What is a liability clause in a SaaS agreement?

Introduction

Nearly every SaaS agreement, whether negotiated with an enterprise customer or accepted on standard terms, will contain a liability clause. For SaaS providers, this is one of the most commercially significant provisions in the agreement because it defines the extent of their potential exposure if the software causes loss, disruption or other damage.

For customers, the liability clause determines the level of protection and available remedies if the SaaS product fails to perform as expected. The negotiation of these provisions often involves balancing competing interests:

• providers seek to manage unpredictable risk; and
• customers seek sufficient protection against business-critical failures.

What is a liability clause?

“Liability clause” is a commercial term used to describe contractual provisions that allocate responsibility for loss or damage arising from events such as breach of contract, negligence or other actionable conduct. In commercial agreements, they typically appear in two forms:

A limitation of liability clause which caps the total amount one party can recover from the other, regardless of the amount of the actual loss suffered.

An exclusion of liability clause which removes liability for a certain category of loss.

How do Australian Courts interpret liability clauses?

The leading Australian authority on the interpretation of exclusion and limitation clauses is Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500, a decision of the High Court of Australia.¹

In this case the High Court of Australia confirmed that exclusion and limitation clauses are to be interpreted according to their natural and ordinary meaning, read in the context of the contract as a whole.² Where ambiguity remains after applying ordinary principles of contractual interpretation, the contra proferentem rule may apply as a last resort, being that the clause is construed against the party seeking to rely on it.³

Australian courts will give effect to exclusion and limitation clauses according to their clear terms and will not construe them as extending beyond what is expressed in clear and unambiguous language, read in context.⁴

Which liability clauses commonly appear in SaaS agreements?

Liability clauses in SaaS agreements vary significantly but a number of structures appear with regularity:

Mutual exclusion of consequential loss

Both parties agree to exclude liability for consequential loss, including loss of profit, revenue, data and goodwill. Although these clauses are drafted on a mutual basis, they often operate more favourably for the SaaS provider because it is generally the party with greater exposure to significant consequential loss claims.

This is because a provider’s claims against a customer are more commonly limited to direct losses, such as unpaid fees or misuse of the software, whereas a customer’s losses arising from a platform failure may include significant business interruption, lost revenue or reputational damage.

Aggregate cap linked to fees paid

Liability is commonly capped by reference to the fees paid by the customer during a specified period before the claim arose. For example, if a customer pays $500 per month and the cap is limited to the previous 12 months’ fees, the maximum recoverable amount may be $6,000, regardless of the actual loss suffered.

A customer could therefore suffer a substantially larger business loss while remaining contractually limited to recovering only a fraction of that amount.

Carve-outs from the cap and exclusions

Standard form SaaS agreements (those with limited or no ability to be negotiated) typically carve out certain categories of liability by monetary limitation or exclusion. Common carve-outs include liability arising from:

• fraud;
• wilful misconduct;
• confidentiality obligations; and
• intellectual property indemnities.

Why does this matter for business owners?

For business owners on both sides of a SaaS agreement, the practical effect of these clauses is significant.

• A business owner issuing a SaaS agreement on standard terms carries the risk that a broadly drafted exclusion or limitation clause may not operate as intended. The High Court confirmed in Darlington Futures Ltd v Delco Australia Pty Ltd (1986) 161 CLR 500 that exclusion clauses are construed according to their natural and ordinary meaning in context, meaning a clause drafted to exclude all liability may be read narrowly if the circumstances giving rise to the loss fall outside that meaning.
• A business owner signing a SaaS agreement as a customer should understand that an aggregate cap linked to fees paid may leave them with limited recourse in the event of a significant platform failure, data loss, or service disruption; regardless of the actual loss suffered.
• Both parties to a SaaS agreement should be aware that, where the agreement is classified as a standard form contract, it may be subject to the unfair contract terms (UCT) regime under the Australian Consumer Law (Schedule 2, Competition and Consumer Act 2010 (Cth)). From 9 November 2023, proposing or relying on unfair terms in standard form contracts attracts civil penalties.

What does this mean in practice?

Liability clauses in SaaS agreements are not boilerplate. The interaction between how Australian Courts construe exclusion clauses, the cap structures commonly used in the market and the regulatory framework governing standard form contracts means these provisions carry real legal weight in both directions.

Understanding how these clauses are structured and what legal framework applies to them is the starting point for any informed commercial conversation about a SaaS agreement.

For advice specific to your circumstances, consult a qualified Australian legal practitioner.