Software license agreements often contain provisions that restrict and limit the customer’s rights and remedies for damage or loss caused by the software vendor’s breach of the agreement or other misconduct. Customers should understand those provisions and consider managing risk through prudent business practices and insurance.

Remedy Restrictions

Software license agreements often restrict the customer’s remedies if the licensed software or associated services fail to comply with contractual requirements. For example, the customer’s remedies may be limited to repair or replacement of defective software or re-performance of deficient services, or alternatively (at the vendor’s option) to a refund of fees paid for the defective software or deficient services. A customer might also be entitled to credits against future fees if certain services (e.g. technical support for serious software problems) fail to meet contractual requirements. If the specified remedies are exclusive, then the customer may not be able to sue the vendor for financial compensation for losses caused by defective software or deficient services.

Liability Limitations and Exclusions

Software license agreements also usually contain provisions – called “liability limitations” – that limit or cap the amount of the software vendor’s potential liability to the customer for damage and loss caused by the vendor’s breach of contract or other misconduct. Liability limitations typically impose a cap that is a specified amount or is determined by a formula, which is often based on the amount of fees paid by the customer.

Software license agreements also usually contain provisions – called “liability exclusions” – that limit the software vendor’s potential liability to “direct damages” only, and exclude or eliminate liability for all other kinds of damages (e.g. indirect, consequential, special and punitive damages) and specific kinds of losses (loss of business, revenue, profit and data) regardless of the cause. Liability exclusions often prevent a customer from recovering financial compensation for the kinds of damage and loss that are most likely to result from defective software or deficient services.

Liability limitations and liability exclusions are often subject to exceptions for specific kinds of damage and loss (e.g. bodily injury or physical damage to tangible property) or for damage and loss caused by specific misconduct (e.g. breach of confidentiality, privacy or data protection obligations or infringement of intellectual property rights).

Liability limitations and liability exclusions may be reciprocal and apply to both the software vendor and the customer, but applicable exceptions often substantially limit the protection that liability limitations and exclusions provide to the customer.

Business Rationale

Reasonable remedy restrictions, liability limitations and liability exclusions (with appropriate exceptions) can benefit customers by eliminating the need for the software vendor to include significant risk premiums in the software license fees, while providing certainty and efficiently allocating risk. Liability limitations and liability exclusions can shift to customers certain risks inherent in software licensing transactions that customers can most efficiently manage and mitigate through prudent business practices (e.g. effective project management, business continuity plans and data protection procedures) and insurance for residual risk.

Recommendations

When negotiating a software license agreement, a customer should understand the contractual remedy restrictions and risk allocation, and consider how to best manage and mitigate risk.