Limitation of liability in a contract: what works, what does not — and how not to get it wrong

Service page: Commercial contracts lawyer: drafting, review and enforcement.

What is the difference between a limitation of liability and an exclusion of liability?

A limitation of liability sets a cap on the damage that can be claimed. An exclusion of liability says that a certain type of damage is not covered at all. Both are common in contracts. In a standard-form contract both are presumed to be unfair terms, since section 4(1) of the Standard Contracts Law applies to an exemption “in full or in part”, but a measured limitation is easier to justify than a complete exclusion.

For example: “the supplier will not be liable for indirect damage” is an exclusion. “The supplier’s liability will not exceed NIS 10,000” is a limitation. The two can be combined, and many do so.

What cannot be limited?

In a standard-form contract there are two provisions that are absolutely void, with no discretion: a term that excludes or limits the customer’s right to go to court (section 5(a) of the Standard Contracts Law, 5743-1982), and a term that exempts the supplier, in full or in part, from liability for bodily injury or for a malicious act that is imposed on it by law (section 5(b)). Beyond that, a contract clause will not protect someone who acted by fraud or with malicious intent, and in a contract that is not a standard-form contract, the court can strike down a clause that is contrary to public policy under section 30 of the Contracts (General Part) Law, 5733-1973.

Limitation of liability in a contract with a consumer

In a contract with a consumer (B2C), every clause that limits liability is open to review under the Standard Contracts Law. Section 3 empowers the court and the Standard Contracts Tribunal to cancel or change an “unfair term”, and section 4 sets a list of presumptions of unfairness, the first of which is exactly a term that exempts the supplier from liability.

The rule: the more the contract is a standard-form contract (for a product or a service) and the weaker the consumer, the stricter the review that the limitation of liability will receive.

Limitation of liability in a B2B contract between businesses of equal strength: the courts respect the terms of the contract more. Even so, there are weak points here too: a limitation that entered the contract under pressure (take it or leave it) may be regarded as an unfair clause even between businesses.

How do you write a limitation of liability that a court will not cancel? First, set a realistic cap, in relation to the value of the contract and to the real risk.

A practical checklist

1. Spell out which damages are included and which are not.
2. Add an express carve-out for fraud and gross negligence.
3. Make sure the clause is prominent in the contract, not buried.

The legislative framework: exactly where the line runs

A standard-form contract: the strict rules

First of all, what is a “standard-form contract”? Section 2 of the Standard Contracts Law, 5743-1982 defines it as “the wording of a contract whose terms, all or some of them, were set in advance by one party in order to serve as terms for many contracts between it and persons who are not determined in their number or identity”. Note that the definition is not limited to consumers: SaaS terms of use, a standard supplier agreement or a standard order form toward small businesses may all be a standard-form contract. The definition of “term” in the same section also expressly excludes “a clause that the supplier and the customer agreed on specially for the purpose of a particular contract”, so a clause that was negotiated and documented as such is much stronger.

Section 3 gives the power to cancel or change an unfair term, and section 4 lists presumptions of unfairness. Three concern limitation of liability directly: section 4(1), “a term that exempts the supplier, in full or in part, from liability that would have been imposed on it by law but for that term, or that unreasonably qualifies the liability that would have been imposed on it under the contract”; section 4(6), a term that excludes or limits a right or a remedy available to the customer by law; and section 4(6a), unreasonable liquidated damages in favor of the supplier. A presumption is not a verdict: the supplier may rebut it.

And above them, two absolutely void provisions in section 5: a term that excludes or limits going to court (5(a)), and a term that exempts the supplier from liability for bodily injury or for a malicious act (5(b)). These two are void and there is no discussion about them.

A commercial contract between businesses: the flexible rules

The more the contract was actually negotiated and is not standard, the more respect the court gives the clause. The main restraint is the duty of good faith in performing a contract (section 39 of the Contracts (General Part) Law) and public policy (section 30 of the same Law).

And there is a change here worth knowing: following the amendment of section 25 of the Contracts (General Part) Law, a business contract made or renewed on or after 7 January 2026 that does not set provisions on interpretation will be interpreted according to its wording alone, unless its wording leads to an unreasonable result or an internal contradiction arises from it. For limitation of liability clauses this is a double message: precise wording will receive full weight, but careless wording will also be read as written, without being rescued by “the intention of the parties”. Note that section 25(a)(4) states expressly that a standard-form contract will be interpreted according to the intention of the parties even if it states otherwise, meaning that in a standard-form contract you cannot buy interpretive certainty through a clause.

What happens when there is no cap, and is one needed at all

Even without a limitation clause, liability is not unlimited: section 10 of the Contracts (Remedies for Breach of Contract) Law, 5731-1970 limits compensation to damage “that the party in breach foresaw, or should have foreseen, when the contract was made, as a probable result of the breach”. The foreseeability test is already a natural cap, and the limitation clause is meant to replace it with a certain cap. In the other direction, liquidated damages under section 15(a) are given without proof of damage, but can be reduced “if it found that the damages were set without any reasonable relation to the damage that could have been foreseen”.

