What is the cap on the vendor's liability?

Dec 31, 2022

"Everyone knows that IT contracts set the vendor's cap at 12 months of fees."

If someone tells you that, you now have the contract data to tell them it is a bunch of hooey.

When we look at the vendor's starting form of contract, most (51% to be precise) had a cap on damages equal to 12 months of fees.

So there is some truth that many do cap it at that amount. But that means 49% of their forms did not set it at 12 months' fees.

The data showed that 11% set that cap to be less than 12 months' fees, while 2% set it at more than 12 months. We also see that 13% of the vendor forms have another metric for setting a varying amount, while 6% use a fixed amount.

The most interesting thing in this data to me is that while 8% of vendors' starting forms cap liability at all fees paid or more, 18% of the negotiated agreements set it at those levels.

So when do we see vendors' liability goes beyond 12 months of payments?

Here are two circumstances where I see this happen:

1. Customer has bargaining power - As we all know, we can toss market standards aside when there is one party that can change the terms in their favor because of their leverage.

2. Customized services - We tend to see 12 months' fees as the cap in most SaaS subscription arrangements. But when we get into an on-prem software arrangement or a contract that involves more complex scope of services, those caps shift more to the total contract value.

*This blog post uses data from TermScout's database of 1,000+ IT contracts. It is based on Laura Frederick's LinkedIn post.

**All the How to Contract paid members get access to a free annual TermScout plan, valued at $1,200 per year.