Introduction

When negotiating technology licence agreements for plant construction and operation, liability caps are a central issue. Licensors typically seek to limit their financial exposure, while licensees want meaningful remedies if things go wrong. This practice note explores the key principles, negotiation strategies, and best practices for setting liability caps in these agreements.

How this note relates to Indemnification: This practice note addresses the risk containment side of the deal (how much exposure sits behind contractual breaches and other liabilities), while our companion guide, Indemnification in Technology Licence Agreements for Plant Construction and Operation addresses the risk allocation side (who pays for specific categories of loss—typically third-party claims—and on what procedure). The two clauses must be drafted and interpreted together: a broad indemnity can be unintentionally diluted by a liability cap or excluded-damages language, and conversely a liability limitation can be unintentionally overridden if the agreement does not specify whether (and to what extent) indemnity payments are inside or outside the cap.

General Liability Framework

Caps on Liability

• Standard practice: A financial cap is typically tied to the commercial value of the deal (often total fees paid/payable, sometimes expressed as a multiple). Parties should confirm whether the cap is (i) per claim or in the aggregate, (ii) mutual or one-way, and (iii) “eroded” by amounts paid under the agreement (including, if intended, amounts paid under indemnities).
• Carve-outs (handle deliberately): Certain liabilities are often carved out of the cap (or placed under a separate cap), commonly including fraud, wilful misconduct, and sometimes IP infringement and confidentiality. Each carve-out should be tested against the indemnity regime and the excluded-damages language (see “Interplay with indemnities” above), so the contract achieves the intended risk allocation without creating accidental unlimited exposure.

Interplay with indemnities (caps, exclusions and priority)

• Confirm whether indemnities are inside or outside the cap: If the commercial intent is that an indemnity (for example, IP infringement) should survive the general cap, state that clearly (for example, “the cap does not apply to amounts payable under the IP indemnity”). If the intent is the opposite, state that indemnity payments are included within (and erode) the cap.
• Check excluded-damages language against indemnity drafting: Consequential/indirect-damages exclusions can inadvertently exclude heads of loss that are typically part of third-party claims (for example, third-party loss of profit). If the indemnity is meant to cover third-party judgments/settlements as awarded, consider a carve-out so the exclusion does not apply to third-party amounts covered by an indemnity.
• Align defined terms: Ensure the liability clause does not redefine or contradict “Claim”, “Losses”, “defense costs”, “settlement”, or similar terms used in the indemnity. Where the indemnity is limited to third-party claims, avoid liability language that suggests the indemnity covers first-party losses (or vice versa).
• Avoid procedure conflicts: If the indemnity includes a duty to defend and “pay as incurred”, ensure the limitation of liability clause does not create timing friction (for example, by stating that payments are only due “after final determination”).
• Add a priority rule (if needed): Where there is any realistic ambiguity, include a short ordering provision (for example, “to the extent of any conflict, the indemnity clause prevails over this limitation of liability clause in respect of indemnified claims”).
• Link to insurance in a non-circular way: Where the parties intend insurance to backstop risk, consider referencing insurance limits when setting caps (or separate caps), but avoid making liability dependent on actual recovery under an insurance policy unless that is a deliberate bargain.

Intellectual Property (IP) Infringement Claims

• Cap treatment: In practice, the indemnity for IP infringement may be (i) carved out of the general cap, (ii) subject to a higher/separate cap, or (iii) included within the general cap—depending on bargaining power and insurability. Whichever approach is taken, it should be stated expressly to avoid ambiguity about whether the limitation of liability clause applies to indemnity payments.
• Scope and remedies (drafting points): If IP infringement risk is addressed via indemnity, align the scope with the Indemnification practice note (for example, limit to third-party claims arising from authorised, unmodified use; define jurisdictions; exclude licensee modifications, combinations, or use outside the agreed field). Consider including standard “cure” options for IP claims (obtain a licence, replace/modify the technology, or refund/termination as a last resort) and ensure any cure language is consistent with the liability cap structure.

Performance Guarantees & Re-engineering Costs

• Scope: Performance guarantees cover plant throughput, efficiency, emissions, or other technical benchmarks.
• Liability Cap: These obligations are typically subject to the overall liability cap (e.g., 100–150% of licence fees).
• Remedies: May include technical assistance, re-engineering, or compensation for retrofit costs. Licensees may negotiate milestone-linked remedies, such as liquidated damages for failure to meet guaranteed outputs.

