What is a limitation of liability clause?
Written by For Founders Law, a Toronto firm licensed by the Law Society of Ontario. About us
Short answer
A limitation of liability clause caps how much one party can owe the other if something goes wrong under a contract, and usually excludes indirect losses such as lost profits. In software contracts the cap is often tied to the fees paid over a set period, such as the previous 12 months. Canadian courts generally enforce clear limitation clauses between businesses, subject to limits set by the Supreme Court of Canada.
A limitation of liability clause sets the most either party can be made to pay if the contract goes wrong. It is one of the most negotiated terms in any SaaS agreement, because it decides who carries the risk of an outage, a data incident or a bad deliverable.
What does the clause usually say?
Most clauses do two things: they cap total liability at a dollar amount or a formula, and they exclude certain kinds of loss altogether.
| Part of the clause | What it typically says |
|---|---|
| The cap | Liability is limited to the fees paid or payable in the 12 months before the claim, or a fixed amount |
| Excluded losses | No liability for indirect, consequential, special or punitive damages, lost profits, lost revenue or lost data |
| Carve-outs | Some liabilities sit outside the cap, or under a higher one |
| Who it protects | Usually both parties, though a vendor’s first draft often protects mainly the vendor |
What is usually carved out of the cap?
Commonly carved out: breach of confidentiality, the customer’s obligation to pay fees, IP infringement indemnities, and fraud, gross negligence or wilful misconduct. Enterprise buyers often ask for a separate, higher “super-cap” for data breaches and privacy obligations instead of an uncapped exposure.
Carve-outs are where most of the money is. A low general cap with a broad uncapped indemnity can leave you more exposed than a higher cap with narrow carve-outs.
Will a Canadian court enforce it?
Usually, between businesses, if the wording is clear. The Supreme Court of Canada’s decision in Tercon Contractors Ltd. v. British Columbia (Transportation and Highways), 2010 SCC 4, sets the test: the court asks whether the clause applies to what happened on its proper reading, whether it was unconscionable when the contract was made, and whether there is an overriding public policy reason not to enforce it.
Clauses fail most often because they are ambiguous, because they were buried in terms the other side never saw, or because one side had no real ability to negotiate. For clickwrap contracts, see are clickwrap agreements enforceable in Canada.
Is it different with consumers?
Yes. Ontario’s Consumer Protection Act, 2002 gives consumers rights that a contract can’t take away (s. 7), including a deemed warranty that services are of reasonably acceptable quality and the Sale of Goods Act’s implied conditions and warranties for goods (s. 9), so a broad disclaimer in consumer terms may not work as written. Write consumer terms separately from your business contracts. See do I need terms of service.
How should a startup set its cap?
Match the cap to the deal and to your insurance. A 12-month-fees cap is common for SaaS. If an enterprise customer asks for more, consider:
- A cap of a multiple of annual fees, rather than uncapped liability.
- A separate super-cap for data breach claims, tied to your cyber insurance limit.
- Keeping lost profits and indirect losses excluded on both sides.
- Making the cap mutual, so it protects you if the customer breaches too.
Ask your broker what your errors and omissions and cyber policies cover before you agree to a number.
What to do next
Keep a short internal fallback position for the cap and carve-outs so every deal doesn’t start from scratch. We draft SaaS and master services agreements and review contracts customers send you as a contract review, at fixed fees listed on our fees page. See also the glossary entry for indemnity.
This guide is general information about Ontario and Canadian law, not legal advice for your situation. To talk through a liability clause in front of you, book a free 15-minute consult.