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Disclaimer Provisions in Terms of Use Save Companies

Internet-related venture businesses always set “terms of use”.
Terms of use usually contain disclaimer provisions stipulating that the company will have no liability even in the event that the user sustains any damages.
Although this disclaimer provision may be an effective means of saving a company in a worst-case scenario, at the same time, it may be void depending on how the provision is actually worded.
It is very important to understand both the importance and the vulnerability of disclaimer provisions.

In this article, we will address the following topics:

  • Understanding an actual example where the disclaimer provision saved a company
  • Understanding when the disclaimer provision is void
  • Understanding in what particular circumstances the disclaimer provision should be included.

The FirstServer, Inc. case where the company was saved by a disclaimer provision.

In June 2012, FirstServer, Inc., a (Japanese) server rental company, experienced a large-scale system failure of the server it operated, resulting in the loss of data.
The service of more than 5000 users was impacted by this system failure.

FirstServer’s System Failure, Worsening of Large-Scale Data Loss [Japanese only]

Despite the data loss and the large number of users who incurred significant damages due to this incident, in the end, there were no reports at all about the court ordering FirstServer to pay large amounts in compensation.
To the contrary, FirstServer’s disclaimer provision functioned effectively to keep the amount of compensation very low; and currently, FirstServer even now is not the subject of any bankruptcy proceedings, and still continues to provide services.
What saved FirstServer was the disclaimer provision in its terms of use. More specifically, they were clauses like these.

Article 35(Disclaimer)
6. The Company shall have no liability of any kind for indirect damages, including consequential damages, incidental damages, and lost profits for damages sustained by a contracting party or a third party in relation to the Services, regardless of whether [such damages] were foreseen or foreseeable.
8. Paragraphs 2 through 6 of this Article shall not apply in cases where there are [damages attributable to] an intentional act or gross negligence of the Company or when a contracting party falls under the “consumer” category in the Consumer Contract Act.

Article 36 (Limitation on Amount of Compensation for Damages)
When the Company is liable for compensation for damages relating to the use of the Services, the maximum amount of such compensation liability shall be the total amount paid by the contracting party to the Company as consideration for the Services.

Without this disclaimer provision, FirstServer’s liability for damages would have been massive, and, under certain circumstances, FirstServer probably would have become bankrupt. For this reason, I cannot emphasize enough the importance of a disclaimer provision; on the other hand, you may be aware that in reality a disclaimer provision may be void depending on how it is worded.

Disclaimer provisions may be invalid.

This is from the perspective of

  1. Under what circumstances (intentional act, gross negligence, or slight negligence)
  2. What kind of liability is there?

Since this is confusing, I think it may be easier to grasp with a diagram.
First, let’s try to illustrate what kind of liability a service provider company has toward a user when there is no disclaimer provision [in the terms of use]. This is what it looks like.

The red portion shows the scope of the company’s liability.
To start with, obviously, in a case where there is no negligence, there is also no liability.
However, in a case where there is negligence (slight negligence or gross negligence) or an intentional act, the liability will be in accordance with the law, meaning that where there is a causal relationship [between the damages] and a default in performance, there is liability for all damages [arising therefrom].
Therefore, to reduce the liability, a company as a service provider includes disclaimer provisions in its terms of use.
For example, consider a clause which provides that “there is no liability of any kind in the case of slight negligence”

An alternative would be a provision which prescribes liability where there is negligence (slight negligence and gross negligence) and also where there is an intentional act, but which also restricts the scope of liability within certain fixed limits (for example, limited to an amount equal to one month’s use fee).

Yet another alternative might be including a provision stipulating that there is no liability under any circumstances (a complete disclaimer provision).

Complete disclaimer provisions are void. Of these, there are many who think that a provision where there is no liability under any circumstances goes too far. The complete disclaimer provision stipulating that there is no liability under any circumstances is void, regardless of whether it is used in B to B or B to C context.