Limitation of Liability Clauses in California: When a Damages Cap Holds and When It Fails

Last updated: November 2026. Reviewed by Pavel Kolmogorov, California business litigation attorney (State Bar No. 321018).

A limitation of liability clause is a contract term that caps what one party can recover from the other or excludes categories of damages such as lost profits. In California, a cap agreed between businesses is generally enforceable against claims for breach of contract. It cannot limit damages for willful injury, and it will not shield a party from its own fraud. (Civ. Code, § 1668.) A cap can also be struck as unconscionable. Kolmogorov Law, P.C. litigates these clauses for businesses in Orange County, Los Angeles, and across California.

Call (909) 235-6116 or contact us online to discuss a liability cap you need to enforce or one standing between you and your losses.

What a limitation of liability clause looks like

Most commercial contracts contain some version of four terms.

• A cap: total liability will not exceed a stated sum, often the fees paid in the prior twelve months.
• An exclusion: no liability for consequential, incidental, indirect, or special damages, or for lost profits.
• An exclusive remedy: the customer's only recourse is repair, replacement, a refund, or service credits.
• Carve-outs: listed claims, such as indemnity or confidentiality breaches, that sit outside the cap.

These terms are different from an indemnification clause, which shifts third-party claims, and from liquidated damages, which fix the amount owed for a breach in advance.

The general rule: caps between businesses are enforced

California lets contracting parties allocate risk. The California Supreme Court confirmed in 2025 that section 1668 does not prevent parties from limiting their liability for pure breaches of contract, absent a violation of an independent duty that falls within the statute. Those limits are tested by ordinary contract principles such as unconscionability. (New England Country Foods, LLC v. VanLaw Food Products, Inc. (2025) 17 Cal.5th 703, 717.)

So if the claim is breach of contract and the cap was negotiated, a court will ordinarily apply it.

Which damages fall inside an exclusion is a separate fight. Whether a loss is "direct" or "consequential" is often less obvious than the drafters assumed, as our page on lost profits and consequential damages explains.

What a cap cannot reach

The statute is short. It declares against the policy of the law any contract whose object is, directly or indirectly, to exempt a person from responsibility for three things. They are his own fraud, willful injury to the person or property of another, and violation of law, whether willful or negligent. (Civ. Code, § 1668.)

Vendors long argued that a cap is not an exemption, because some recovery remains. The Supreme Court rejected that reading for willful injury. Limitations on damages for willful injury to the person or property of another are prohibited, not only complete releases. (New England Country Foods, supra, 17 Cal.5th at p. 712.) The Court added that the weight of authority treats damages limits and full releases alike, pointing to decisions that refused to apply limits to fraud and statutory violations. (Id. at pp. 713-714.) How far that reaches a cap on a merely negligent violation of law is less settled.

That makes the pleading decisive. A customer who can allege fraud in the inducement, an intentional tort, or a statutory violation has an argument outside the cap. A customer whose complaint is that the vendor performed badly is inside it. Relabeling a contract breach as a tort does not work, for reasons covered on our page about the economic loss rule.

Gross negligence is close to the forbidden side. In a case about a release for a recreational camp, the Supreme Court held that public policy generally precludes enforcing an agreement that would remove the obligation to adhere to even a minimal standard of care. (City of Santa Barbara v. Superior Court (2007) 41 Cal.4th 747.) In 2025 the Court described that rule as categorical. (New England Country Foods, supra, 17 Cal.5th at p. 711.) It has not squarely decided the point for a negotiated cap between two businesses, so I treat a cap as unreliable against a well-supported gross negligence claim. Ordinary negligence that violates no statute is different. It can generally be released or capped unless the transaction affects the public interest.

Unconscionability and take-it-or-leave-it contracts

A court that finds a clause was unconscionable when made may refuse to enforce it, enforce the rest of the contract without it, or limit its application. (Civ. Code, § 1670.5, subd. (a).)

Courts look for both an unfair process and an unfair result. The usual signs are a form contract with no chance to negotiate, a cap buried where nobody would find it, and a limit so low it leaves the customer with no real remedy. Between two sophisticated companies with lawyers, the argument rarely succeeds.

