What Is Limitation Of Liability? (2026 Updated)

If you run a business in New Zealand, you’ve probably seen (or signed) a contract clause that says something like: “Our liability is limited to the fees paid,” or “We aren’t liable for indirect loss.”

That’s a limitation of liability clause - and it can make a huge difference if something goes wrong with a project, product, or service.

This 2026 update reflects how common limitation of liability clauses have become across modern NZ contracts (especially for online services, tech, and subscription models), and why it’s worth getting your wording right from day one.

Below, we’ll break down what limitation of liability means in plain English, what it can (and can’t) do under NZ law, and what to look out for before you agree to one.

What Is A Limitation Of Liability Clause?

A limitation of liability clause is a part of a contract that tries to:

• cap how much one party might have to pay if they’re responsible for loss or damage (for example, “liability is capped at $10,000”); and/or
• exclude certain types of loss altogether (for example, “no liability for loss of profit”); and/or
• set rules about what happens if there’s a claim (for example, notice periods, mitigation obligations, or time limits).

In practical terms, it’s a risk-allocation tool. It answers the question: “If this deal goes bad, who wears what cost?”

Limitation of liability clauses are common in all kinds of business relationships, including:

• service agreements (consultants, agencies, trades)
• software and SaaS subscriptions
• online stores and supply arrangements
• construction and professional services
• events, venue hire, and consumer-facing services

They’re also often built into your standard customer paperwork, like Terms of Trade or online terms and conditions.

Limitation Of Liability vs “Limited Liability” (Companies)

These sound similar, but they’re different concepts.

• Limitation of liability (contract clause): limits what you (or the other party) can claim if something goes wrong under the agreement.
• Limited liability (business structure): relates to whether owners/shareholders are personally responsible for company debts (usually they aren’t, but there are exceptions).

If you’re setting up a company and thinking about protection, both the contract clause and the business structure matter - but they solve different risks.

Why Does Limitation Of Liability Matter For NZ Businesses?

Most business owners don’t think about liability limits until there’s a dispute - and by then, you’re stuck with the contract you signed.

A well-drafted limitation of liability clause can:

• protect your cashflow by capping worst-case exposure
• reduce litigation risk by making outcomes more predictable
• help you price properly (you can’t charge $2,000 for a job if you’re exposed to $200,000 of risk)
• keep deals moving where both sides want certainty and can’t negotiate every detail

On the flip side, signing a contract with a one-sided limitation of liability can leave you with very little recourse if the other party messes up.

A Quick Real-World Example

Imagine you hire a marketing consultant to run ads for your eCommerce store. They accidentally breach platform rules, your ad account gets suspended, and you lose sales for two weeks.

If your contract says “liability is limited to the fees paid in the last month,” you might only be able to recover (say) $1,500 - even if your losses were much higher.

That might be fair (depending on the situation), or it might be a red flag (for example, if they were reckless or if you specifically relied on them to manage compliance).

What Types Of Liability Can Be Limited (And What Usually Can’t)?

In NZ, limitation of liability clauses are generally allowed in business-to-business contracts, but they aren’t limitless. There are legal boundaries, and the context matters.

Common things contracts try to limit include:

• overall dollar value caps (for example, a fixed amount, fees paid, or a multiple of fees)
• indirect or consequential loss (like loss of profit, loss of revenue, loss of goodwill)
• third-party claims (sometimes excluded, sometimes allocated via indemnities)
• loss caused by delays (particularly in supply and service contracts)
• data loss and cyber-related risks (especially in tech agreements)

Key NZ Laws That Affect Liability Limits

Even if you have a clause that “looks clear,” NZ law can still affect whether it works in practice.

Consumer Guarantees Act 1993 (CGA)

If you sell goods or services to consumers in trade, the Consumer Guarantees Act 1993 provides automatic guarantees (like acceptable quality and reasonable care and skill).

In many cases, you can’t contract out of these consumer protections just by putting a clause in your terms.

