A supplier agrees to deliver goods. Something goes wrong—they're defective, or delayed, or they fail and cause your business loss. How much do they actually owe you? That depends on the liability cap in your agreement. A well-negotiated cap protects both parties. A badly drafted one can leave you exposed or the supplier unwilling to do business.
What is a liability cap?
A liability cap is a clause that limits how much one party can claim if things go wrong. For example: "The supplier's total liability shall not exceed £50,000 or the price of the goods, whichever is higher."
This does several things. It protects the supplier from catastrophic claims arising from goods worth £10,000. And it sets both parties' expectations about risk allocation. You know the maximum you can lose (or the supplier can claim), which matters for insurance and contingency planning.
Why liability caps matter in supply agreements
Supply agreements typically involve goods with defined value. A shipment of steel worth £100,000. Components worth £50,000. But if those goods fail, the downstream loss can be enormous. You might have a contract with a customer worth £1 million. Your customer's business stops because of the defective goods. They sue you for the full £1 million. You then sue your supplier hoping to recover that loss.
Without a liability cap, the supplier faces unlimited exposure. With a cap, both parties understand the boundary. The supplier can price the risk. The buyer knows the maximum recovery and can arrange insurance for anything beyond that.
Liability caps and the Consumer Rights Act 2015
Here's where UK law gets important. The Consumer Rights Act 2015 says that if you're a consumer buying goods from a business, certain liability caps are not enforceable. You have statutory rights regarding quality, fitness for purpose, and description. Those can't be capped or excluded.
But if you're a business buying from a business, liability caps are generally enforceable if both parties are aware of them and they're not unreasonable. The key test is: did you have an opportunity to negotiate, and is the cap proportionate to the contract value and the risk?
Common types of liability caps
Financial cap: Total liability capped at a fixed amount, say £100,000. Clear and simple, but you need to ensure it's adequate for your business context.
Multiple of contract value: Liability capped at, say, two times the value of the goods or services. This scales with the contract size. A £10,000 contract has a £20,000 cap; a £100,000 contract has a £200,000 cap.
Exclusion of consequential loss: The supplier is not liable for lost profits, lost business, lost revenue, or other indirect damages. You can claim for direct loss (the defective goods themselves) but not consequential loss (the business disruption that followed).
Carve-outs: The cap applies to most losses, but specific things are excluded from the cap—death, personal injury, fraud, or breach of confidentiality. These remain unlimited liability.
Is the cap reasonable? The legal test
UK courts will enforce a liability cap if it passes the "reasonableness" test. Factors include:
Contract value: A £500,000 cap on a £5 million contract is reasonable. A £500,000 cap on a £50,000 contract is not.
Nature of goods: For low-risk goods (stationery, standard components), a tight cap is reasonable. For high-risk goods (critical industrial equipment, safety-critical systems), the cap should be higher.
Ability to insure: Can the supplier obtain insurance for the liability? If insurance is unavailable or prohibitively expensive, a high cap may be unreasonable.
Opportunity to negotiate: Was the cap in a pre-printed contract that you couldn't negotiate? Or did both parties discuss and agree it? Courts view negotiated terms more favourably.
Knowledge of the risk: Did both parties understand the potential liability? If a supplier knew the goods were critical to your business and refused to increase the cap, a court might enforce a higher implied liability.
Exclusion of consequential loss: the powerful clause
One of the most important—and most disputed—clauses in supply agreements is: "Neither party shall be liable for any loss of profits, loss of revenue, loss of data, loss of business opportunity, or other indirect or consequential damages, even if advised of the possibility of such loss."
This is powerful. Goods are defective and cause you business disruption costing £500,000 in lost sales. You can claim the value of the defective goods (direct loss), but not the lost sales (consequential loss). The cap is essentially zero for consequential damages.
Courts generally enforce these clauses for business-to-business contracts, especially if they're negotiated. But they look closely at whether the clause was fair and clearly communicated. If the other party hid the clause in fine print and you signed without reading it, enforcement is less certain.
Carve-outs from the cap
Even with a liability cap, some things remain unlimited:
Death or personal injury: You can never cap liability for death or personal injury caused by negligence. That's unenforceable under UK law.
Fraud: Fraudulent misrepresentation or deliberate deception can't be capped. If the supplier deliberately lied about the goods, you can claim unlimited damages.
Breach of confidentiality or intellectual property: If the supplier breaches an NDA or infringes your patents, that often sits outside the cap.
Gross negligence or willful misconduct: Some agreements allow unlimited liability for gross negligence. This protects you against reckless behaviour.
Make sure your agreement includes carve-outs for things that truly matter to your business.
Negotiating a reasonable cap
If the supplier proposes a cap that's too low, here's your negotiation strategy:
Start with your exposure: What's the worst-case loss if these goods fail? If goods worth £100,000 could cause £500,000 in downstream damage, the cap should be at least £500,000 (or the insurance should cover it).
Propose a tiered approach: "The cap is £100,000 for ordinary breaches, but £500,000 for breaches of quality or defective goods, and unlimited for fraud or gross negligence."
Suggest insurance: "We'll accept your proposed cap of £200,000 if you can show you have professional indemnity insurance covering up to £1 million."
Multiple of contract value: "Instead of a fixed cap, let's cap it at three times the contract value. That scales as our relationship grows."
Next steps
If you're signing a supply agreement with a liability cap, don't assume it's fair. Consider: What's the maximum reasonable loss? Is the cap adequate? Are there important carve-outs? Can you negotiate?
Unsure whether a proposed liability cap is enforceable or fair? Upload your supply agreement to QuickLegalCheck for a professional assessment.