Small companies negotiating a contract with a large enterprise typically have little leverage to get more favorable terms, especially with the limitation of liability clause, but they’re not completely at the mercy of the bigger company, contract specialists say. 

If you’re the buyer, start by negotiating with the vendor before the product is implemented. That’s particularly important when it’s a software-as-a-service product, Jessica Nguyen, chief legal officer at Lexion, said in an In-House Connect webcast. 

“Once they’re embedded as part of your workflow, they’re sticky, so you have no leverage from a contractual standpoint,” she said. 

It’s different if you’re prepared to spend a lot of money — $1 million, say – or you’re a strategic logo that the vendor wants to bring into the fold. In these cases, the larger company will be more open to talking, she said. 

If the contract is $50,000 or less, it’s typically not worth it to either side to negotiate outside of the standard contract you use or the other company uses. For some companies, the negotiation threshold is closer to $100,000. 

For smaller companies, it helps to keep the risk level that’s at stake in mind. Although limitation of liability tends to be the most heavily negotiated part of a contract, 99% of deals don’t result in claims, so the actual risk remains low. That means a smaller company can better use what leverage it has to negotiate terms that don’t involve risk allocation.

“Instead, look for easy outs, like flexible — or very clear — termination rights,” said Nguyen. Or “ask for a limit on the increase in fees over time.” 

A limit in fee increases is important to SaaS companies because relationships tend to be long-term. That means even big companies won’t necessarily want to lose a long-term relationship over fee hikes. 

Another tactic is to focus on what the parties can do to make the relationship successful. “People focus too much time negotiating clauses that apply when a relationship goes wrong,” said Nada Alnajafi, corporate counsel at Franklin Templeton and founder of Contract Nerds. 

Alnajafi recommends adding in a service level agreement that defines a course of action other than termination when a term isn’t met. For example, she said, “‘If we don’t receive what we paid for, we should get a credit to proportionately adjust for what we lost. Build in those inter-contractual remedies [that are] somewhere in the middle between perfect delivery vs. material breach.”

Ideally, you want the contract to use your template but when you’re dealing with a large company, that’s unlikely, especially if your contract isn’t that valuable to the larger company. But there are a few things you can offer that might work, like faster closing. If your standard contract is 10 pages compared to 50 pages for theirs, the sales rep on their side might prefer using your paper to get the deal closed more quickly.

“Sales are all about speed,” said Nguyen. “Time kills deals. [Their sales people] are focused on measuring the sales cycle. It’s a metric the chief revenue officer is reporting to the CEO and the board.”

If you can impress them that the sale can close in days rather than weeks using your paper, that’s an argument worth trying. “Our legal team won’t even have to review it,” said Alnajafi. “We can sign by the end of this week.”

Or you could propose using the bigger company’s paper for the master service agreement and your paper for the service level agreement. Or, given the rising importance of data protection, you could suggest using your data processing addendum rather than theirs. “We’re the customer,” said Alnajafi. “It’s our data. We must protect our data appropriately.”

Liability exemptions

Common exceptions in limitation of liability clauses include indemnification obligations, breach of confidentiality obligations, losses from negligence and willful misconduct, buyer payment obligations and data security incident expenses. Intellectual property claims are sometimes excluded, too. 

You can’t adequately negotiate limitations of liability without having a good picture of the terms of these exclusions, the lawyers said. 

With indemnification obligations, for example, you want to make sure they’re limited to third-party claims. With data security incident expenses, you want to limit your exposure to any fine that’s assessed and what it costs to respond to the incident. You don’t want to be liable for indirect consequential damages — the unknown damages a buyer incurs, said Nguyen

A growing trend with these types of obligations, especially with data privacy increasing as a concern, is the imposition of so-called super caps. These are liability caps that go beyond the standard limitation of liability that’s agreed to. If the limitation of liability is set as a multiple of the fees paid over the last 12 months, which is fairly standard, then the super cap would come on top of that for specific high-risk areas such as data privacy. 

“Super caps are more common today, especially around privacy, security or confidentiality,” said Alnajafi. “If you’re sharing data [as a buyer using a SaaS product] on 10,000 clients, privacy and security are paramount. You would want a super cap for that.”

“Super caps are common for suppliers or vendors who are willing to negotiate and don’t have complete leverage over the negotiation process,” said Nguyen. “If you’re negotiating against Microsoft, a super cap is probably a no-go. They don’t need your revenue. For smaller, scrappier companies where every deal counts, they’ll absolutely negotiate a super cap. Even a middle market company with a dollar value of the contract over $25,000 will [likely] negotiate a super cap.”

Super caps on liability for data security incidents have grown a lot over the last several years, especially for technology companies. “They went from just being a multiplier of fees paid, which could be quite low, if you’re buying a SaaS product and paying $10,000 or $30,000 a year, to some customers demanding [up to] $1 million,” said Nguyen.

Last task

Negotiating the limitation of liability clause should be the last matter covered in any commercial contract, the lawyers said.

“You don’t want to start negotiating it and assert a position and then the vendor gives a discount on the fees,” said Alnajafi. “That’s going to change the calculation. Or if I jump in and start redlining, I don’t really understand the services we’re buying.”

For example, it might come out during negotiations that use of the product requires sharing a lot of sensitive customer data. “That’s something that might call for the addition of a super cap,” Alnajafi said. “It destroys your leverage a little bit.” 

Although the limitations of liability tends to be the most negotiated part of the contract, it’s seldom the reason a deal falls through. 

“If a company wants to do business with you and decided they want your product or service [it’s not] a deal breaker,” said Nguyen, speaking mainly of the tech sector. “It’s a risk allocation document.”

As long as you go in with a good understanding of the value of the contract to your company, and how much risk your company is willing to take, negotiating the limitations of liability clause doesn’t have to be difficult. 

“It’s like the bow,” said Alnajafi. “It wraps everything up together.”