There is limited ability to contract out of the CGA when dealing with other businesses, but it needs to be done properly and clearly - and not every transaction qualifies. This is one of those areas where it’s worth getting advice before you rely on a template.

Fair Trading Act 1986 (FTA)

The Fair Trading Act 1986 prohibits misleading or deceptive conduct in trade. A limitation of liability clause doesn’t give you a free pass to make inaccurate claims or sell something that isn’t what you said it was.

For example, if your advertising promises “guaranteed results” or “fully compliant,” you may still face risk under the FTA even if your contract tries to heavily limit liability.

Contract and Commercial Law Act 2017 (CCLA)

This Act covers key contract principles in NZ (including remedies and how some contractual issues are handled). While it doesn’t “ban” limitation clauses, it forms part of the overall legal framework in disputes.

Unfair Contract Terms (UCT) Rules

NZ also has unfair contract term protections (particularly relevant where one party uses standard-form terms and the other party has little bargaining power). A limitation clause that is very one-sided can attract scrutiny, depending on the circumstances.

Just because a clause is common doesn’t mean it’s automatically safe.

Can You Limit Liability For Negligence?

Sometimes, yes - but it depends on wording and context.

Clauses may try to exclude or limit liability for negligence (or “negligent acts or omissions”), but these need to be drafted carefully. Courts will look closely at exclusion wording, particularly where the result would be harsh or unexpected.

If you’re relying on this kind of clause, it’s a good idea to have it drafted (or at least reviewed) so it matches the risk profile of your work.

Common Limitation Of Liability Models (And When They Make Sense)

There isn’t one “best” limitation of liability clause. What’s appropriate depends on what you sell, who your customer is, and what could realistically go wrong.

Here are some common approaches we see in NZ contracts.

1) Cap At Fees Paid

This is one of the most common caps, especially in services and SaaS:

• “Liability is limited to the fees paid under the agreement in the last 12 months.”

When it can make sense: where your price is relatively low compared to the customer’s potential downstream losses, and you don’t want to take on unlimited risk for how they use your work.

Watch-outs: if the fees paid are tiny (like one month of fees), the cap may be so low it becomes commercially unrealistic - and could be harder to negotiate or justify.

2) Fixed Dollar Cap

For example:

• “The total liability of the Supplier is capped at $50,000.”

When it can make sense: where you want certainty (especially for insurance alignment), or your project has a defined scope and value.

Watch-outs: fixed caps can become outdated as the contract grows (for example, renewals, expansions, add-on services).

3) Multiple Of Fees

For example:

• “Liability is capped at 2x the fees paid in the previous 12 months.”

When it can make sense: where both sides want a cap that scales with the contract value but still provides a ceiling.

4) Excluding Specific Categories Of Loss

Many contracts exclude:

• loss of profit
• loss of revenue
• loss of data
• loss of goodwill
• consequential or indirect loss

When it can make sense: where those losses could be massive, hard to verify, or caused by many factors outside your control.

Watch-outs: “consequential loss” can be interpreted differently depending on drafting and context. Clear definitions are important.

5) Carve-Outs (Things Not Covered By The Cap)

A “carve-out” means certain liabilities are not limited, even if there is a general cap.

Common carve-outs include:

• fraud or wilful misconduct
• breach of confidentiality
• IP infringement
• privacy and data protection breaches
• unpaid fees

Carve-outs are often where negotiations get real - because they’re usually linked to your biggest risks.

If your contract includes confidentiality obligations (or you’re sharing commercially sensitive information), it’s worth making sure your Confidentiality Clause and your limitation wording actually work together, rather than accidentally contradicting each other.

What Should You Look For Before You Agree To A Limitation Of Liability?

Limitation of liability clauses can be reasonable, but they can also be a “quiet trap” - especially in standard-form supplier contracts where you’re expected to click “accept” and move on.

Before you agree, it’s worth checking a few practical points.

Is The Cap One-Sided?

Sometimes only one party gets a cap.

For example, the supplier limits their liability to fees paid, but the customer’s liability (for unpaid invoices, misuse, or breach) is unlimited. That imbalance can be risky.

