Short answer: A limitation of liability clause limits how much one party may have to pay if a contract claim arises. It may cap liability at a fixed amount, the fees paid under the contract, insurance cover, or another agreed measure.
This clause is one of the main ways a contract allocates financial risk. It helps suppliers avoid open-ended exposure and helps customers understand whether the remedy is meaningful if something goes wrong.
A SaaS contract might cap general liability at twelve months of fees, but carve out confidentiality breaches, data protection claims, fraud or indemnity obligations. Those carve-outs should be reviewed with the indemnity clause and any data processing agreement.
Common mistakes include ignoring exclusions of loss, missing unlimited liability carve-outs, failing to check whether the cap applies per claim or in aggregate, and assuming the same cap works for every contract value.
See also what clauses contract AI should extract first and how to build a contract clause library for AI.
Reviewed for general contract operations use. This definition is general information and is not legal advice.