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

Standard position

Limitation of liability clauses in English NDAs typically cap damages to direct loss only, exclude consequential and indirect losses, and often impose a financial cap (frequently the fees paid under the agreement, or a fixed amount). However, English law distinguishes NDAs sharply from commercial contracts: because NDAs are often mutual and non-transactional, parties often resist broad liability caps. The standard position reflects the principle that a breach of confidentiality can cause severe, difficult-to-quantify harm (reputational damage, loss of competitive advantage), making unlimited liability clauses more common in high-value NDAs than in other contract types. Many sophisticated parties reject caps entirely or accept only narrow carve-outs for gross negligence or willful breach.

Legal basis

Under English law, parties are free to limit liability by contract, subject to the Unfair Contract Terms Act 1977 (UCTA). Clause 2 of UCTA restricts limitation of liability for breach of contract causing personal injury or death (which rarely applies to NDAs), and clause 3 requires that non-standard terms be fair and reasonable in the circumstances. However, UCTA's reasonableness test applies primarily when one party is acting in the course of business and the other is a consumer or when terms are non-negotiated. In arm's-length commercial NDAs between businesses, limitation clauses are generally enforceable provided they are clear, unambiguous, and not unconscionable. The contra proferentem rule means ambiguous limitations are construed against the drafter.

Crucially, English courts will not enforce a limitation clause that excludes liability for breach of the core obligation itself. In an NDA, the core obligation is confidentiality; a clause purporting to eliminate all liability for disclosing confidential information would be unenforceable as contrary to the contract's essential purpose.

Drafting and negotiation

Drafters must clearly distinguish between: (1) direct loss (including reasonable costs of investigating and remediating a breach); (2) indirect, consequential, or special damages (lost profits, business interruption, reputational harm); and (3) punitive or exemplary damages. English law does not award punitive damages in contract disputes except in narrow circumstances, so excluding them adds little practical value but signals intent.

Key negotiation points include:

• Financial cap: A fixed cap (e.g., GBP 250,000) is more predictable than a fee-based cap (which may be zero if no fees are paid). Receiving parties often resist caps; disclosing parties often propose them. Market practice varies by sector and deal size.
• Carve-outs for gross negligence and willful breach: Almost essential. Excluding liability for intentional disclosure is unconscionable and unenforceable.
• Liability for third-party claims: Consider whether the cap applies to indemnification obligations (e.g., defending the other party against IP infringement claims arising from confidential information).
• Duration of cap: Specify whether it applies indefinitely or expires after a set period (e.g., five years after termination).

In negotiations, receiving parties typically push back against caps entirely, arguing that confidentiality is the contract's sole purpose and that damages are inherently difficult to prove. Disclosing parties counter that unlimited exposure is uninsurable and disproportionate. A middle ground: no cap for gross negligence or willful breach, but a modest cap for ordinary breach.

Common pitfalls

Avoid circular or ambiguous language (e.g., "liability shall be limited to direct loss, excluding all loss arising from breach of confidence") which courts will construe against the drafter. Do not use different liability caps for different breaches without clear justification, as this invites argument about which breach occurred. Never exclude liability for breach of confidentiality itself; courts will strike down such provisions as destroying the contract's purpose. Ensure the cap applies symmetrically to both parties unless there is genuine commercial reason for asymmetry, as one-sided caps may be challenged as unfair. Finally, do not assume that a limitation of liability clause alone protects against third-party claims or regulatory fines; these require separate indemnification and insurance analysis.

Sample language

Each party's total aggregate liability under this Agreement, whether arising from breach of contract, negligence, or any other cause, shall be limited to direct loss only and shall not exceed the greater of (a) the fees paid by the receiving party to the disclosing party in the 12 months preceding the claim, or (b) GBP 100,000. This limitation does not apply to either party's liability for gross negligence, willful breach of confidentiality, indemnification obligations, or breach of the Confidentiality Clause itself. Neither party shall be liable for indirect, consequential, or special damages, including lost profits or business interruption.

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.