Limitation of liability under English law: what to check in a contract

In brief

A liability cap only makes sense alongside its calculation rules and exceptions. Check how the amount is calculated, which claims the cap covers and how much could be recovered under several provisions together. Then assess whether the restriction is legally effective.

If you sell, broad exceptions can expose you to costs out of proportion to the fees. If you buy, a low cap may not even cover moving to another service. The same figure can look very different from each side of the deal.

1. Calculate the cap in money

Fixed cap£24,000

Fees paid cap, after

1 month£2,000

3 months£6,000

6 months£12,000

12 months£24,000

Fees paid cap = £2,000 × months paid

In the first month, the fees paid cap is twelve times lower than the fixed cap. The two only match after a year.

This shows the arithmetic only. Exceptions, other terms and legal requirements need separate review.

In your own agreement, check:

• Which fees count. Only amounts received, or also amounts the customer is obliged to pay.
• The relevant period. The whole agreement, a particular year or the twelve months before a specified event.
• The calculation date. The breach, the loss and the claim may happen at different times.
• The work included. The entire agreement or only the part of the work that gave rise to the dispute.

If you buy a business-critical service, check the early months separately: a cap tied only to fees already paid may be particularly low. If you sell, check whether each new statement of work increases the available cap.

2. Establish whether there is one cap or several

“No more than £24,000 for each claim” and “no more than £24,000 for all claims in aggregate” provide different protection. Several separate claims may lead to several payments under the first formulation. The second addresses the overall amount. Also check whether the cap resets each year.

£24,000 for all claims

£12,000£12,000£12,000cap

Total recovery up to£24,000£12,000 above the cap is not recovered

£24,000 for each claim

£12,000£12,000£12,000

Total recovery up to£36,000Each claim stays below its own cap

Example: three separate claims of £12,000 each. All are valid and covered by the contract, with no other restrictions.

Look for per claim, in aggregate and provisions grouping related claims. Check whether the main agreement, statements of work and schedules use consistent wording.

In Drax Energy Solutions v Wipro [2023] EWHC 1342 (TCC), the court considered exactly this question and concluded that the provision created a single aggregate cap. The practical point is to read “total liability” together with the rest of the calculation, rather than in isolation.

Check payment obligations under the agreement too. For example, the parties may preserve the obligation to pay for work performed separately from a damages cap. If liability is capped on both sides, state whether the cap also applies to those payments.

3. Bring all the exceptions together

Suppose the general cap is £24,000, but it does not apply to confidentiality breaches, software rights or any indemnity claims. The £24,000 figure may then provide no protection against the claims most likely to arise from your work.

Make a short table. For each obligation, establish whether the general cap applies, a separate amount applies or liability is uncapped.

The label indemnity does not itself make an obligation uncapped. The answer depends on the indemnity and the limitation wording. For claims involving third-party rights, see the article on software IP indemnities.

Triple Point Technology v PTT [2021] UKSC 29 illustrates the problem. An exception for negligence extended to a breach of the contractual duty to exercise reasonable care and skill. This does not mean every mistake automatically removes a cap. It was the court's interpretation of that particular agreement.

Keep the amount of liability separate from the types of loss that can be recovered. A contract may contain a high cap but exclude the very loss that matters to your business. Check both provisions, including the treatment of data recovery costs, replacement services and third-party claims.

4. Check whether the law permits the restriction

Agreeing a number does not guarantee that a court will apply it as the parties expect. English law contains mandatory rules and tests for contractual terms.

One key statute, the Unfair Contract Terms Act 1977 (UCTA), does not apply to every agreement or every restriction in the same way.

• Where section 2 UCTA applies, liability for death or personal injury caused by negligence cannot be excluded or restricted. A restriction on liability for other loss caused by negligence must satisfy the reasonableness requirement.
• Where one business deals on the other's written standard terms, section 3 UCTA may require a restriction on liability for breach of contract to satisfy that requirement. Not every agreement that started with a template automatically falls within this rule.
• Reasonableness is assessed when the contract is made. Relevant circumstances include what the parties knew or ought to have contemplated. For a monetary cap, the Act expressly identifies available resources and the possibility of insurance. Signing the agreement does not, by itself, settle the issue.

For an international deal, check separately whether UCTA is engaged at all. Section 27(1) disapplies sections 2–7 where the law of a part of the UK governs only because the parties chose it and foreign law would otherwise govern. There are also specific rules for international supply contracts involving goods and for intellectual property provisions. An English governing-law clause alone therefore does not establish that every restriction must pass a reasonableness test.

A separate issue arises where a company entered the contract in reliance on a false statement. Restrictions on liability for misrepresentation have their own rules, including section 3 of the Misrepresentation Act 1967. A party cannot exclude liability for its own fraud inducing the other party to enter the contract, as confirmed in HIH Casualty v Chase Manhattan Bank [2003] UKHL 6.

This article addresses business-to-business contracts governed by the law of England and Wales. Consumer contracts and other legal systems require a different assessment.

5. Put forward more than one solution

There is no universally correct cap, including one year's fees. Assess the amount against the price, the possible consequences of a mistake, available insurance and which party can control the risk.

If the other side rejects the general cap, options to discuss include:

• A separate higher cap for a defined risk. For example, certain software IP claims instead of leaving every such claim uncapped.
• An express relationship between caps. State whether the general and special caps are cumulative or one sits within the other.
• Terms that reduce potential losses. A period to fix problems, backups, a clear data handover and a process for approving costs. These do not replace financial protection, but make serious damage less likely.
• A different price or scope. If the risk you are asked to accept is out of proportion to the deal, the commercial terms need attention as well as the drafting.

Obligation	Draft agreement	Negotiation option
Delays and defects in the work	General cap	General cap
Confidentiality breach	Uncapped	Separate, higher cap
Software IP claims	Uncapped	Separate, higher cap
Other indemnity obligations	Uncapped	General cap, expressly linked
Death or personal injury caused by negligence	Uncapped	Uncapped where section 2 UCTA applies

In this example, software IP claims and confidentiality breaches fall under the separate, higher cap, including claims made under an indemnity. The outcome depends on the price, insurance and which party can control the risk.

Test any assurance that “insurance will cover it” against the policy: covered events, exclusions, deductibles and the amount available for the particular claim. Insurance limits do not, by themselves, determine contractual liability.

Before signing

1. Calculate the cap at the start of the work and at a later stage.
2. Establish whether it applies to all claims together, each claim or each year.
3. Collect exceptions and separate caps from every schedule.
4. Check the relationship with indemnities, legal costs and payment obligations under the agreement.
5. Compare the cap with the types of loss the contract allows you to recover.
6. Check which mandatory English-law rules apply to your particular deal.

For a wider review framework, start with the article on contracts from overseas companies.

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Sources

• UCTA 1977, section 2: negligence liability.
• UCTA 1977, section 3 and section 11: standard terms and reasonableness.
• UCTA 1977, section 26, section 27 and Schedule 1: scope, international transactions and intellectual property.
• Misrepresentation Act 1967, section 3: restrictions on misrepresentation liability.
• Drax Energy Solutions v Wipro [2023] EWHC 1342 (TCC): interpreting the overall liability cap.
• Triple Point Technology v PTT [2021] UKSC 29: the negligence carve-out, paragraphs 99–108.
• HIH Casualty v Chase Manhattan Bank [2003] UKHL 6: own fraud, paragraph 16.