The Hidden Cap on Damages: Why Your Recovery May Be Smaller Than You Think
Many commercial contracts quietly limit liability—often to one year’s fees or the amount paid under the agreement. Others exclude entire categories of damages (lost profits, consequential, incidental). Those limits can turn a strong claim into a small check.
Two Clauses That Shrink Recoveries
- Limitation of Liability (LoL): Caps total damages to a stated amount (e.g., fees paid in the last 12 months).
- Exclusions: Bars recovery of consequential, incidental, special, punitive, or lost-profit damages.
Why Businesses Miss It
- Buried in Boilerplate: The cap hides in general terms, not in pricing or SOW pages.
- Complex Labels: “Indirect, special, incidental, consequential” looks technical—but it’s money you can’t recover.
- Mutual ≠ Fair: A “mutual” cap still favors the party creating more risk (often the vendor or landlord).
Typical Outcomes
- Ceiling on Recovery: Even a seven-figure loss can be capped at a fraction of that number.
- Lost-Profit Claims Vanish: Exclusions knock out the most valuable damages category in many disputes.
- Insurance Mismatch: Your insurance may not fill the gap the cap creates.
Negotiation Playbook
- Raise the Cap: Tie it to a multiple of annual fees or total contract value.
- Targeted Carve-Outs: Exclude from the cap: confidentiality breaches, data security, IP infringement, willful misconduct, personal injury/property damage, and non-payment obligations.
- Keep Consequentials for Certain Breaches: Allow lost profits for missed exclusivity, delivery failures, or downtime SLAs.
- Align with Insurance: Match caps and carve-outs to available coverage limits.
Bottom Line
The fine print decides your upside. If your agreement caps damages or excludes lost profits, your leverage in litigation drops fast. At JDE Law Firm, PLLC, I help clients spot, negotiate, and—when needed—litigate around these limits before they kill recovery.
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