Written by Jeff Aronson

Imagine that you’re counsel for a software company. You draft a software license agreement’s limitation-of-liability clause to limit the liability of each party under the agreement to $5,000, notwithstanding anything to the contrary.  What do you expect would be the result if the customer refuses to pay for the $20,000 in license fees and argues that its liability is capped at $5,000?

A recent (2014) case out of Texas had this exact scenario.  The customer, a security alarm installation and monitoring service provider, had licensed software from a vendor for $20,000.  The software license agreement contained the following sentence: “NOTWITHSTANDING ANYTHING TO THE CONTRARY, THE TOTAL DOLLAR LIABILITY OF EITHER PARTY UNDER THIS AGREEMENT OR OTHERWISE SHALL BE LIMITED TO U.S. $5,000.”  The software supposedly did not function as promised.  The customer refused to pay.  When the vendor sued, the customer asserted its liability was capped at $5,000. The Texas Court of Appeals ultimately read the aforementioned cap on liability to apply just to damages caused by the “improper functioning or failure of software“ and found the contract’s ‘notwithstanding anything to the contrary’ language did not operate to limit the customer’s liability in the event it breaches the agreement by refusing to make payment.

The software vendor got lucky in this situation – a different court could just have easily concluded the other way given the breadth of the ‘notwithstanding anything to the contrary’ language.  What could have been done differently here to avoid this situation?  The vendor’s counsel could have simply carved out the customer’s express payment obligations from the cap on liability. That would have saved a lot of legal fees and wrangling over the payment.

See IHR Security, LLC v. Innovative Business Software, Inc., 441 S.W.3d 474 (2014).