Risk Allocation

Risk allocation is a big part of contracts, and there are two main types: fault-based, and not fault-based.

A limitation of liability is the main type of fault-based risk allocation. Yes, I’m in breach of the contract, but I will only pay you damages up to X. You carry the rest of the risk which flows from my breach.

An IPR indemnity (of the type you get in software and SaaS contracts) is the main type of not fault-based risk allocation. I will indemnify you for all claims from third parties that your use of my software infringes their IPR, however spurious and baseless the claims are.

The not fault-based allocation is intended to take the risk entirely off the table. In the software/SaaS scenario it means that, if you are the buyer, you don’t have to do any due diligence on the IP provenance of the product. It simplifies your life considerably, and makes it that much easier to buy the product.

20 May 2025