October 2012

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  • What Does Your SaaS Agreement Liability Model Look Like?


    Businessman is balancing on a rope - Aber Law Firm


    Don’t be surprised if you don’t totally understand this SaaS agreement question, even though you want to know the answer. Ok, let me explain, and this will (hopefully) become clearer.

    In every SaaS transaction, the law imposes a liability model that is limited only by what your customer can prove as its damages under contract law.  Therefore, each SaaS agreement has an embedded contractual risk/liability model (i.e. limitation of liability clause) that modifies the liability model with the purpose of lowering your risk (…stick with me, as this is not that hard). You can recognize these models by their language, which looks something like: “X is not liable for indirect, special or consequential damage . .  X liability for direct damages is limited to . . . “ These clauses are actually super important, so don’t ignore these as simply legal “boilerplate” language.  In fact, most SaaS lawyers would say that these clauses are the most important clauses in any SaaS agreement.

    Let’s take a conceptual look at 3 different contractual risk/liability models to get a sense of how they work.

    Model 1: Standard model, where vendor is liable only for direct damages up to 1X (e.g. amount paid in the last 12 months).

    SaaS Agreement Liability Model 2

    Model 2: Modified model, where vendor’s liability for direct damages is capped at 3 times X, with exceptions (a.ka. unlimited liability) for (i) breach of confidentiality (breach of contract), (ii) IP infringement (=indemnity), and (iii) gross negligence or willful misconduct (=tort).