How to Negotiate Limitation of Liability Clauses - NDA Clause Library

🎯 Strategic Overview

Limitation of liability clauses are among the most heavily negotiated provisions in any commercial agreement, and NDAs are no exception. The key to successful negotiation is understanding that these clauses have three primary components, each of which can be negotiated independently:

The Liability Cap: The maximum dollar amount recoverable for any breach
Damage Type Exclusions: Categories of damages that cannot be recovered at all (typically consequential damages)
Carve-Outs: Exceptions where the limitations do not apply (e.g., confidentiality breaches, willful misconduct)

Your negotiation strategy should focus on ensuring that even if general liability caps exist, breaches of confidentiality obligations are carved out from those limitations. After all, the entire purpose of an NDA is to protect confidential information - limiting liability for breaching that obligation defeats the agreement's purpose.

💡 Core Negotiation Strategies

1

Carve Out Confidentiality Breaches

This is your non-negotiable priority. The whole purpose of an NDA is to protect confidential information. Any liability cap that applies to confidentiality breaches effectively sets a price for disclosure. Insist that breaches of confidentiality obligations be completely carved out from all limitations.

2

Preserve Consequential Damages for NDA Breaches

The real harm from disclosed trade secrets or confidential business information is almost always "consequential" - lost deals, competitive disadvantage, customer defection. If consequential damages are excluded, you may only recover the cost of the paper the information was printed on.

3

Add Willful Breach Exception

Even if the other side insists on caps, intentional or willful breaches should never be subject to limitations. Without this carve-out, a bad actor can simply budget the cap amount to intentionally violate the NDA when it's profitable to do so.

4

Right-Size the Cap Amount

If caps must exist, ensure they're proportional to the value of the information being shared. A $50,000 cap when sharing technology worth millions is meaningless. Argue for caps tied to deal value, insurance coverage, or a meaningful minimum floor.

5

Address Asymmetric Information Value

If one party's confidential information is significantly more valuable than the other's, symmetric caps may be unfair. Consider different caps for each party, or negotiate separate treatment based on the type of information disclosed.

6

Align with Indemnification

Check how the limitation of liability interacts with any indemnification clause. If indemnification is uncapped but direct liability is capped, third-party claims become the primary risk exposure. Ensure consistent treatment.

⚖ Reasonable Cap Amounts

When caps on general liability are unavoidable, here are benchmarks for what's typically considered reasonable:

Context	Typical Cap Range	Notes
Exploratory Discussions / Pre-Deal NDA	$250,000 - $1,000,000	Limited information exchange; moderate risk
Technology Evaluation NDA	$1,000,000 - $5,000,000	Source code or IP access; higher risk
M&A Due Diligence	$5,000,000 - $25,000,000+	Extensive access to financial/strategic data
Ongoing Business Relationship	12-24 months of fees or $1M minimum	Tied to relationship value
Trade Secret Disclosure	No cap (or very high)	Trade secrets warrant maximum protection

Warning: Insurance Coverage

Always verify that the other party has adequate insurance (E&O, cyber liability) to cover the cap amount. A $5 million cap is meaningless against an uninsured startup with $50,000 in assets.

📋 Essential Carve-Outs

Even when accepting liability limitations, certain conduct should always be carved out from the caps:

Tier 1: Non-Negotiable Carve-Outs

Breach of confidentiality obligations - The core purpose of the NDA
Willful misconduct or intentional breach - Cannot price intentional wrongdoing
Fraud or intentional misrepresentation - Public policy prohibits
Gross negligence - Near-willful disregard of obligations

Tier 2: Strongly Recommended Carve-Outs

Trade secret misappropriation - Covered by federal/state statutes with their own remedies
Third-party IP infringement claims - Indemnification should apply
Personal injury or death - Public policy concern
Violation of law - Illegal conduct shouldn't be capped

Tier 3: Context-Dependent Carve-Outs

Data breach notification costs - Can be significant for personal data
Regulatory fines and penalties - May result from disclosure
Public relations/remediation costs - For high-profile disclosures

Sample Carve-Out Language

"The limitations set forth in this Section shall NOT apply to: (a) any breach of a party's confidentiality or non-disclosure obligations under this Agreement; (b) any willful misconduct, gross negligence, or fraud; (c) any violation of applicable data protection or privacy laws; or (d) any misappropriation of trade secrets."

💬 Negotiation Scripts

When They Propose a Low Cap with No Carve-Outs

"We appreciate the need for certainty around liability exposure. However, the proposed $50,000 cap applies to confidentiality breaches - which is the entire purpose of this agreement. A cap at that level would essentially make the NDA unenforceable for any material breach. We need confidentiality breaches carved out from the limitations entirely. For other claims, we can discuss a reasonable cap."

When They Resist Carving Out Confidentiality Breaches

"Consider this from a business perspective: if your trade secrets were disclosed and you suffered $10 million in competitive harm, would a $50,000 recovery make you whole? The limitation defeats the purpose of signing an NDA. We're not asking for unlimited liability across the board - just for the core confidentiality obligations that are the reason we're signing this agreement."

When They Want to Exclude All Consequential Damages

"We understand the desire to exclude speculative damages. However, for confidentiality breaches specifically, the harm is almost always consequential in nature - lost deals, competitive disadvantage, customer defection. If we exclude consequential damages for NDA breaches, there may be nothing left to recover. We propose carving out confidentiality breaches from the consequential damages exclusion."

When They Insist on One-Sided Limitations

"The proposed limitations only protect the receiving party, while the disclosing party has no protection. In a mutual NDA where both parties share information, the liability provisions should be mutual. We're equally at risk if our information is disclosed, so we need equal protection - or we need to reconsider whether mutual exchange is appropriate here."

⚠ Red Flags to Watch For

Red Flag	Risk Level	What It Means
Cap applies to confidentiality breaches with no carve-out	Critical	NDA is essentially unenforceable for material breaches
Consequential damages excluded for all claims	High	May eliminate most practical recovery for disclosure
No carve-out for willful misconduct	High	Intentional breaches become financially viable
Cap significantly below information value	High	Provides no meaningful deterrent
One-sided limitation (only receiving party protected)	Medium	Unfair risk allocation in mutual exchange
"No exceptions" or "no carve-outs" language	Critical	Aggressive attempt to eliminate all recourse

Walk-Away Scenario

If the other party insists on a low liability cap that covers confidentiality breaches with no carve-outs, and refuses to negotiate, seriously consider whether to proceed. You would be signing a document that provides no meaningful protection for your confidential information.

📚 Common Compromise Positions

When negotiations stall, consider these middle-ground approaches:

Tiered Caps: Lower cap for general claims, higher cap (or no cap) for confidentiality breaches
Super-Cap for Confidentiality: Accept a general cap but with a much higher limit specifically for confidentiality breaches (e.g., 3-5x the general cap)
Time-Limited Exclusion: Consequential damages recoverable only for breaches occurring during the first 12-24 months
Insurance Tie-In: Cap set equal to the other party's insurance coverage, ensuring collectibility
Per-Incident vs. Aggregate: Per-incident caps allow multiple recoveries for separate breaches
Willful Breach Multiplier: Accept a cap for negligent breaches but 3x multiplier for willful breaches

Sample Tiered Cap Language

"Each party's total liability for claims OTHER THAN claims for breach of confidentiality obligations shall not exceed $500,000. Each party's total liability for breach of confidentiality obligations shall not exceed $5,000,000. There shall be no limitation on liability for willful misconduct, fraud, or gross negligence."