The limitation of liability clause in a non-disclosure agreement (NDA) under the United States law

Standard Position

In US NDAs, limitation of liability clauses typically cap damages to direct damages only, exclude consequential and punitive damages, and often include a monetary cap (such as fees paid under the agreement or a fixed amount). Many NDAs also include a 'no liability for breach of confidentiality' carve-out, making the limitation inapplicable when one party deliberately breaches its confidentiality obligations. The prevailing market practice is that disclosers seek broad liability caps to minimize exposure, while recipients resist caps that shield gross negligence or willful misconduct.

Legal Basis

Under US common law and the Uniform Commercial Code (UCC), parties have substantial freedom to allocate risk through contractual language, provided the limitations are not unconscionable or contrary to public policy. The enforceability of liability caps depends on:

1. Conspicuousness: The limitation must be clearly visible and not buried in fine print. Courts in most states apply heightened scrutiny to liability exclusions.

2. Unconscionability: A cap may be struck down if it is both procedurally and substantively unconscionable (e.g., a one-sided cap that eliminates meaningful remedy).

3. Consequential Damages Exclusions: Courts generally enforce contractual exclusions of consequential, incidental, and punitive damages under UCC Section 2-719(3), even in services contracts by analogy, provided the limitation is not unconscionable.

4. Indemnification Interaction: Many NDAs pair liability caps with indemnification clauses; courts will interpret both together to determine actual exposure.

5. Gross Negligence and Willful Misconduct: Some state courts (notably California) disfavor waivers of liability for gross negligence or intentional breaches, though contractual carve-outs for deliberate confidentiality breaches are generally enforceable.

Drafting and Negotiation

When drafting or negotiating a limitation of liability clause in a US NDA:

For Disclosers (those sharing confidential information): Seek a broad cap that excludes consequential damages and limits recovery to direct damages or a fixed monetary amount. Push for carve-outs that preserve liability for breach of confidentiality obligations specifically. Consider tiered caps (higher for gross negligence, lower for ordinary negligence) to signal good faith.

For Recipients (those receiving confidential information): Resist overly broad caps on liability for breach of confidentiality itself, since your core obligation is protecting the information. Negotiate a distinction between liability for disclosing confidential information (which should have limited caps) and liability for other breaches (e.g., misuse, failure to implement security measures). Request reciprocal caps rather than one-sided language.

Practical Negotiation Points:

• Define what counts as "direct damages" (lost profits from misuse are often excluded here).
• Consider whether the cap applies per incident or in the aggregate over the agreement's term.
• Ensure the cap does not eliminate remedy for IP infringement or breach of trade secret laws.
• Clarify whether insurance or indemnity payments count against the cap.
• Include a reasonable notice and cure period before liability accrues.

Common Pitfalls

1. Conflicting Carve-Outs: A clause that says "this limitation does not apply to breach of confidentiality" but then defines "confidentiality breach" narrowly can create litigation over scope.

2. Overlooking State Variations: California and a few other states strictly construe liability waivers and may refuse to enforce caps on gross negligence; tailor the clause to your jurisdiction.

3. Indemnity Amplification: A liability cap paired with broad indemnification language can unintentionally expose the indemnitee to third-party claims with no cap, defeating the purpose.

4. Missing Interaction with Insurance: Failing to specify whether insurance proceeds count toward the cap can lead to disputes when a claim exceeds the limit but is partially covered.

5. Overly Aggressive Disclosure-Specific Caps: Capping liability for unauthorized disclosure of trade secrets at a trivial amount (e.g., $1) may be deemed unconscionable if the information is highly valuable, risking unenforceability of the entire clause.

Sample language

Except for breaches of Section [Confidentiality Obligations], neither party shall be liable for any indirect, incidental, consequential, special, or punitive damages, including lost profits or data loss, even if advised of the possibility of such damages. Each party's total cumulative liability under this Agreement shall not exceed the greater of (a) the fees paid by Recipient in the twelve months preceding the claim, or (b) $[amount]. This limitation does not apply to either party's willful or grossly negligent breach of its confidentiality obligations or its indemnification obligations.

This is general drafting guidance, not legal advice, and not a substitute for advice on your specific facts and jurisdiction. Sample language is a starting point to adapt, not a finished clause.