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Liability Cap

A liability cap is a contractual provision that limits the amount of damages that a party can be held liable for in the event of a breach of contract or other legal claim. The purpose of a liability cap is to help manage risk and provide some certainty for both parties. For example, a company may agree to a liability cap with a vendor to limit the vendor’s exposure to damages if the vendor fails to meet certain contractual obligations.

The amount of the liability cap can vary widely depending on the circumstances of the contract and the negotiation between the parties. A common formula for a liability cap is to limit liability to a specific dollar amount or a percentage of the contract value. It is important to note that a liability cap does not absolve a party of responsibility for damages, but rather limits the amount of damages that can be recovered.

In the context of investment agreements, a liability cap may be included in a subscription agreement or shareholders agreement to limit the potential liability of the company or its officers and directors for actions or omissions related to the investment. The liability cap is typically negotiated between the investors and the company and can be a significant point of negotiation in the investment process.