Caps the maximum damages recoverable for breaches of the NDA, excludes certain damage types (like consequential damages), and may include carve-outs for willful misconduct or confidentiality breaches.
A limitation of liability clause sets boundaries on how much money one party can recover from the other if something goes wrong under the NDA. These clauses work in several ways:
Damage Caps: Set a maximum dollar amount (e.g., $1,000,000) or formula (e.g., fees paid in the last 12 months) that caps total recovery regardless of actual harm.
Consequential Damages Exclusion: Eliminates liability for indirect damages like lost profits, lost business opportunities, or reputational harm.
Carve-Outs: Exceptions that remove certain types of breaches (willful misconduct, confidentiality breaches, IP infringement) from the limitations.
In NDAs, these clauses are particularly contentious because the primary harm from disclosure of trade secrets or confidential business information is often consequential in nature. A low liability cap or broad consequential damages exclusion can effectively gut the protection the NDA is meant to provide.
Courts generally enforce these clauses when clearly written and mutually agreed upon, though some jurisdictions limit enforcement for gross negligence, willful misconduct, or fraud.
⚠
Why This Clause Matters
Risk Allocation: This clause fundamentally determines who bears financial risk if confidential information is leaked. Low caps shift risk from the recipient to the discloser.
Deterrent Effect: If liability is capped at a trivial amount, there is less financial incentive for careful handling of your sensitive information.
Recovery Reality: Even unlimited liability is meaningless against an insolvent party. Caps provide certainty about what can actually be collected.
Insurance Alignment: Liability limits often correlate with available insurance coverage. Verify caps align with collectible amounts.
Asymmetric Information Value: If one party's secrets are worth significantly more than the other's, symmetric caps may unfairly protect the higher-risk party.
🎯
Key Risk Factors
Cap Amount: Is the cap proportional to potential harm? A $50,000 cap when sharing billion-dollar trade secrets provides essentially no protection.
Consequential Damages Exclusion: Most real harm from NDA breaches is "consequential" (lost deals, competitive damage, customer loss). Broad exclusions severely limit practical recovery.
Confidentiality Carve-Out: Does the clause specifically carve out breaches of confidentiality obligations? This is the most critical carve-out for NDAs.
Willful Breach Carve-Out: Intentional breaches should not be subject to liability caps, as this essentially prices intentional misconduct.
Mutual vs. One-Sided: One-sided limitations that protect only the receiving party unfairly skew risk allocation.
Indemnification Interaction: If the limitation doesn't apply to indemnification, third-party claims could create unlimited backdoor liability.
📄
Clause Versions
LIMITATION OF LIABILITY
1. Liability Cap. EXCEPT AS SET FORTH IN SECTION 3 BELOW, each party's total cumulative liability arising out of or related to this Agreement, whether based on warranty, contract, tort (including negligence), strict liability, or any other legal theory, shall not exceed the greater of: (a) One Million Dollars ($1,000,000); or (b) the aggregate amounts paid or payable under any related commercial agreement between the parties during the twelve (12) months immediately preceding the event giving rise to the claim.
2. Exclusion of Consequential Damages. EXCEPT AS SET FORTH IN SECTION 3 BELOW, in no event shall either party be liable to the other for any indirect, incidental, consequential, special, or punitive damages, including but not limited to loss of profits, loss of revenue, loss of business opportunities, loss of goodwill, or loss of data, arising out of or related to this Agreement, even if such party has been advised of the possibility of such damages.
3. Carve-Outs. The limitations set forth in Sections 1 and 2 above shall NOT apply to:
(a) A party's breach of its confidentiality obligations under this Agreement;
(b) A party's willful misconduct, gross negligence, or fraud;
(c) Either party's indemnification obligations for third-party intellectual property claims; or
(d) Damages arising from unauthorized disclosure of trade secrets.
4. Essential Basis. The parties acknowledge that the limitations set forth in this Section reflect the allocation of risk between the parties and form an essential basis of the bargain between them.
Note: This balanced version includes meaningful caps but critically carves out confidentiality breaches, willful misconduct, and trade secret violations from the limitations - preserving full recourse for the types of breaches most likely to occur under an NDA.
LIMITATION OF LIABILITY
1. No Limitation on Confidentiality Breaches. The parties expressly acknowledge that a breach of the confidentiality obligations under this Agreement could cause harm that is difficult or impossible to quantify. Accordingly, there shall be NO limitation on the types or amounts of damages recoverable by the Disclosing Party for any breach of confidentiality obligations, including but not limited to:
(a) Direct damages;
(b) Consequential and incidental damages;
(c) Lost profits and lost business opportunities;
(d) Damage to reputation and goodwill;
(e) Costs of investigation, remediation, and notification; and
(f) Reasonable attorneys' fees and expert witness costs.
