Limitation of liability clauses in SaaS contracts: what you need to know

‍Why this limitation of liability clause is essential

In a SaaS contract, the limitation of liability clause regulates the financial risks in the event of a dispute. Its objective is clear: to protect the SaaS company against excessive claims and to reassure the customer about the guarantees offered. Poorly written, it can unbalance the contract and become a source of litigation. Here's what to look out for both the customer and the supplier.

What is in a limitation of liability clause in a SaaS contract

A limitation of liability clause defines which types of damages are covered and which are excluded. It also regulates compensation ceilings. In a SaaS model, which is based on the sharing of resources, this clause must take into account the management of global risks for the supplier. The customer must therefore take this into account in order to request reasonable adjustments.

Exclusion of indirect damages

Most SaaS contracts exclude indirect damages. These include revenue losses, data loss, or image damage. The service provider thus limits its exposure to financial risks. It is also possible to exclude the prequalification of indirect damages, in order to avoid excluding too much damage.

Customer compensation limit

The liability of the provider is often capped. The amount generally corresponds to the amounts paid by the customer over a defined period (three, six or twelve months) or to the annual amount due under the contract. A ceiling that is too low may reduce the attractiveness of remedies for the customer, but it must also remain reasonable in view of the risks for both parties.

Exceptions to the limitation

Some events cannot be covered by a limitation of liability, due to a legal prohibition. Intellectual property violations, gross misconduct or breaches of legal obligations are exempt from this clause. In addition, some contracts provide for super-ceilings of liability for significant risks, such as the protection of personal data, in order to guarantee coverage adapted to sensitive issues.

Points of attention for the customer

The client's main objective will be to ensure that the limitation of liability clause does not exclude its main risks and allows reasonable compensation to be obtained in the event of damage suffered.

Effective level of protection

A provider may exclude too many responsibilities, making the contract unbalanced. Excessive exclusion of indirect damage is generally a good clue on this point. It is necessary to ensure that essential guarantees remain covered, especially in the event of a data breach.

Consistency with insurance

Checking whether the supplier has professional liability insurance is essential. This guarantees that he will be able to assume the compensation provided for in the event of a disaster. This does not mean that the ceiling should be placed at the height of the insurance ceiling, due to the shared nature of the SaaS service.

Alignment with business risk

A SaaS managing sensitive data or financial transactions involves high risks. In this case, a clause that is too restrictive can be a problem. It may be necessary to negotiate a higher compensation ceiling. On the other hand, a less critical SaaS can be more flexible.

Points of attention for the supplier

The SaaS provider must find a balance between risk limitation and the attractiveness of its contract. The objective for this one is to limit changes in order to allow rapid contracting.

Limiting without unbalancing

An overly protective clause may be considered abusive and therefore unenforceable. Any liability should not be excluded, especially in the event of serious misconduct or a breach of legal obligations. Accepting a super-ceiling of liability for certain major risks, such as the management of personal data, can also be a solution to reassure the customer.

Adapting the limitation to the activity and the public

A SaaS intended for consumers or businesses does not involve the same risks and is not subject to the same rules. A contract for a consumer cannot include a limitation of liability clause, which would be considered abusive. A contract for a professional can better protect the supplier. Likewise, an activity that will be critical for the customer cannot easily be subject to a strict limitation of liability, unlike a less important activity.

How to properly negotiate this clause

A successful negotiation is based on taking into account the interests of each party. It is essential to put yourself in the shoes of the other party and to objectively assess the real risks of the contract in order to find a balance that is acceptable to all.

For the customer

• Request a compensation ceiling that is in line with real risks.
• Check for exclusions and try to limit them if they are too broad.
• Ensure that the supplier has taken out appropriate insurance.

For the supplier

• Provide a ceiling that protects without appearing abusive.
• Adjust exclusions according to legal and contractual obligations.
• Guarantee the validity of the clause with balanced wording.

Conclusion

A well-written limitation of liability clause prevents disputes and protects each party. The customer must ensure that it does not deprive him of an effective remedy or reasonable compensation in the event of harm. The supplier must limit its exposure without creating an abusive clause. He must also adapt his contract to take into account the real risks for the client, in order to streamline negotiations. A good balance guarantees a viable and secure SaaS contract for everyone.

I can assist you in reviewing the liability clauses of your contracts with your suppliers or customers, and in drafting your SaaS contracts.