How to review a limitation of liability clause

A limitation of liability clause sets the most each party can recover from the other, and excludes some kinds of loss altogether. Together with the indemnities, it decides how much risk each side really carries. This guide covers how to read the clause, the US law rules that limit it, and how to review it in Word with LexDraft.

Last checked: 17 October 2026. The law changes; check the current position before relying on this page.

The parts of a limitation of liability clause

• The exclusion. Usually a mutual exclusion of indirect, consequential, special, incidental and punitive damages, often with lost profits named expressly. Courts read "consequential" in light of the foreseeability rule from Hadley v. Baxendale (1854), so naming the categories you mean (lost profits, lost revenue, lost data) avoids an argument later.
• The cap. A fixed amount, a multiple of fees paid or payable over a period, or the greater of the two. Check the measurement period and whether the cap is per claim or aggregate.
• Super-caps. A separate, higher cap for specific risks such as data breaches or confidentiality.
• Carve-outs. Liabilities that sit outside the cap and exclusion. Common examples: indemnified third-party claims, breach of confidentiality, gross negligence or willful misconduct, fraud, and payment obligations.

US law limits

• Sales of goods. Under UCC section 2-719(3), consequential damages may be limited or excluded unless that is unconscionable, and a limitation for injury to the person with consumer goods is prima facie unconscionable. Under section 2-719(2), if an exclusive limited remedy fails of its essential purpose, other UCC remedies may become available.
• Fraud, willful injury and violations of law. In California, Civil Code section 1668 says contracts that exempt a party from responsibility for its own fraud, willful injury to the person or property of another, or violation of law are against the policy of the law.
• Gross negligence. New York courts will not enforce an exculpatory clause against gross negligence or intentional wrongdoing (Kalisch-Jarcho, Inc. v. City of New York, 58 N.Y.2d 377 (1983)). Many drafters carve these out expressly for that reason.

Review checklist

• Is the cap mutual, and is it big enough to matter for the risks in this deal?
• Does the exclusion of lost profits wipe out the main damages you would actually suffer, for example lost revenue under a supply contract?
• Are the carve-outs consistent with the indemnities? See our indemnification clause guide.
• Do the carve-outs apply to both the cap and the exclusion, or only one?
• Is the clause conspicuous where state law or the UCC requires it, for example in capitals or bold?
• Does an order form, SOW or purchase order change the cap without saying so?
• Does the insurance clause match the risk the cap leaves with each side?

A limitation of liability clause review workflow in Word

LexDraft is a Word add-in from Microsoft AppSource. It opens as a side panel in Word 365 (Windows and Mac), Word 2021 and Word on the web, so the agreement never leaves the tool you already draft in.

1. Open the agreement in Word and open LexDraft in the side panel.
2. Pick the governing law. Select the state named in the governing law clause so LexDraft looks for state-specific red flags.
3. Run the review. Run the review on the whole agreement. For NDAs, SaaS MSAs, DPAs and services agreements, run the matching playbook on the whole agreement; for other contracts LexDraft runs a general review against the governing law you chose. LexDraft has no separate clause-only playbook.
4. Triage by severity. Findings are graded Critical, High, Medium or Low, and LexDraft flags standard terms that are missing.
5. Run the quick checks. The defined-term and cross-reference checks are rule-based and run without AI.
6. Accept or reject each redline. Accepted changes land as native Word tracked changes.
7. Verify and sign off. You check every output before it goes to the client or the other side.

What LexDraft does not do

LexDraft does not give legal advice or decide whether a cap will be enforced. Nothing changes in your document until you accept a redline.

This guide is general information, not legal advice. LexDraft does not give legal advice; qualified counsel must review every draft. Spotted something out of date? Email support@lexdraft.ai and we will fix it.