How to write a clause that will hold, step by step

1. Decide first whether the contract is a standard-form contract. If it is, sections 4 and 5 are the framework, and there is no point in drafting beyond it.
2. Set a realistic cap in relation to the consideration and the real risk, not an arbitrary round number.
3. Spell out what is included and what is not. “Indirect damage” and “consequential damages” are not defined terms in Israeli law: define them in the contract.
4. Add an express carve-out for fraud, malice, bodily injury and breach of confidentiality, so that the cap that remains looks more reasonable.
5. Make the clause visible and document the negotiations. A hidden clause invites the presumption of unfairness, while documenting a discussion and an amendment takes it out of the definition of a “term” in a standard-form contract.
6. Back it with insurance. A cap matched to the limits of the professional liability policy is a cap you can stand behind.

What to document

• The draft versions and the correspondence about the clause: the strongest evidence that there were negotiations.
• The basis for setting the cap: the value of the contract, the risk assessment, the policy limits.
• The date and place the clause was presented to the customer, and confirmation of receipt, especially in online terms of use.

Common mistakes

• Translating American wording as it is. The hierarchy of Israeli law is different, and the foreign wording does not take sections 4–5 of the Standard Contracts Law into account.
• Assuming that B2B is exempt from the Standard Contracts Law. The definition in section 2 is based on the way the contract was made, not on who the customer is.
• A cap that is too low. A clause that limits liability to a token amount invites the presumption of unfairness in section 4(1).
• Forgetting to update. A cap set years ago in an ongoing contract loses its relation to the risk: set an update mechanism.
• Mixing up a limitation of liability with a waiver of going to court. The latter is completely void in a standard-form contract (section 5(a)) and may drag the whole clause down with it.

When a lawyer is worth it, and when not

You can manage on your own: in small, one-time contracts where the cap roughly equals the consideration, and there is no exposure to bodily injury or to customer data.

It is worth involving a lawyer: when you draft terms of use that will be presented to the public (a standard-form contract in every respect); when the contract involves processing personal information or holding customers’ money; in long-term deals with cumulative exposure; and when the other party presents wording you do not understand exactly, especially in a business contract made on or after 7 January 2026 that will be read according to its wording alone.

FAQ

Can liability for bodily injury be limited?

In a standard-form contract, no. Section 5(b) of the Standard Contracts Law provides that a term that exempts the supplier, in full or in part, from liability for bodily injury or for a malicious act that is imposed on it by law is void. This is direct voidness, without a reasonableness test and without discretion.

Will a clause that sets a low liability cap stand?

It depends on the context. In a commercial contract that was negotiated, probably yes, if the cap is in proportion to the consideration and the risk. In a standard-form contract, the presumption of unfairness in section 4(1) applies, and the supplier will need to show that the term is not unfair, taking into account all the terms of the contract and the circumstances (section 3).

What is the difference between a limitation of liability and liquidated damages?

A limitation sets a cap on what can be claimed; liquidated damages set an amount that will be paid without proof of damage under section 15(a) of the Contracts (Remedies for Breach of Contract) Law. The two can live together, but both are subject to review: the court may reduce liquidated damages if they were set without any reasonable relation to the expected damage, and in a standard-form contract there is also a presumption of unfairness under section 4(6a).

I have no limitation clause at all: how exposed am I?

Less than it seems. Section 10 of the Remedies Law limits compensation to the damage that the party in breach foresaw, or should have foreseen, when the contract was made, as a probable result of the breach. This is a natural cap: not certain, but it exists. The value of a limitation clause is in replacing the uncertainty with a known number.

How does the 2026 amendment to the Contracts Law affect limitation of liability clauses?

A business contract made or renewed on or after 7 January 2026 that does not set provisions on how it is to be interpreted will be interpreted according to its wording alone, unless its wording leads to an unreasonable result or a contradiction arises from it (section 25 of the Contracts (General Part) Law). So precise wording will receive full weight, but careless wording will be read as written. A standard-form contract, on the other hand, will be interpreted according to the intention of the parties “even if it states otherwise” (section 25(a)(4)).

Is the “limited liability” of a Ltd. company the same thing?

No. A limitation of liability in a contract is a clause that limits what can be claimed from a party to the contract. “Limited liability” in a company concerns the shareholders’ liability for the company’s debts: if it is limited, the way it is limited is set out in the articles of association (section 35(a) of the Companies Law, 5759-1999 (חוק החברות, התשנ״ט-1999)), and the company’s name ends with “limited” (בערבון מוגבל) or “Ltd.” (section 26). The company itself is a legal person (section 4) and is liable for its debts, so to limit its exposure in a particular deal a clause in the contract is needed. On setting up a company, see opening a limited company: steps, fee and directors.