How to Negotiate a Liability Cap
Without a liability cap, a small project could create unlimited exposure. Here's how to negotiate reasonable limits on your liability.
Types of Liability Caps
Dollar Cap
Fixed maximum amount: "Liability shall not exceed $50,000"
Contract Value Cap
Tied to what was paid: "Liability shall not exceed fees paid under this Agreement"
Insurance Cap
Limited to coverage: "Liability limited to amounts recoverable under Contractor's insurance"
Negotiation Strategies
1. Propose Contract Value Cap
Your position: "My liability should be proportional to what I'm being paid"
- Most commonly accepted formula
- Fair because it ties risk to compensation
- Alternative: Multiple of contract value (e.g., 2x)
2. Exclude Certain Damages
Your position: "Consequential damages are too speculative to cap"
- Exclude: Lost profits, business interruption, speculative damages
- Include: Only direct damages (actual out-of-pocket costs)
- Standard: "No indirect, consequential, or punitive damages"
3. Carve-Outs for Serious Misconduct
Clients may want uncapped liability for certain situations. Offer:
- Gross negligence or willful misconduct: May accept higher cap
- Breach of confidentiality: May accept higher cap
- Third-party IP infringement: Covered by insurance
4. Mutual Caps
Your position: "If I'm capped, you should be too"
- Both parties limited to same formula
- Fair and balanced approach
- Easier to negotiate than one-sided cap
Pushback Responses
"We can't accept any liability cap"
Response: "A liability cap is standard in [industry] contracts and essential for me to take on this work. Without it, a small project creates unlimited exposure I can't accept."
"The cap is too low"
Response: "I'm happy to discuss a higher cap. Keep in mind that my fees reflect the scope of work, not the potential damages if everything goes wrong. What cap would work for you?"
Frequently Asked Questions
What's a reasonable liability cap?
The most common formula is total fees paid under the agreement. Some contracts use a multiple (2x or 3x fees). For ongoing services, fees paid in the last 12 months is common. The key is proportionality to compensation.
Should liability caps be mutual?
Yes, mutual caps are fairer and often easier to negotiate. If you're limited in what you can recover from them, they should be similarly limited. This creates balanced risk allocation.
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