The terms of a SaaS agreement should always include a clause limiting the SaaS supplier’s liability to the customer. The specific details of the liability clause will depend upon the type of SaaS software being supplied, the value of the SaaS agreement and what is usual in the business sector in which the parties operate.
The following issues should be covered by the limitation of liability clause in most SaaS agreements.
Amount of Liability
If you do not cap the amount of your monetary liability to SaaS customers in your SaaS agreement you will be liable for an unlimited amount. You can specify whatever financial cap you choose for all liabilities or specific liabilities, provided that you do not place any cap on your financial liability for:
- death or personal injury arising out of negligence; and
- fraud or fraudulent misrepresentation;
Under English law you cannot limit your liability for these issues and any attempt to do so will be invalid and could make all of your limitation of liability clauses invalid.
Type of Damage Covered
In addition to limiting the amount of your liability you should also limit the types of damages and losses for which you will be liable. Generally in SaaS agreements, liability is excluded for indirect, consequential and economic losses. If there are any particular losses that you do not want to be liable for it is prudent to specifically state these in order to ensure that they are included in your restriction. For example, the non-functioning of the SaaS software due to the Internet being unavailable.
In some circumstances you may want to specify a fixed amount that the parties agree in advance is a fair sum to be paid for particular breaches of the SaaS agreement. Usually liquidated damages (service credits) will be specified in your service level agreement (SLA) for availability problems. Remember that if you include liquidated damages in your SaaS agreement you should ensure that no other types of damages can be claimed in addition for the same breach.
Validity of the Limitation
In order for your limitation of liability clauses to be valid they must:
- be reasonable;
- be incorporated into the terms of the SaaS Agreement; and
- be clearly worded.
There are different rules concerning the reasonableness of your limitation of liability depending upon whether you are operating business to business (BTB) or business to customer (BTC).
Any limitation clause should be included in your standard terms and conditions and the wording should be clear. Remember that any uncertainty or contradiction in the wording will be construed in favour of your SaaS customer. For example, specifically state that indemnities are included in the financial cap on liability.
If you supply SaaS services outside of the UK SaaS customers often request that you change the law that applies to the SaaS agreement to their local law. Be careful when agreeing to this, as your limitation of liability clauses could be invalid under the SaaS customer’s local law and you will then have unlimited liability for all claims.
Alternatively, if your SaaS agreement is currently subject to a law other than English law and you wish to change the applicable law to English, you should have the agreement checked by an English lawyer, as you will probably be able to restrict your potential liabilities to a greater extent under English law.
In view of the above it may be worth reviewing your SaaS agreement to ensure that it covers the above issues in order to limit your liability for potential claims.
Irene Bodle is an IT lawyer specialising in SaaS agreements with over 10 years experience in the IT sector. If you require assistance with any SaaS, ASP, software on demand contracts or any other IT legal issues contact me:
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