How to cap your liability in a client contract
Pick a cap amount that fits your business, sort the exceptions into accept, narrow or refuse, and send the client a mutual cap they can sign.
Ask for a cap that limits both sides' liability for most claims, then settle two details: how the number is calculated, and which claims sit outside it. Give each exception its own cost check, and put the riskiest under a higher cap you could pay rather than no cap. Send one clause in which the general cap, the higher cap and the exceptions fit together.
What does a liability cap limit, and what doesn't it?
A liability cap limits what either side can owe the other for most claims under the contract, subject to its exceptions and the law that applies. Without an agreed cap, damages may exceed the fee. Common Paper's notes warn that deleting the cap "does not set it to $0" but removes any monetary limit.
A cap works alongside a waiver of lost profits and indirect damages, and the two do different jobs. An example, with made-up names and numbers:
- Quillmoss Studio, two people, builds a checkout page for Bramblecrest Outfitters. All $14,000 of its fees fall within the cap's 12-month period.
- A bug takes checkout down for a weekend. Bramblecrest claims $90,000 in lost revenue and $40,000 to have another developer rebuild the page.
- A lost-revenue waiver, if it applies and is enforceable, may exclude the $90,000 claim.
- The cap aims to limit the rest: to $25,000 with the sample clause's floor, not $14,000.
Watch for a cap that protects only the client, or one deleted in their redlines. Why the cap matters is in our guide for the smaller party.
What do standard contracts set as the cap?
Two free standard contracts are a useful reference: Common Paper's Professional Services Agreement (PSA) version 1.1 and Bonterms' PSA version 1.2. Both cap each party's liability, not only the provider's (Common Paper §8.1, Bonterms §12.1).
| Term | Common Paper PSA 1.1 | Bonterms PSA 1.2 |
|---|---|---|
| Default cap | A chosen multiple of fees "paid or payable" in the 12 months "immediately before the claim" (pre-ticked); or a fixed amount, or the greater of the two | Fees paid or payable in the 12 months before "the first incident giving rise to liability" (§12.5) |
| Higher cap for named claims | Optional: "Increased Claims" get their own cap (§8.1), which the cover page says is "often called a supercap" | None by default |
| No cap | Optional "Unlimited Claims"; none is ticked on the blank cover page (§8.3). The notes say the general cap doesn't cover "claims that cannot be limited as a matter of law" | Five by default: indemnities; the provider's breach of its duties on client materials, systems and facilities; either side's confidentiality breach; "personal injury or tangible property damage" from the provider's negligence or willful misconduct; and "liabilities that cannot be limited by Law" (§12.5) |
| Lost profits and indirect damages | Waived for both sides, except Increased Claims and confidentiality breaches (§8.2, §8.3) | Waived for both sides, except uncapped claims (§12.2, §12.3) |
Common Paper's notes help when a client wants a long uncapped list. They describe a trend toward a supercap for "higher risk concerns such as personal data issues," and call fully uncapped claims "hard to justify."
Which cap amount should you ask for?
Choose the liability cap before you send proposed wording, and be ready to explain the amount. Figures are examples.
| Cap amount | Fits when | Watch for |
|---|---|---|
| Fees paid or payable in the 12 months before the first event giving rise to liability | Retainers and ongoing work | Your general capped exposure grows with a year's fees |
| Fees under this statement of work (SOW) | One-off, fixed-fee projects | A small SOW may draw a request for a floor |
| A fixed amount, such as $50,000 | Low fees, or fees paid outside the lookback period | Be ready to say where it comes from |
| The greater of 12 months' fees or $25,000 | New clients, before much is billed | Raise the floor only to a sum you could pay |
Two drafting choices change the number. Common Paper counts back from the claim, Bonterms from the first incident; the sample below uses the first event. Common Paper also counts fees "paid or payable," so a client can't lower its own cap by paying only part of what it agreed.
Your insurance limit is one input to the number, not proof of cover. Ask your broker whether the policy would respond to claims under this contract, what it excludes, and its per-occurrence and aggregate limits. The Small Business Administration (SBA) advises insuring "against things you wouldn't be able to pay for on your own."
Which exceptions should you accept?
Treat each exception as its own decision: what could it cost you, and what will you ask for?
| Exception | What it could cost you | What to ask for |
|---|---|---|
| Plain "negligence," "any breach," or "any claim arising from the services" | Almost any mistake fits, leaving little under the cap | Delete it |
| Fraud, gross negligence, willful misconduct | Uncapped exposure for conduct you can avoid, though a claimant may still allege it | A choice: if you agree, keep the word "gross" and make it mutual |
| Liabilities the law won't let you limit | Set by the governing law, not the contract | Leave it in; ask a lawyer if it could matter |
| Confidentiality breach | Depends on what you'll see: customer lists, plans, code | The higher cap. Common Paper offers higher-cap and uncapped options, with or without a gross negligence or willful misconduct condition |
| Personal data | Depends on whose data you handle, and how much | The higher cap. If the work involves no personal data, ask to drop it. Common Paper treats privacy and security as a separate option |
| Security duties: passwords, system access, their security policy | Can apply even when no personal data is involved | The higher cap, sized to the access you'll actually have |
| Indemnities | Third-party claims, which can be large | Ask for the higher cap, or see a lawyer |
| Personal injury or tangible property damage | Uncapped in Bonterms when caused by the provider's negligence or willful misconduct, including its employees, agents or subcontractors (§12.5(d)), wherever the work happens. Real if your work involves premises, equipment or events | Check your general liability policy (the SBA lists "bodily injury, property damage, medical expenses"), then accept or ask for the higher cap |
For the rest of their paper, see how to read their contract from your side.