Typical Split Between IP and Performance Liabilities

Jurisdictional Nuances

• EU: Courts scrutinize liability caps for fairness; IP indemnities are often mandatory.
• US: Freedom of contract allows broad caps, but carve-outs for IP infringement are standard.
• South Africa & Emerging Markets: Licensees often demand stronger indemnities due to weaker enforcement of IP rights and higher project risk.

Why Liability Caps May Exceed Licence Fees

• Competitive Market Pressure: In competitive sectors, licensors may agree to higher liability caps (e.g. up to 150%) to win contracts, especially when the technology is critical to the project’s success.
• Licensee Demands: Licensees often require higher caps to ensure adequate recourse if the technology fails or causes significant losses.
• Risk Allocation: If the project value or potential damages are substantial, a cap at or above 100% of licence fees may be reasonable.
• Carve-Outs for Critical Risks: Licensors may agree to higher or uncapped liability for specific risks, such as IP infringement.
• Jurisdictional and Industry Norms: Local legal requirements and industry practices may dictate higher caps or mandatory carve-outs.

Limitation of liability drafting checklist (practical)

• Define the cap clearly: amount, currency, time period (per claim vs aggregate), and whether it applies to all causes of action (contract, delict/tort, statute) to the extent permitted.
• State whether the cap is mutual: mutual caps are common in balanced deals; one-way caps are common where one party has stronger leverage.
• List carve-outs precisely: avoid open-ended carve-outs; decide whether each carve-out is uncapped or subject to a separate cap (and at what level).
• Draft the excluded-damages clause with examples: specify whether “consequential/indirect” includes loss of profit, loss of production, loss of revenue, business interruption, or loss of goodwill—and whether the exclusion applies to third-party claims paid under an indemnity.
• Address indemnities explicitly: confirm whether each indemnity is capped/uncapped and whether indemnity payments erode the cap; add a short priority clause if there is any scope for conflict.
• Check consistency with remedies and termination: ensure any exclusive remedy language, liquidated damages, service credits, or IP “cure” options work coherently with the cap and do not create double recovery.
• Align to insurance (where relevant): sanity-check that caps and carve-outs are commercially supportable and (where intended) broadly align with available cover (for example, product liability, professional indemnity, cyber, pollution/environmental cover).

Negotiation Strategies

• Link the Cap to Licence Fees: Propose a cap tied to total licence fees (100–150%). Licensees may push for a higher cap if the technology is critical.
• Carve-Outs for Critical Risks: From a licensee perspective, exclude certain liabilities (e.g., IP infringement) from the general cap.
• Milestone-Linked Remedies: Negotiate remedies linked to project milestones, such as liquidated damages for missed outputs.
• Jurisdictional Considerations: Adapt liability caps based on local legal norms.
• Risk Sharing with EPC Contractors: Split liability between the licensor (technology risk) and EPC contractor (construction/implementation risk).
• Market Pressure and Bargaining Power: Use competitive dynamics to negotiate higher caps or more favorable terms.

Summary

Licensors usually cap liability at 100 up to 150% of licence fees, but IP infringement indemnities may be carved out and also be uncapped, while performance guarantees and re-engineering costs may fall within the cap. This balance protects licensors from unlimited exposure while ensuring licensees have meaningful remedies for critical risks.

References and Further Reading

• In brief: limiting contractual liability in South Africa (Lexology)
• Limitations on liability | South Africa | Global Private M\&A Guide (Baker McKenzie)
• Protecting consumers from unfair terms in contracts (EUR-Lex)
• Uniform Commercial Code | Legal Information Institute (Cornell)
• ICC Model International Transfer of Technology Contract
• FIDIC Briefing Note: Limitations of Liability (2024)
• Belet Cellular v MTN Service Provider (Supreme Court of Appeal of South Africa)
• Contract liability caps: Portsmouth University case (Keystone Law)
• International Journal of Law and Information Technology (Oxford Academic)
• Journal of Intellectual Property Law & Practice (Oxford Academic)
• Successful Technology Licensing (WIPO)
• Exchanging Value, Negotiating Technology Licensing Agreements (WIPO)

Disclaimer: This practice note provides a general overview and does not constitute legal advice. Parties should consult qualified legal professionals for advice tailored to their specific circumstances and jurisdictions.