TSA Pre-Signing Review
Make sure the remedy is real.
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The TSA liability cap sets the ceiling on what the seller pays when a service failure causes the buyer loss. Set too low, it makes every other remedy in the contract decorative. The seller's first draft is almost always too low. Negotiate the cap and its exclusions at signing as part of a complete TSA negotiation position.
The liability cap is the ceiling on the seller's total financial responsibility under the TSA. Every other remedy in the contract, service credits, indemnities, damages for breach, sits beneath it. If the cap is low, the buyer can win every argument about breach and still recover almost nothing, because the cap limits the total. This is why the cap is one of the most important commercial terms in the entire agreement and why sellers fight hardest to keep it small.
The buyer's exposure in a TSA is not theoretical. A failed payroll run, a botched data migration, a security incident in a shared system, or a finance close that misses a regulatory deadline can each cause loss far larger than a few months of service fees. The cap determines whether the seller shares that risk or whether it sits almost entirely with the buyer. A cap set at a fraction of annual fees leaves the buyer holding losses that dwarf the cap.
The cap also interacts with the service credit regime and the limitation of liability language. Sellers sometimes structure service credits as the sole remedy for service failures, which combined with a low cap can leave the buyer with no meaningful recourse at all. The buyer must read these clauses together. How service credits fit the picture is covered in TSA service credit claims.
The most common cap is a multiple of the fees paid under the TSA, often the fees for the 12 months preceding the claim. That basis is reasonable as a starting point, but the buyer should consider whether 12 months of fees actually reflects the loss a serious failure could cause. For high value services where failure carries large downstream consequences, a cap tied only to fees can be far too low. The buyer should size the cap against potential loss, not just against the fee.
The buyer should also resist a cap expressed as a fraction of annual fees, which sellers sometimes propose. A cap of 50 percent of annual fees on a critical service is barely a deductible. The buyer's position should be at least the full annual fee, and higher for services where the consequence of failure is severe. The number should reflect the role the service plays, not a uniform formula applied across the catalog.
Where a uniform cap cannot capture the range of risk across services, the buyer can negotiate a higher super cap for defined high consequence events while accepting a standard cap for routine services. This tiered approach prices risk where it actually sits. The buyer that accepts a single low cap across all services is subsidizing the seller's exposure on exactly the services where failure hurts most.
The cap should not apply to everything. Certain categories of loss are routinely carved out so they sit above the cap or have no cap at all. The standard carve-outs include breach of confidentiality, breach of data protection obligations, breach of intellectual property rights, fraud, and wilful misconduct. These are losses the seller should bear in full regardless of the cap, because capping them would let the seller treat them as a priced risk.
Data protection is the carve-out the buyer should fight hardest for. A data breach in a shared system can produce regulatory fines, notification costs, and liability that far exceed any fee based cap. If data protection loss sits under a low cap, the buyer absorbs the difference. The buyer should require that data protection and confidentiality breaches are either uncapped or subject to a much higher super cap. The disputes that arise here are examined in TSA data protection disputes.
The buyer should also confirm that the seller's indemnities for third party claims are not swallowed by the cap. An indemnity that promises to cover third party claims is worthless if the cap limits recovery below the claim value. The carve-out list is where the buyer protects itself against the losses that are large, foreseeable, and squarely the seller's responsibility. How warranty and liability caps interact is set out in TSA warranty liability caps.
The first pushback is on the cap size. The seller argues a TSA is a low margin accommodation to the buyer and that uncapped or high cap liability is disproportionate to the fee. There is some force to this on routine services. The buyer's counter is to tier the cap, accepting a modest cap on low risk services and holding for a higher cap or super cap on services where failure carries serious consequence.
The second pushback is on the carve-outs. The seller wants the cap to apply to everything, including data protection and confidentiality, to bound its total exposure. The buyer should refuse to cap data protection, confidentiality, IP, fraud, and wilful misconduct. These are not ordinary performance risks. Capping them would let the seller treat a data breach as a priced cost rather than a serious obligation.
The third pushback is on excluding consequential loss. Sellers routinely exclude indirect and consequential damages, which can swallow the buyer's real losses depending on how the exclusion is drafted. The buyer should narrow the exclusion so that direct, foreseeable losses from a service failure remain recoverable, and should ensure key categories such as the cost of procuring replacement services are treated as direct. A balanced cap negotiated before signing is far cheaper than discovering the limit during a dispute, as explained in TSA pre-signing leverage.
The liability cap is a pre-signing clause in the purest sense. It cannot be raised after a loss has occurred, and the seller has no reason to renegotiate it once the contract is signed. The buyer that accepts a low cap at signing has agreed in advance to absorb most of the risk of a serious failure. No amount of strong drafting elsewhere in the contract recovers that.
The practical position is a cap sized against potential loss rather than a flat fraction of fees, tiered where risk varies across services, with firm carve-outs for data protection, confidentiality, IP, fraud, and wilful misconduct, and a narrow rather than blanket exclusion of consequential loss. Read the cap together with the service credits, the indemnities, and the limitation language so the package holds as a whole.
The buyer that negotiates the cap seriously is buying the right to a real remedy. A cap set too low turns every other protection in the contract into theatre, because the buyer can win the argument and still not recover the loss. The cap is where the buyer decides, in advance, whether the contract's remedies are real or decorative.
Most caps are a multiple of fees, often the fees for the 12 months before a claim. That is a starting point, not an answer. The buyer should size the cap against the loss a serious failure could actually cause, and tier it higher for services where the consequence of failure is severe.
Breach of confidentiality, breach of data protection, breach of IP rights, fraud, and wilful misconduct should sit above the cap or be uncapped. These losses can far exceed any fee based cap, and capping them lets the seller treat a data breach as a priced cost rather than a serious obligation.
Because a data breach in a shared system can trigger regulatory fines, notification costs, and third party liability that dwarf annual fees. If data protection loss sits under a low cap, the buyer absorbs the difference. Hold for uncapped data protection liability or a much higher super cap.
No. The cap cannot be increased after a loss occurs, and the seller has no incentive to reopen it once the contract is signed. A low cap accepted at signing is an agreement, in advance, to absorb most of the risk of a serious failure. That is why the cap is a pre-signing priority.
How warranty caps and the general liability cap interact across the contract.
Read the article →The insurance that should stand behind the seller's capped and uncapped liabilities.
Read the article →Why service credits beneath a low cap can leave the buyer with no real remedy.
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