Liability 101: Liability Clauses in Technology and Outsourcing Contracts

In this blog entry, authors Nick Jens, Kerri Gevers & James Russell (Norton Rose Fulbright) discuss liability clauses in English-law governed technology and outsourcing contracts, examining their purpose, key components, and current market trends. The authors explain that liability clauses serve both as a sword to claimants by specifying recoverable losses and circumstances for unlimited liability, and as a shield to the other party by defining excluded losses and maximum liability amounts. They emphasize that liability is typically the most contentious topic in contract negotiations and note that their focus is on the parties’ commercial positions and market norms rather than general legal principles.

The authors explain that the fundamental purpose of liability clauses is risk allocation, which is ultimately a commercial rather than legal issue driven by each party’s appetite for risk. They observe that fair risk allocation in technology and outsourcing contracts rarely results in reciprocal liability provisions because the parties’ risk profiles are fundamentally different. For instance, service providers are typically positioned to cause far greater damage to customers than vice versa, leading customers to seek maximum liability for technology failures, security incidents, and legal breaches, while service providers aim to limit their liability for service provision while maintaining customers’ payment obligations and protecting against misuse of their intellectual property or third-party claims.

The authors outline the three typical components of liability clauses in English law contracts: unlimited liability provisions that disapply limitations for certain instances; excluded liability clauses that specify unclaimable losses; and financial caps that set maximum claimable amounts. Under unlimited liability, the authors distinguish between situations where law prevents limitation (such as death or personal injury from negligence under the Unfair Contract Terms Act 1977, or fraud under common law) and negotiated positions where parties agree to disapply caps. Common examples include uncapped indemnities for third-party intellectual property infringement by service providers, uncapped liability for users who upload infringing data to SaaS or cloud platforms, and exclusion of license or service fees from liability caps.

The authors identify several emerging market trends as of the publication date. These include the increasingly common disapplication of financial caps and exclusions in cases of willful breach or misconduct, which particularly disadvantages service providers. Service providers are now more frequently limiting intellectual property indemnities to amounts payable to third parties and associated costs rather than system replacement, a position customers are increasingly accepting. Additionally, there is a trend toward using “super caps” (separate or higher liability limits) for data protection, security, and confidentiality breaches rather than unlimited liability, and service providers are increasingly refusing unlimited liability for regulatory breaches, sometimes also subject to super caps…

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