Loss limitation: Overview, definition, and example
What is loss limitation?
Loss limitation refers to a clause in a contract that caps or restricts the amount of money one party can be held responsible for if something goes wrong—like a breach of contract, a mistake, or damages. It sets a financial ceiling on how much can be claimed in losses, even if the other party is harmed.
In plain terms, it’s a way to say, “If things go south, here’s the maximum amount I might have to pay.”
Why is loss limitation important?
For businesses, a loss limitation clause helps manage risk. It prevents one bad incident from turning into a financially devastating lawsuit. On the flip side, if you’re the other party, it’s important to understand how much you could actually recover if something goes wrong.
These clauses are especially common in software agreements, consulting contracts, and service deals—where things might not go perfectly, but both sides want to limit their exposure.
Without a loss limitation clause, liability could be open-ended—leaving your business vulnerable to large claims that far exceed what you were paid for the job.
Understanding loss limitation through an example
Let’s say your marketing agency signs a $20,000 contract to run a campaign for a client. Something goes wrong with the ad platform, and the client loses $100,000 in potential sales.
If your contract includes a loss limitation clause that caps liability at the total fees paid, your maximum exposure would be $20,000—even though the client’s loss was higher. This protects your business from paying damages far beyond the value of the work you performed.
An example of a loss limitation clause
Here’s how a loss limitation clause might appear in a contract:
“The total liability of either party for any and all claims arising out of or related to this Agreement shall not exceed the total amount paid by the Client under this Agreement in the twelve (12) months preceding the claim.”
Conclusion
Loss limitation is a smart safeguard that sets boundaries around financial liability. It helps businesses operate with more confidence, knowing they won’t be bankrupted by a single mistake—while still being held accountable in a fair and measurable way.
If you’re signing or drafting a contract, look for the loss limitation clause. Whether you're protecting yourself or checking the limits on the other side, it's a key part of managing legal and financial risk in any deal.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.