Limitation of liability

A limitation of liability clause caps maximum developer or service liability in case errors, losses, or damages. Instead of developer responsible all possible damages (potentially millions), clause says “developer liable only up amount customer paid for software.”

Practical example: Software company creates banking system priced $5 million yearly. Contract contains: “If system fails and bank loses $100 million, software company liable only up to maximum $5 million (annual price).” Without clause, bank could sue all $100 million.

Common limitations: (1) Capped at purchase price—up purchase amount; (2) Capped at annual revenue—up annual contract revenue; (3) Consequential damages exclusion—no indirect damages liability; (4) Data loss exclusion—no liability data lost; (5) Time limitation—liability exists only certain period.

Limitation of liability advantages: (1) Predictability—know maximum risk; (2) Insurance—easier insure knowing maximum; (3) Business viability—without it, few would sell million-dollar software; (4) Understanding—both sides know agreement.

However, can be problem: (1) Unfair—sometimes damage exceeds limitation; (2) Disagreements—what exactly “consequential damage” can disputed; (3) Enforcement—not all courts follow clauses; (4) Big-small disparity—often only big companies set such caps.

For startups: If developing software, should require limitation of liability clause. It’s standard.