financial software contracts terms

Hi, some friends are starting a brokerage firm soon, and their software vendor (the brokerage's main software that will connect to the banks and will handle transactions and reporting of clients accounts), has some clauses in the contract about liability.

basically they are saying that if the program malfunctions and causes a huge financial loss in the clients business (for example crashing when it needs to place a trade for a million dollars transaction), then the vendor will only accept responsibility in terms of the fees they have received in order to develop/license their program to the brokerage (not proportional to the possible losses/damage)

Is this typical practice in mission-critical application vendors in the financial industry or should they seek legal advice from attorneys experienced in software contracts?

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The legal term is consquential loss and its always limited or excluded to one extent or another. Your friends should be looking for a Service Level Agreement with some strong failure clauses and they can look at the possibility of insuring against the risk of such an incident happenning.

It is a typical clause in most contracts, not limited to software, for example if you tried to sue a car manufacturer because a fault in your new company van lost you some money on a job you *might* be able to get some compensation by arguing but you would never get more than the amount you paid for the Van UNLESS you could prove gross negligence and that there was no opportunity for due diligence by you (or fraud in the due diligence process). If they check the license agreement for their PC software, which they have probably agreed to without reading, they will find exactly the same story and its as likely to fail as the vendors platform (probably more so).

To be frank - if they are worried about this specific possibility they either dont trust the vendor, are unsure how to choose a package or unsure how to perform due dilligence for their IT infrastructure. My advice would be to ask for a proposal from two or three vendors and use an expert to review the responses, then let the vendors woo them for the business, this will let them have a much closer look at the overall operation than simply talking to an account manager.


Most of the vendors in software will have clause for limited liability.Vendors will be mostly responsible on the investment done to build the application, and not much on the 'actual' damage caused by the software malfunction.

Best advice would be to seek legal attorney experienced in software contracts, and get an input from them before deciding the contract.

Software and consulting contracts usually limit liability to the cost of the software and services provided. That's typical and probably a requirement of the vendor's insurers. Whether additional liabilities could ever be enforced against them is something you would have to consult a lawyer about.
I would be more concerned about the areas of the contract concerning data recovery, off load in the event of switching provider, encryption of data, data ownership and protection and so on.
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