2. Limited Application for Non-Confidentiality Claims. For claims unrelated to confidentiality breaches, each party's total liability shall not exceed Five Hundred Thousand Dollars ($500,000), and neither party shall be liable for indirect or consequential damages.
3. Willful and Intentional Breaches. Notwithstanding any other provision of this Agreement, there shall be no limitation whatsoever on damages resulting from:
(a) A party's willful, intentional, or reckless breach of this Agreement;
(b) Breach caused by gross negligence;
(c) Fraud or intentional misrepresentation; or
(d) Criminal conduct.
4. Preservation of Equitable Remedies. Nothing in this Agreement shall limit or affect either party's right to seek injunctive relief, specific performance, or other equitable remedies for breach or threatened breach of confidentiality obligations.
5. Trade Secret Protection. For any unauthorized disclosure or use of information qualifying as a trade secret under applicable law, the Receiving Party shall be liable for the full measure of damages available under the Defend Trade Secrets Act, state trade secret laws, and common law, without limitation.
Why this favors the disclosing party: No limitations whatsoever on confidentiality breach damages, explicitly preserves consequential damages and lost profits for NDA breaches, expansive carve-outs for willful conduct, and specifically references trade secret statutory remedies.
LIMITATION OF LIABILITY
1. MAXIMUM LIABILITY. TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, IN NO EVENT SHALL EITHER PARTY'S TOTAL AGGREGATE LIABILITY ARISING OUT OF OR RELATED TO THIS AGREEMENT, INCLUDING LIABILITY FOR BREACH OF CONFIDENTIALITY OBLIGATIONS, EXCEED FIFTY THOUSAND DOLLARS ($50,000) USD.
2. EXCLUSION OF DAMAGES. NEITHER PARTY SHALL BE LIABLE TO THE OTHER FOR ANY:
(a) INDIRECT, INCIDENTAL, CONSEQUENTIAL, SPECIAL, EXEMPLARY, OR PUNITIVE DAMAGES;
(b) LOSS OF PROFITS, REVENUE, BUSINESS, SAVINGS, OR ANTICIPATED SAVINGS;
(c) LOSS OF GOODWILL, REPUTATION, OR BUSINESS RELATIONSHIPS;
(d) LOSS OF DATA OR COST OF PROCUREMENT OF SUBSTITUTE GOODS OR SERVICES;
(e) DIMINUTION IN VALUE OR LOST OPPORTUNITIES; OR
(f) ANY OTHER DAMAGES OF ANY KIND WHATSOEVER,
ARISING OUT OF OR RELATED TO THIS AGREEMENT, REGARDLESS OF WHETHER SUCH DAMAGES WERE FORESEEABLE AND REGARDLESS OF WHETHER EITHER PARTY HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH DAMAGES, AND REGARDLESS OF THE LEGAL OR EQUITABLE THEORY (CONTRACT, TORT, STATUTE, OR OTHERWISE) UPON WHICH THE CLAIM IS BASED.
3. NO EXCEPTIONS. THE LIMITATIONS SET FORTH IN THIS SECTION APPLY TO ALL CLAIMS ARISING UNDER OR RELATED TO THIS AGREEMENT, INCLUDING CLAIMS FOR BREACH OF CONFIDENTIALITY OBLIGATIONS, AND THERE ARE NO EXCEPTIONS OR CARVE-OUTS FOR ANY TYPE OF BREACH, CONDUCT, OR THEORY OF LIABILITY.
4. ACKNOWLEDGMENT. THE PARTIES ACKNOWLEDGE THAT THESE LIMITATIONS ARE A FUNDAMENTAL ELEMENT OF THE BASIS OF THE BARGAIN BETWEEN THE PARTIES AND THAT NEITHER PARTY WOULD HAVE ENTERED INTO THIS AGREEMENT ABSENT THESE LIMITATIONS. THE RECEIVING PARTY HAS SPECIFICALLY CONSIDERED THE RISKS ASSOCIATED WITH THESE LIMITATIONS AND HAS DETERMINED THAT THEY ARE ACCEPTABLE.
Warning - Severely limits protection: Very low $50,000 cap applies even to confidentiality breaches, broad exclusion of all consequential damages including lost profits, explicitly no carve-outs for any conduct including intentional breaches, and covers all legal theories. This essentially makes the NDA unenforceable for any serious breach and should be strongly resisted.