How can IT service providers limit their liability?

Keep on running

Lloyds Banking Group recently apologised after Lloyds, TSB and Halifax customers couldn't complete debit card transactions for three hours when two of the group's seven servers failed.

This follows a system failure in December 2013 which prevented hundreds of thousands of RBS, Natwest and Ulster Bank customers from using their debit or credit cards on one of the busiest shopping days of the year.

In each case, customers flocked to social media to vent their frustration and embarrassment at being left unable to pay when they reached the checkouts. With the reputational damage caused by such glitches damaging enough, what can be done to protect against customer claims for IT service failures?

Limiting your liability – standard terms and conditions

The terms and conditions for supply of the IT service will be a good place to start. Standard terms and conditions for supply of a service will typically include a section setting out limitations on the service provider's liability.

Limiting your liability in this way could significantly reduce the amount a customer can claim from you following a service failure. A limitation of liability clause will usually include three elements:

  1. A financial limit on the maximum amount that a customer can claim against you as a result of a service failure – known as a 'cap' on liability;
  2. A list of certain types or categories of losses incurred by the customer for which you will not be responsible at all. These might include loss of profits, loss of an opportunity or 'consequential losses'; and
  3. A list of the types of losses which are not excluded because the law does not allow it, e.g. losses incurred as a result of fraud. It is important to include this to avoid the risk of the limitation clause being unenforceable.

Limitations on liability for breach of contract in standard terms and conditions will be subject to the legal requirement that they are 'reasonable'.

'Reasonableness' is defined by law and is based on the requirement that a contractual term must be fair and reasonable having regard to the circumstances known (or which ought to have been known) by the parties at the time the contract was made.

Other helpful terms

Your standard terms and conditions can also help to limit your liability by:

  1. Making clear that you do not guarantee that the service will be uninterrupted or continuously available;
  2. Stating that you will not be responsible for providing the service when it is unavailable due to circumstances beyond your reasonable control - known as a 'force majeure' clause; and
  3. Excluding certain conditions for the benefit of the customer that are otherwise automatically implied by law.

Consumer-facing services

If the limitation and exclusions of liability in your standard terms are too wide, they may not be enforceable at all, leaving you exposed to potentially unlimited claims. The risk of this is particularly great where your customers are using the service as consumers, rather than business customers.

Contractual terms which restrict liability to consumers are heavily controlled by law. For example, the language used in consumer-facing terms and condition will be important, with a legal requirement for the terms use 'plain and intelligible language' rather than legal jargon.

Standard consumer terms must also pass a 'fairness' test meaning they do not cause a significant imbalance to the detriment of the consumer. If they are deemed to be unfair they will not be binding on the consumer under English law.

Claims for distress and inconvenience

In general, a customer is not entitled to damages for distress or inconvenience as a result of a service provider's breach of contract unless the inconvenience resulted in a financial loss, although a consumer may be entitled to make such a claim in certain specific circumstances.

  • Victoria Hart specialises in commercial law at Stevens & Bolton LLP. She advises businesses on a broad range of commercial contracts including IT outsourcing agreements, software development and licensing arrangements, supply agreements and online terms. She also advises on intellectual property, e-commerce and data protection law.