- A software contract's warranty section usually addresses some combination of: - Performance / conformance warranty — a promise that the software will perform substantially in accordance…
- A typical limitation of liability clause does two separate things, and it's worth understanding them as distinct: 1.
- Sophisticated contracts typically carve certain categories out of the general liability cap, because a blanket cap on everything can be unreasonable in specific situations: - Breach of…
Two clauses in a software contract do more work than almost anything else in the document: the warranty section, which sets out what the vendor is actually promising about how the software will perform, and the limitation of liability section, which sets a ceiling on what the vendor owes if it doesn't. Whether you're the customer buying software or the vendor selling it, these clauses deserve careful attention — they're often where the real risk allocation of the deal actually lives.
What Warranties Typically Cover
A software contract's warranty section usually addresses some combination of:
- Performance / conformance warranty — a promise that the software will perform substantially in accordance with its documentation or specification, usually for a defined period
- Non-infringement warranty — a promise that the software doesn't infringe a third party's intellectual property rights
- No malicious code warranty — a promise the software is free of viruses, malware, or similar harmful code
- Authority to license — a promise the vendor actually has the right to license what it's licensing, relevant if open-source or third-party components are involved
Most vendor-drafted contracts then disclaim all other warranties, express or implied, "to the maximum extent permitted by law," including implied warranties of merchantability or fitness for a particular purpose that might otherwise apply. Whether such a disclaimer is fully effective can depend on the type of transaction and the parties involved, which is exactly why the specific wording matters.
What a Limitation of Liability Clause Usually Does
A typical limitation of liability clause does two separate things, and it's worth understanding them as distinct:
- Caps the amount either party can recover, commonly tied to the fees paid under the agreement over some period
- Excludes categories of damages entirely — most often "indirect, incidental, special, or consequential damages," and often lost profits or lost revenue specifically
The combination of a dollar cap and a categorical exclusion can leave a customer with a very limited remedy even where the vendor's failure caused a genuinely significant loss to the business.
Carve-Outs: What Usually Falls Outside the Cap
Sophisticated contracts typically carve certain categories out of the general liability cap, because a blanket cap on everything can be unreasonable in specific situations:
- Breach of confidentiality obligations
- Intellectual property infringement claims, often paired with an indemnification obligation
- A party's indemnification obligations generally
- Gross negligence or wilful misconduct
- In some agreements involving personal information, liability arising from a data breach
Whether a given contract includes these carve-outs, and how broadly they're drafted, varies enormously and is one of the most heavily negotiated parts of any significant software agreement.
Indemnification: A Related but Different Protection
An indemnification clause is different from a warranty or a liability cap: it's a promise by one party to cover the other's losses, including legal defence costs, arising from specific third-party claims — most commonly IP infringement claims arising from use of the software. Indemnification obligations are often, though not always, carved out of the general liability cap, since the party giving the indemnity is agreeing to stand behind a specific, defined risk.
A Comparison of Perspectives
| Issue | What a Customer Typically Wants | What a Vendor Typically Wants |
|---|---|---|
| Liability cap | High, or carved out for certain claims | Low and fixed, applying to nearly everything |
| Consequential damages | Excluded from the exclusion for at least some categories | Broadly excluded, with no exceptions |
| Warranty period | Long, with meaningful remedies for breach | Short, with repair or replace as the sole remedy |
| IP indemnification | Broad, uncapped or separately capped | Capped, with defined exclusions |
Where a specific contract lands on this spectrum depends on negotiating leverage, the size of the deal, and how essential the software is to the customer's business.
Frequently asked questions
Can a vendor really disclaim all responsibility for its software not working?
Not entirely — courts are generally reluctant to enforce a clause that would let a party escape all responsibility for a fundamental failure to deliver what was promised, particularly where there's evidence of gross negligence or wilful misconduct. But a well-drafted, reasonable limitation of liability clause covering ordinary failures is generally enforceable between commercial parties.
Should the liability cap be the same amount for both parties?
Not necessarily. Many contracts include mutual caps that apply equally, but it's common to negotiate different caps or carve-outs for different types of claims, such as an uncapped indemnity for confidentiality breaches, rather than a single number covering everything equally.
What's the difference between a warranty claim and an indemnification claim?
A warranty claim is about the vendor's own product not performing as promised. An indemnification claim is about a third party suing you (or the vendor) over something related to the software, most often an IP infringement allegation, with one party having agreed in advance to cover those costs.
Is it worth negotiating these clauses on a smaller software purchase?
It depends on how dependent your business is on the software and how much is genuinely at stake if it fails. For a business-critical system, negotiating the liability and warranty terms is usually worth the effort even on a moderate-sized contract.
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