What wording should you send?
Adapt the sample before you paste it: their party names and defined terms, the section numbers, your categories and amounts. Delete unused brackets. Check it against their indemnity, insurance and order-of-precedence clauses. Then track it into their file in place of their liability section.
“Limitation of Liability. (a) General cap. Except for claims under (b) and matters in (d), each party's total liability to the other for all claims arising out of or relating to this Agreement, taken together, will not exceed the greater of (i) the fees paid or payable by Client to Provider under this Agreement in the 12 months before the first event giving rise to liability, and (ii) $[25,000]. (b) Higher cap. Each party's total liability to the other for [breach of Section [__] (Confidentiality),] [breach of Section [__] (Data Protection and Security),] [and its obligations under Section [__] (Indemnification)], taken together, will not exceed the greater of $[100,000] and [2] times the amount in (a). Liability under (a) and (b) combined will not exceed the amount in (b). (c) Waiver. Neither party will be liable to the other for lost profits or revenue, or for indirect, incidental, special, consequential or punitive damages. (d) Exceptions. Nothing in this Section limits (i) Client's obligation to pay fees and expenses due under this Agreement, [(ii) a party's liability for its fraud, gross negligence or willful misconduct,] or (iii) liability that cannot be limited by law.”
Common Paper's form keeps the two caps separate and lifts the waiver for higher-cap claims; a client may ask for either.
Then send a short cover note:
“Subject: [Project name] agreement: liability clause Hi [Name], We've proposed a new Section [X] (Liability), tracked in the attached copy. It caps most claims at the greater of the fees paid or payable in the 12 months before the first event giving rise to liability, or $[25,000]. [Confidentiality, data and indemnity] claims get a higher cap: the greater of $[100,000] or [twice] the general cap. The two caps share that higher ceiling, so they don't add up. [Fraud, gross negligence, willful misconduct] and fees due stay uncapped. We set these limits [in line with what our business could pay or insure]. Happy to talk it through. Best, [Your name]”
When should you accept their cap as written?
Accept a cap as written only when all three of these hold:
- The general cap is a sum you could pay, from your own funds or from cover your broker has confirmed.
- You've weighed each exception's cost separately and could live with each.
- You know what's left outside the cap, including anything under a higher cap.
If one fails and the client won't move, raise the price, narrow the work or decline.
What should you check before you reply?
- Both sides. The cap limits your liability as well as theirs.
- One anchor. The 12-month period counts back from one point, and the amount has a floor.
- How the caps fit. The general cap excludes higher-cap claims, the higher cap can't be lower, and both share one ceiling. The waiver in (c) covers higher-cap claims; (d) lifts both caps and the waiver.
- Each exception. None is plain negligence or "any breach," and each has had its own cost check.
- The rest of the contract. No SOW, data agreement or purchase order sets a different limit that would win, and your email says what the clause says.
When should you get a lawyer?
A lawyer is worth the fee when the cap is all that stands between a claim and your business:
- One claim could exceed what you could pay, such as on systems the client's revenue depends on.
- You'll handle health, financial or other personal data about the client's customers.
- The client insists on unlimited liability for you, or on uncapped indemnities.
- You need the cap to hold whatever the claim. Both forms accept that some liabilities can't be limited by law, and which ones can depend on the state and the type of claim.
- The contract is under another state's or country's law.
When does capping liability by hand stop working?
Working out a cap by hand holds up while one liability section says everything. It slips when the exceptions point to an indemnity, a data agreement or a security policy elsewhere, or when an SOW or purchase order sets its own limit. It also slips when a later redline changes a section the cap refers to and nobody rechecks it. That's when it's worth having a tool read the whole contract from your side and suggest wording you can send back.
DealMate is an AI contract assistant that takes a deal from first draft to final: describe the deal in a sentence and get a draft built from your templates and clauses; when they send their template, review it from your side and see what's risky; when their redlines come back, compare the versions and see every change and the risk it carries.
Sources
- Professional Services Agreement Standard Terms, Version 1.1 — Common Paper
- Professional Services Agreement: Cover Page and annotations (Standard Terms v1.1) — Common Paper
- Professional Services Agreement, Version 1.2 — Bonterms
- Launch your business: Get business insurance — U.S. Small Business Administration
This is general information, not legal advice. For high-stakes or unusual terms, talk to a lawyer.
Got their version in front of you? DealMate reads it from your side and suggests wording you can send back.
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