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Limitation of Liability

Perhaps the most discussed and negotiated area of any information technology agreement is the limitation of liability. This is usually an area where the parties begin discussions from very different vantage points, and if using vendor’s forms as a starting point for your software license transactions, you will quickly notice that most vendor forms include a cap in the vendor’s liability, but no protection for the customer.

There are commonly two types of damages that are recoverable in a software licensing transaction—consequential damages and direct damages. It is common for the parties to disclaim all liability, with some exceptions, for consequential damages that may arise, while the ability to recover direct damages is commonly capped at a specified amount of some multiple of the fees paid by the customer to the vendor under the software license agreement.

■ Ensure that the limitation of liability is applicable to both parties. As mentioned, if you are starting with a vendor form of software license agreement, you will quickly notice that most vendor forms contain a limitation of liability that is only applicable to the vendor.

■ When thinking about the cap on direct damages, think about the damages that could arise. Your company will want to choose a dollar amount, or a multiple of fees, that appropriately allocates responsibility for damages your company suffers to the vendor.

■ Consider whether instead of making the one-sided limitation of liability mutual, your company proposes deleting the limitation of liability all together. In many instances, particularly in the software license agreement context, this can be an advantageous position.

■ Ensure that certain things are “carved out” of the limitation of liability—both the exclusion of consequential damages and the cap on direct damages. This should, at a minimum, include damages that arise out of the vendor’s breach of its confidentiality obligations, claims for which the vendor is insured, and damages payable pursuant to and expenses incurred as a result of the vendor’s obligations to indemnify the customer under the agreement. In many instances, it is also appropriate to include in this list damages that result from property damage or injury to employees.

Specifications

As mentioned previously, software vendors typically tie all warranties, representations, and vendor performance with respect to the software to the “specifications” or “documentation.” It is important to understand that the vendors “specifications” and “documentation” are completely within the vendor’s control and are subject to change at any time, without notice to the customer. What’s more, many companies don’t take the time before the software license agreement is signed to read the specifications or documentation to ensure that they understand the content. Control over the documentation and specifications gives the vendor an enormous amount of control over what they are contractually responsible for providing to you. They can change features and functionality at any moment and could ultimately alter the value of the software to your company. In order to avoid these issues, consider incorporating the following terms into your company’s software license agreements:

■ If there are specific features or functionality that must be contained in the software, these should be identified in the body of the agreement, or perhaps more appropriately, in an exhibit to the agreement.

■ In many cases, it will be appropriate to include the vendor’s specifications and documentation as of the effective date of the software license agreement as an exhibit to the agreement. The vendor might require the ability to modify these specifications and documentation over time. If that is required, ensure that the agreement states clearly that the specifications and documentation included in the agreement provide a baseline with respect to the features and functionality of the software and that any changes to the specifications and documentation will not diminish the features and functionality contained in the software as of the effective date of the software license agreement.

■ Consider adding a broad term “software specifications” and define it to include all specifications, documentation, materials, functionality, request-for-proposal (RFP) responses, etc. If you do this, ensure that all of the vendor’s warranty and other obligations are tied to the newly defined software specifications.

 
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