financial software contracts terms

Posted on 2011-10-26
Last Modified: 2012-06-27
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?

Question by:darkbluegr
    LVL 2

    Assisted Solution


    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.

    LVL 22

    Assisted Solution

    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.
    LVL 19

    Accepted Solution

    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.

    LVL 19

    Assisted Solution

    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.

    Featured Post

    Why You Should Analyze Threat Actor TTPs

    After years of analyzing threat actor behavior, it’s become clear that at any given time there are specific tactics, techniques, and procedures (TTPs) that are particularly prevalent. By analyzing and understanding these TTPs, you can dramatically enhance your security program.

    Join & Write a Comment

    Suggested Solutions

    Email signature management is something that is often overlooked in many organizations or is simply not implemented effectively. Let's take a look at what methods are available for managing this important piece of corporate branding.
    It can often be challenging to stay relevant in the rapidly evolving world of technology. This can make recruiting talent difficult for companies of all sizes.
    This tutorial will walk an individual through the steps necessary to configure their installation of BackupExec 2012 to use network shared disk space. Verify that the path to the shared storage is valid and that data can be written to that location:…
    This tutorial will show how to configure a new Backup Exec 2012 server and move an existing database to that server with the use of the BEUtility. Install Backup Exec 2012 on the new server and apply all of the latest hotfixes and service packs. The…

    732 members asked questions and received personalized solutions in the past 7 days.

    Join the community of 500,000 technology professionals and ask your questions.

    Join & Ask a Question

    Need Help in Real-Time?

    Connect with top rated Experts

    25 Experts available now in Live!

    Get 1:1 Help Now