Sales of goods: exclusive remedies that fail

A sales contract may limit the buyer's remedies to return and refund, or to repair and replacement, but the remedy is exclusive only if the contract expressly says so. (Com. Code, § 2719, subd. (1).) Where circumstances cause an exclusive or limited remedy to fail of its essential purpose, the buyer may pursue the Code's ordinary remedies. (Com. Code, § 2719, subd. (2).) The standard example is a seller that keeps trying, and failing, to repair the same defect.

Consequential damages may be limited or excluded unless the limitation is unconscionable, and where the loss is commercial the limitation is valid unless proved unconscionable. (Com. Code, § 2719, subd. (3).) Warranty disclaimers raise related issues, discussed on our page about commercial breach of warranty.

If you are the customer whose losses exceed the cap

I read the carve-outs first. Data breaches, confidentiality, and indemnity obligations are often excluded from the cap, and one of them may describe what happened. Then ask whether the facts support a claim the statute protects: a misrepresentation that induced the contract, intentional misconduct, or a violation of law. A limit that appears only in linked online terms also raises formation questions. Software and SaaS agreements have their own patterns, covered on our page about software and SaaS contract disputes.

If you are the vendor relying on the cap

Plead the clause as an affirmative defense and raise it early, because it shapes settlement value from the first letter. Expect the complaint to include a fraud count aimed at getting around the cap, and be prepared to test that count on the pleadings.

What to bring to the first meeting

• The signed contract, order forms, and any online terms it incorporates.
• Earlier drafts and emails showing whether the cap was negotiated.
• A summary of the losses, separated into direct costs and lost business.
• Statements the other side made before signing about what the product or service would do.

Frequently asked questions

Our vendor's contract caps its liability at the fees we paid, but its mistake cost us ten times that. Is the cap enforceable in California?

Probably, if your claim is only that the vendor breached the contract and the cap was part of a negotiated business agreement. California enforces such limits subject to unconscionability. The cap will not apply to willful injury or fraud, and it may not apply to a violation of law. The question becomes whether the facts support one of those claims or fall within a carve-out.

Is a limitation of liability clause enforceable in California?

Generally yes between businesses. California courts apply negotiated caps and exclusions to breach of contract claims. Civil Code section 1668 declares contracts that exempt a party from its own fraud, willful injury, or violation of law to be against public policy, and that bar reaches damages limits for willful injury. Civil Code section 1670.5 lets a court refuse to enforce a clause that was unconscionable when made.

Is a consequential damages waiver enforceable?

Usually. For sales of goods, California's Commercial Code allows consequential damages to be limited or excluded unless the limitation is unconscionable, and treats a limitation of commercial loss as valid unless proved unconscionable. Service contracts follow similar reasoning. Disputes often center on whether a particular loss, such as lost profits, is consequential or direct.

Does a limitation of liability clause cover gross negligence?

Probably not, though the point is not fully settled. California's Supreme Court has held that public policy generally bars agreements releasing liability for future gross negligence, and in 2025 it called that rule categorical. It has not squarely ruled on a negotiated damages cap between businesses. Many agreements avoid the question by expressly excluding gross negligence and willful misconduct from the cap.

We are a small company and signed a large vendor's standard contract with no chance to negotiate. Can we argue the liability cap is unconscionable?

You can argue it, and the lack of negotiation helps. A California court will also ask whether the cap was hidden or surprising and whether it is so one-sided that it leaves you without a meaningful remedy. Courts hold businesses to the contracts they sign more readily than consumers. You must show that both the process and the result were unfair, though a stronger showing on one can offset a weaker showing on the other.

Talk to a California breach of contract attorney

If a liability cap is limiting your recovery, or you need to enforce one against an inflated claim, call (909) 235-6116 or contact us online. Kolmogorov Law, P.C. is located at 327 Magnet, Irvine, CA 92618, and represents businesses in Orange County, Los Angeles, and throughout California. Related reading: our breach of contract practice page and indemnification clauses.

This page provides general information about California law and is not legal advice. Outcomes depend on the contract language, the claims pleaded, and the court.