Does The Contract Define “Indirect” Or “Consequential” Loss?

If a clause just says “no liability for consequential loss” without defining it, you can end up arguing later about what that means - exactly when you want clarity most.

Are There Hidden Carve-Outs That Expand Your Risk?

A contract might have a liability cap, but then carve out so many things that the cap barely applies.

For example, the cap might not apply to:

• any breach of privacy obligations
• any breach of IP warranties
• any third-party claims

Those are not necessarily “bad” carve-outs - but you should understand what they mean for your business in real terms (and whether you have insurance coverage for them).

Does The Contract Include An Indemnity That Overrides The Cap?

Indemnities can shift risk heavily. If you agree to indemnify the other party, you may be taking on liability that sits outside the cap (depending on drafting).

This is especially common in software, marketing, and contractor arrangements, where one side wants a broad indemnity “for any claims arising from your services.”

Is Your Liability Cap Consistent Across Your Documents?

Many businesses accidentally create conflicting terms, for example:

• a master agreement says liability is capped at $20,000
• your online terms say liability is capped at $1,000
• your proposal says “unlimited liability for defects”

That’s when disputes get messy. Keeping your standard terms consistent (or clearly ranking documents by priority) makes it much easier to enforce your intended risk position.

If you’re using a broader service contract framework, it can help to build your limitation clause into a properly drafted Service Agreement, so it matches the scope of work, payment structure, and the rest of the risk terms.

How Do You Draft A Strong Limitation Of Liability Clause?

This is where a lot of businesses either overdo it (“we’re not liable for anything, ever”) or underdo it (no cap, no exclusions, and a lot of unpriced risk).

A strong clause is usually:

• clear (it’s easy to understand and doesn’t rely on vague concepts)
• commercial (it matches the pricing and the type of risk)
• consistent (it doesn’t conflict with indemnities, warranties, or other clauses)
• tailored (it reflects what could actually happen in your business model)

Key Building Blocks To Consider

Depending on what you do, you might include:

• an overall cap (fees paid, a fixed amount, or multiple of fees)
• excluded loss categories (profits, revenue, goodwill, etc.)
• time limits for bringing claims
• mitigation obligations (the other party must take reasonable steps to reduce loss)
• allocation of responsibility for third-party tools, systems, or customer inputs

Make Sure Your Other “Foundation Documents” Match The Risk

Limitation of liability clauses are only one part of protecting your business. They work best when the rest of your legal setup is solid too.

For example:

• If you’re hiring staff, your Employment Contract should clearly set expectations, duties, and confidentiality, so problems don’t turn into expensive disputes.
• If you’re operating through a company, your internal governance documents (like a Company Constitution) help clarify decision-making and reduce internal conflict that can spill into customer disputes.
• If you handle customer data, you’ll want to align your limitation wording with privacy obligations and your Privacy Policy, especially if a breach could create regulatory and contractual risk.

And if you’re ever unsure whether your clause is actually enforceable in your situation, it’s worth getting a contract review. It’s much cheaper (and less stressful) than litigating a clause you hoped would protect you.

Key Takeaways

• A limitation of liability clause is designed to cap or exclude certain losses, so you’re not exposed to unlimited risk if something goes wrong.
• These clauses are common in NZ business contracts, but they’re not “one size fits all” - the right wording depends on your business model, pricing, and risk profile.
• NZ laws like the Consumer Guarantees Act 1993 and Fair Trading Act 1986 can affect whether a liability limitation is effective, especially when dealing with consumers.
• Watch out for one-sided caps, undefined “consequential loss,” broad indemnities, and carve-outs that effectively remove the cap.
• The most effective clauses are clear, commercially realistic, and consistent with the rest of the contract (including warranties, indemnities, confidentiality, and privacy terms).
• Getting your limitation of liability clause drafted or reviewed early helps you price confidently and avoid expensive disputes later.

If you’d like help drafting or reviewing a limitation of liability clause (or your wider contract terms), you can reach us at 0800 002 184 or team@sprintlaw.co.nz for a free, no-obligations chat.