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There are several ways in which you may seek to limit your liability under the relevant contract. You may consider excluding liability in relation to certain events or circumstances or even including limits to such liability. Although there is a degree of freedom in drafting and negotiating contractual terms, particularly where you may wish to minimise the risk profile of a contractual arrangement, there are legal frameworks and principles to consider. This article will explore how your SaaS business can limit or exclude your liability.
Before going any further, you will need to consider the impact of the Australian Consumer Law on the relevant contract because the Unfair Contract Terms regime can potentially render certain clauses void. The common law and court precedents and judgments mean that certain case law or legal principles may also have the effect of invalidating, voiding, or rendering clauses unenforceable. Thus, it is important to seek legal advice concerning any clauses concerning liability. There are limits to how you may limit your liability under the contract.
Exclusion of Liability Clause
You can limit liability by excluding it altogether under a contract. However, ensure you do so carefully, as you will need to appropriately frame an exclusion of liability for a cause or event that is ordinarily excluded. For example, suppose you subcontract any services of your SaaS product or offering to any subcontractors or third parties. You may not be able to include a blanket exclusion of liability for any loss or damage the subcontractors cause. This is because you are responsible for both managing subcontractors and ensuring they perform their services so that you are not in breach of your contractual obligations to your customers.
A key risk exposure for SaaS providers is the potential to cause consequential or indirect losses to a customer through the provision of your SaaS services. The difficulty and risk which comes hand in hand with the causation of consequential loss are that it is almost impossible to quantify the loss or damage that can be caused, particularly if we are considering indirect loss which includes business or economic loss. As such, your risk exposure can be significant if you do not hedge against loss or consequential loss. This clause should be included as appropriate because it will provide you with a degree of certainty and as a form of risk mitigation.
Limitation of Liability Clause
Another way to limit your liability is to expressly include a limitation of liability in the contractual terms. This is effectively placing a backstop or limit to the total losses or damages which you may be liable for under the contract. There are a few ways to draft a limitation of liability clause. Specifically, it should be appropriate for the commercial arrangement. For example, you may consider limiting the liability to the fees paid to you in the 12 months preceding the event or situation giving rise to the liability or even a financial amount which the parties are comfortable with. Alternatively, you may limit the liability to insurance proceeds you can recover on your insurance policy.
Proportionate Reduction Clause
Another clause you should consider including is a proportionate reduction clause. This effectively limits your liability by reducing the liability in proportion to the extent another party causes or contributes to the liability. For example, a SaaS provider is typically responsible for making a platform available to a customer. However, suppose the customer unilaterally changes its API without working with the SaaS provider to ensure the appropriate configuration has been implemented. Any liability caused by the platform’s unavailability would be reduced proportionately by the customer’s failure to communicate and work with the SaaS provider.
The limitation of liability is often one of the most difficult clauses to negotiate with your counterparty. Thus, you must seek legal advice accordingly.
Liability Cap Exclusions
In a SaaS context, the limitation of liability clause will often include exclusions to that limit where certain events or triggers are excluded due to the nature of the loss. This is typically because such losses are significant and unquantifiable. One example of such an exclusion for SaaS providers is any liability for any loss or damage caused by a data or security breach or any unauthorised loss of business-critical data or information for which you are responsible or have caused. Another example of an exclusion could be any liability for an infringement of a third party’s intellectual property rights in providing the SaaS services to a customer.
When negotiating any exclusions, you must carefully consider them in the commercial context. Furthermore, consider speaking with a lawyer because such exclusions will not be subject to the limitation of liability. Therefore, your risk exposure would be unlimited theoretically.
Indemnities
As a SaaS provider, your customers may request that you provide indemnities in favour of your customer for certain liabilities which may arise under the relevant contract. An indemnity is a contractual promise that a party gives to another party to compensate for loss or damage that the indemnified party may incur or suffer. There are several types of indemnities, but the above explanation will suffice for this article. As such, if you can avoid providing indemnities, you should.
The provision of indemnities in the SaaS context is not strictly necessary, given you may still be liable for loss or damage under the contract. However, suppose your customers are larger or blue chip companies or government bodies. Accordingly, there is a greater likelihood you will need to provide some indemnities.
The indemnities common to SaaS providers are often the exclusions from a liability cap or limit that customers seek. For example, customers will often seek indemnities for:
- loss or damage concerning a third-party claim for an infringement of intellectual property rights;
- breach of confidentiality or privacy obligations by you;
- dishonest conduct or fraud by you (or your subcontractors); or
- a breach of service levels by you.
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Key Takeaways
Indemnities are difficult to understand. Thus, it is challenging to draft them appropriately for a commercial arrangement. Accordingly, you seek legal advice to ensure that any indemnities sought do not overreach and are appropriate for your SaaS business.
If you need help limiting your liability, our experienced contract lawyers can assist as part of our LegalVision membership. For a low monthly fee, you will have unlimited access to lawyers to answer your questions and draft and review your documents. Call us today on 1300 544 755 or visit our membership page.
Frequently Asked Questions
This clause limits the total losses or damages you may be liable for under the contract. There are a few ways to draft a limitation of liability clause. Specifically, it should be appropriate for the commercial arrangement.
This clause limits your liability by reducing the liability in proportion to the extent another party causes or contributes to the liability.
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