Liability cap

What it means

A liability cap is a contractual limit on the amount of damage a party must compensate, for example up to the contract price or annual fees, or the exclusion of certain types of loss such as lost profit or indirect damage. It is a common feature of commercial contracts and general terms and conditions.

In Slovakia, however, a cap is legally sensitive. The Commercial Code provides that a claim for compensation for damage cannot be waived before the breach from which the damage may arise. Some practitioners therefore regard a flat cap as a partial waiver and invalid.

The law itself limits compensation to damage that the party foresaw or could have foreseen when the contract was concluded. Parties therefore often avoid a bare cap and instead describe the foreseeable amount of damage, indirectly defining the scope of liability in a way that is more likely to stand up in court.

How it works in practice

A common solution combines a contractual penalty with an agreement that damages exceeding the penalty cannot be claimed. The penalty then works as liquidated damages. In IT and service contracts, price reductions for missing the SLA are used in the same way instead of unlimited liability.

When drafting, it helps to state what damage the parties foresee at the time of contracting, for example up to the annual fee, and expressly exclude the limitation for intentional breach, gross negligence and harm to health. A clause written this way is more likely to be upheld by a court.

Liability beyond the contractual scope can be covered by liability insurance. For a service provider such as an accounting firm, it makes sense for the cap in the contract to match the insured sum, and the client should know up to what amount damage is covered.

What to watch out for

A cap never covers damage caused intentionally, and in consumer contracts it may be an unfair term. If a cap appears in general terms, it must be understandable to the other party and sufficiently highlighted; otherwise it may be disregarded.

Distinguish a cap from force majeure. Circumstances excluding liability release a party from paying damages entirely, but only if the statutory conditions are met. For important contracts, liability clauses should be reviewed by a lawyer.