The Limitation of Liability Clause: When the Other Side Caps Their Risk at $1

Contracts are supposed to balance risk, but many include a hidden provision that flips the scales: the limitation of liability clause. These provisions cap the amount of damages you can recover—sometimes to the amount of fees paid, or worse, to nothing at all.

How Limitation Clauses Work

A limitation of liability clause sets a ceiling on what one party can owe, no matter how much harm is caused. Common examples include:

• Fees Paid: Damages capped at whatever amount you paid under the contract (even if your losses are 10x greater).
• Nominal Caps: Limits like $100 or $1,000, regardless of actual damages.
• Exclusions: Carve-outs that eliminate liability for lost profits, consequential damages, or business interruption.

The Lease-Specific Trap

One place I see this constantly is in commercial leases. Many leases say the tenant can only recover damages from the landlord’s “interest in the real property.” On paper, that sounds reasonable—until you realize what it means. If the landlord mortgages the property heavily or transfers ownership, the tenant may have no meaningful source of recovery.

That’s why, when drafting or negotiating leases, I always add critical language: “and the rents derived therefrom.” This ensures tenants aren’t left chasing an empty property interest with no real value, and that there is an actual stream of income available for recovery.

Why These Clauses Are Dangerous

1. They Undercut Leverage: Even if you win, your recovery may be pennies on the dollar.
2. They Shift All Risk: The breaching party limits its downside, while you still face unlimited harm.
3. They Create False Security: Business owners often assume courts will “fix” unfair clauses—but many courts enforce them.

How to Protect Yourself

• Negotiate Carve-Outs: Exclude intentional misconduct, fraud, or gross negligence from any liability cap.
• Push for Mutuality: If one side gets a cap, both sides should.
• Expand Recovery Sources: In leases, insist damages extend to the property interest and the rents derived therefrom.
• Get Legal Review: A quick review can catch liability caps that undermine your rights.

Don’t Let a Liability Cap Erase Your Rights

At JDE Law Firm, PLLC, I review, draft, and litigate contracts with limitation of liability clauses every day. If you’re about to sign a contract—or you’re stuck with one of these clauses in a dispute—we’ll fight to protect your leverage and make sure your remedies are real.

📞 NY: 718-966-0877 | NJ: 732-490-7120

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