Liability
What a liability cap is for, and the number to ask for
One month of fees is not a cap, it is a rounding error. A plain explanation of the clause that decides who pays when something goes badly wrong.
Ruth Kaminski, Head of Legal Research · May 7, 2026 · 7 minute read
A limitation of liability clause answers one question: if this goes wrong, how much can I get back. It is usually in capital letters, which people read as boilerplate. It is the opposite of boilerplate. It is the clause that decides who absorbs the cost of a bad day.
Section 6, Limitation of Liability
IN NO EVENT SHALL PROVIDER'S AGGREGATE LIABILITY EXCEED THE AMOUNT OF FEES PAID BY CLIENT IN THE ONE (1) MONTH IMMEDIATELY PRECEDING THE EVENT GIVING RISE TO SUCH LIABILITY.
Read that in the context of what the vendor actually does. If they run your servers and they lose your customer records, their maximum exposure is one month of fees. Yours is the notification cost, the regulator, the downtime, and the customers who leave. The gap between those two numbers is not shared. It sits entirely on your side.
Caps are reasonable. This one is not.
A cap itself is fair, and you should expect one. A vendor charging you $2,850 a month cannot carry unlimited exposure on that revenue, and a vendor who agrees to unlimited liability is either not reading or not insured. The question is never whether there is a cap. It is where the cap sits and what it does not cover.
- 12 months
- The common cap in managed services
- 1 month
- What this agreement offers
- 0
- Carve-outs in the clause as written
The carve-outs matter more than the number
A cap normally has exceptions, and the exceptions are the part worth arguing about. Three of them come up again and again:
- Gross negligence and willful misconduct. A cap should not protect someone who was reckless on purpose.
- Breach of confidentiality or data security obligations. If the vendor holds your data, this is the exception that has teeth.
- Indemnity obligations. A cap that swallows the indemnity makes the indemnity decorative.
Ask for twelve months and the carve-outs. Vendors concede the carve-outs more often than the number, so ask for both and be content to settle for the carve-outs.
The other half of the clause
The second sentence usually excludes indirect, incidental, special, consequential and punitive damages, and lists loss of profits and business interruption by name. That wording is standard and you will not remove it. What you can do is make sure the things you actually care about are not quietly filed under it. If downtime is your real exposure, do not rely on a general damages claim. Put a service credit regime in the agreement with a number attached, and make sure the credits are not described as your sole and exclusive remedy for everything.
That last phrase, sole and exclusive remedy, is worth searching for in any contract you are handed. It converts a service level promise into a coupon.