A limitation clause allocates residual risk. Its effectiveness depends on the interaction of three components that are often drafted independently.

The cap. A fixed sum, or a multiple of fees paid in a stated period. Fees-paid caps decline as a contract ages, which sellers like and buyers often fail to notice.

Exclusions of damage types. Consequential, incidental, special, indirect and punitive damages, and lost profits. Because courts differ on whether lost profits are consequential, listing them separately avoids the argument.

Carve-outs from the limits. Typically indemnity obligations, breach of confidentiality, infringement, gross negligence and wilful misconduct, breach of data protection obligations, and payment obligations. The carve-outs are where the negotiation actually happens; an unlimited carve-out swallows the cap.

Failure of essential purpose. Where a limited remedy such as repair or replacement fails to provide the promised value, the limitation of remedy may be disregarded. Whether the separate exclusion of consequential damages also falls depends on the jurisdiction and on whether the clauses are drafted as independent. Stating that the exclusion applies notwithstanding any failure of essential purpose is standard for that reason.

Conspicuousness. Warranty disclaimers must be conspicuous under the commercial code, and drafting the limitation in the same manner is prudent.