What does "limitation of liability" in contracts refer to?

"Limitation of liability" in contracts specifically refers to clauses that establish restrictions on the amount or type of damages one party can recover in the event of a breach. These clauses are designed to provide parties with a way to allocate risk and limit potential financial exposure in the event that a contractual obligation is not fulfilled.

By including a limitation of liability clause, parties can agree on pre-defined consequences for various types of breaches, which may help to mitigate the financial impact of unforeseen events. This is particularly important in commercial contracts where the potential damages could be significant.

The other options focus on different aspects of contractual agreements. Restrictions on the types of contracts that can be formed (the first option) do not directly relate to the limitations on damage recovery. The third option mentions full liability, which is contrary to the concept of limiting liability. Finally, the fourth option suggests waiving all contractual obligations, which is an entirely different legal effect that does not concern limiting the extent of liability for breaches. Thus, the understanding of limitation of liability is crucial for parties seeking to protect themselves within the framework of their contractual relationships.