the Unfair Contract Terms Act 1977, a business cannot use a contract term or a notice to exclude or restrict liability for death or personal injury resulting from negligence. Liability for other loss caused by negligence can be excluded or restricted only so far as the term satisfies the 1977 Act’s reasonableness test (section 2(2)). Under sections 6 and 7, liability for breach of the implied undertakings as to title in contracts for the sale or hire purchase of goods cannot be excluded at all, while exclusions relating to description, quality or fitness for purpose in business contracts are again subject to reasonableness.
Separately, and as a matter of public policy rather than statute, a party cannot exclude liability for fraudulently inducing the other into the contract: see HIH Casualty and General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6. That is a narrower rule than it sounds, and the distinction between fraud in the making of a contract and dishonesty in performing it is dealt with below.
One further point is worth holding on to: where the 1977 Act’s reasonableness test applies, the burden of showing that a term is reasonable falls on the party relying on it (section 11(5)).
The words that mean less than you think
“Consequential loss” is the most misunderstood phrase in commercial contracting. Businesses frequently assume that excluding “indirect or consequential loss” removes exposure to the other side’s lost profits. Under English law it generally does not. Those words have conventionally been read as referring to losses falling within the second limb of the rule in Hadley v Baxendale – losses that do not arise naturally from the breach – with the result that profits flowing directly from the breach usually survive an exclusion drafted in those terms. Croudace Construction Ltd v Cawoods Concrete Products Ltd [1978] 2 Lloyd’s Rep 55 and British Sugar plc v NEI Power Projects Ltd [1997] CLC 622 are the usual reference points.
This is a presumption of construction rather than a rule of law, and it can give way to the scheme of the particular contract, as it did in Star Polaris LLC v HHIC-Phil Inc [2016] EWHC 2941 (Comm). But the practical consequences hold good in most cases. If you are trying to limit your own exposure, an “indirect and consequential loss” exclusion on its own may give you far less cover than you believe. If you are the customer, do not assume such wording has stripped out your main claim.
The words that mean more than you think
The reverse trap is equally expensive. In EE Ltd v Virgin Mobile Telecoms Ltd [2025] EWCA Civ 70 the Court of Appeal considered a clause excluding liability for “anticipated profits”. EE’s claim was for around £24.6 million in charges it said it would have received had Virgin not breached an exclusivity obligation. The majority held that, in substance, this was a claim for loss of anticipated profits and fell within the exclusion – so the claim as formulated could not proceed. The court divided, Phillips LJ dissenting, which is itself instructive: the outcome turned on the words the parties had chosen and the commercial context rather than on any general judicial hostility to exclusion clauses. The majority considered that EE was not left without recourse, since the exclusion did not touch injunctive relief, specific performance, or a claim for wasted expenditure.
The lesson is that a short phrase can carry a great deal of weight, and that how a claim is characterised may decide whether it survives. Where an exclusion could remove your principal remedy for the breach you are most worried about, that is a negotiating point, not a drafting detail.
Whether the cap is the right size
Caps are often expressed as a proportion of the charges paid in the preceding 12 months. That is conventional, and for a low-value, low-risk supply it may be sensible. It becomes a problem where the potential loss bears no relation to the contract value – a modest software subscription that sits at the centre of your operations, or a component whose failure could halt a production line.
Points worth checking: whether the cap is per claim or aggregated across the whole term; whether it covers all causes of action; whether liabilities you regard as important have been brought inside it; and whether the figure bears any relationship to the insurance either party holds. Aligning the cap with available cover, and asking to see evidence of that cover, is a normal part of negotiating substantial contracts.
The reasonableness test, and the risk of standard terms
Where one party deals on the other’s written standard terms of business, section 3 of the 1977 Act brings exclusions and restrictions of liability for breach – and terms allowing substantially different performance – within the reasonableness test. That threshold is narrower than it first appears: the terms must be habitually used and, broadly, used without material alteration, so a genuinely negotiated contract may fall outside section 3 altogether (African Export-Import Bank v Shebah Exploration and Production Co Ltd [2017] EWCA Civ 845).
Where the section does apply, it matters more than many suppliers assume. In Last Bus Ltd v Dawsongroup Bus and Coach Ltd [2023] EWCA Civ 1297 the Court of Appeal held that equality of bargaining strength as to price does not establish equality of bargaining strength as to terms, and that reasonableness is a fact-sensitive question that will ordinarily require a trial. For a business using standard terms, the implication is that those terms should be capable of justification rather than simply maximally protective, and that a demonstrable willingness to negotiate them helps.
Fraud and dishonesty
It is often assumed that dishonesty defeats a liability cap in all circumstances. The position is less clear-cut. In Innovate Pharmaceuticals Ltd v University of Portsmouth Higher Education Corporation [2024] EWHC 35 (TCC) the High Court considered a cap applying to liability “howsoever arising”, with a carve-out expressed to cover fraudulent misrepresentation. The judge construed the carve-out as confined to fraud inducing the contract, and took the view that the cap would have limited liability even for a dishonest breach of a contractual obligation. Recovery was limited to the £1 million cap.
Two important qualifications. The allegations of dishonesty were not made out on the evidence – the finding was of negligence – so the observations about dishonest breach are obiter, and this is a first-instance decision that some commentators consider may not survive appellate scrutiny. And it does not disturb the rule in HIH that a party cannot exclude liability for its own fraud in inducing the contract. The practical point is narrower but still useful: if you want dishonest performance to fall outside the cap, say so expressly. A bare reference to “fraud” may be read narrowly.
Where liability leaks around the cap
Finally, read the liability clause alongside the rest of the agreement. Indemnities are the usual culprit: one that is not expressly made subject to the cap will often carry exposure straight through it. Look also at liquidated damages and service credits, and whether they are stated to be your exclusive remedy; at carve-outs for confidentiality, data protection and intellectual property infringement, which are frequently uncapped; and at any obligation to pay costs on an indemnity basis. It is common to find a carefully negotiated cap sitting alongside an indemnity that renders it largely academic.
Before you sign
Read the liability clause together with the definitions, the indemnities and the termination provisions; identify the two or three failures that would genuinely hurt your business and check whether the clause leaves you a remedy for them; consider the cap against your own insurance and your counterparty’s; and make sure whoever is signing understands what has been given away. These clauses are more often open to negotiation than businesses expect – but only before signature.
This article is general information about business-to-business contracts governed by the law of England and Wales, as at August 2026. Scotland has a separate statutory regime under Part II of the Unfair Contract Terms Act 1977, and consumer and employment contracts are subject to different rules. It is not legal advice, no solicitor-client relationship arises from reading it, and it should not be relied upon: liability clauses turn on their precise wording and on the circumstances of the parties, and the law may have changed since the date given. Please take advice on your own position before signing or relying on such a clause.
Not sure what your liability clause would actually do? Our commercial team advises businesses on contract risk, liability and indemnity terms, and on negotiating them before signature. Please get in touch to discuss your situation.