Entering into an information technology (IT) services contract always comes with risk. Therefore, it is important to exclude or limit your liability where possible. There are several ways to limit your liability, including:
- excluding certain types of liability, including for specific events and different types of loss; or
- capping liability using either a time cap or financial cap.
These approaches can be used in your IT services contract to provide you with a solid foundation for a contract that you can sign with your customers. This article will explain these approaches to limiting liability and how they can help protect your business.
Why Do You Need to Exclude or Limit Your Liability?
It is best to exclude or limit your liability under the contract where possible. This is because where you are liable for a breach of the contract, the court may order you to pay damages to compensate the customer.
However, if the contract excludes your liability in specific circumstances, then the customer will not be able to bring a claim if those circumstances arise. If your liability is limited, then the customer may still be able to bring a claim, but the amount of money they can sue for will be reduced.
What Liability Does a Typical IT Services Supplier Have?
There are a few key types of liability that are likely to arise where you supply IT services. These are as follows:
- failure of a software product. For example, if the software you provide regularly crashes;
- data breach or loss. For example, if a hacker attacks your databases, or an employee accidentally deletes all of a customer’s data;
- breach of confidence. For example, if you reveal a piece of confidential information about a customer’s business;
- infringement of intellectual property rights. For example, if the mobile application you have developed for your customer is subject to a copyright infringement claim by a third party; and
- the software product unleashes a virus and causes property damage to the customer’s systems.
You may attempt to exclude your liability for the types of liabilities listed above. However, there can be a few issues with trying to exclude liability completely.
If you attempt to exclude liability for the failure of a product which is a core part of the contract, the customer will be unlikely to accept this. The customer may argue that it is one of the main reasons they are entering into the contract with you.
Some customers won’t closely read your contract or have it reviewed by a lawyer. Therefore, the customer may not raise any issues with you about the contract. However, there are unfair contract laws which apply to contracts with consumers and small businesses. If a customer later challenges a clause and the court determines that it is unfair, this clause will be void and it will no longer apply to your contract. For example, if you attempt to limit the liability of your business’s software product that is a key deliverable under your contract, the court will likely determine that this is unfair. Therefore, it is important to be reasonable when asking to limit liability. If you are unreasonable, these terms may be struck out and you may be left with nothing to protect you. An exclusion of indirect loss and a financial cap may be a better way to reduce your liability.
What is the Difference Between Direct and Indirect Loss?
Direct loss naturally occurs from a breach. Therefore, if there is a certain type of breach, this loss will always arise.
On the other hand, indirect loss may be anything that could also arise as a consequence of that breach, but it does not arise naturally.
However, the law is slightly unclear about the definition of indirect loss. In a dispute, whether a specific type of loss is direct or indirect will be interpreted by the court. Therefore, it is also useful to be precise and expressly exclude different types of indirect loss if you believe it may occur.
Another way to limit your liability is through a time cap. Time caps limit how long the customer can make a claim after the breach. However, time caps are more often used in construction contracts than IT services contracts.
However, you may face some issues enforcing time caps if the value of the contract is under $40,000. If so, the Australian Consumer Law (ACL) applies. Under the ACL, a time cap from a contract cannot override certain legal rights.
Furthermore, if you are contracting with an individual or small business, a time cap may be an unfair contract term. Whether it is an unfair contract term will depend on the reasonableness of the length of time and how the breach will affect the customer.
Financial caps on liability are far more common in IT services contracts. A financial cap limits the amount of money that you are liable to pay. Even if you have insurance, it is important to have a liability cap because some types of liability will fall outside of your insurance policy’s coverage.
If the customer wants to negotiate the financial cap, you can discuss the cap amount or what it will apply to. If you know your insurance will cover certain aspects, then you may be more willing to leave them out of the cap.
However, if you include an unreasonably low cap, this may be considered an unfair term and will be unenforceable.
If you are supplying IT services, it is important to have a contract in place that excludes and limits your liability. There are several different ways of limiting liability, including:
- excluding liability completely;
- excluding indirect loss;
- using a time cap; or
- implementing a financial cap.
However, you should be aware of laws that may stop you using unreasonable clauses that limit liability.
If you have any questions or need help understanding how to best protect your business using liability clauses, you can contact LegalVision’s IT lawyers on 1300 544 755 or fill out the form on this page.
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