DEFECTIVE SOFTWARE

When a bug, breakdown or error occurs any person suffering loss and damage will be looking for the reasons why or how the fault occurred and compensation from the supplier.

Well drafted contractual documentation and a comprehensive record of all negotiations will be of great assistance if the blame for an incident is placed on you.

Typical causes of action arise under:

• a breach of contract
• the Trade Practices Act (1974) (Cth) ( “the TPA” ) and other relevant consumer legislation such as the Goods Act (Vic) 1958 ( “the Goods Act” )
• the law of Torts

If an essential term of a contract is breached then there may be a claim for losses and damages incurred, in addition to the right to terminate the contract. An essential term is a term of the contract going to the very root of the contract. Terms which are of such importance in IT projects may include:

• failure to provide good title to software or hardware
• failure of performance or functional requirements
• failure to migrate a system or data successfully
• excessive down time

Recoverable loss and damages may include a claim for money to put the customer in the same situation as if the contract had been performed including loss of bargain (expectation loss) and damage suffered and expenditure incurred in reliance of the contract (reliance loss).

The TPA and the parallel state statutes give rise to implied terms that goods will correspond with their description, if they are sold by description, and be of a merchantable quality and fit for a particular purpose where one is specified.

Contracts for hire or supply of services will, in certain circumstances, have an implied warranty that there must be due care and skill expended in providing the services and where services are requested for a particular purpose or result then there is an implied warranty that the services will be reasonably fit for that purpose.

Claims under the TPA for misleading and deceptive conduct and for false representations are potent causes of action against suppliers and in some circumstances other non-contracting parties. The scope of this Act is very wide and not to be under estimated. Of particular concern to the supplier is its liability for future representations for which it did not have reasonable grounds to make. Such representations may include the ability of the supplier to provide support services, encryption keys and access to source code that may be required for amendments. Pre-sales representations and literature and can often be misleading and staff should be made aware of the suppliers vulnerability. The parties may also have common law rights to rescind a contract for misrepresentation.

Representations as to the performance of a software program made in good faith can still breach the TPA.

At common law, parties are free to structure their contacts to include exclusion clauses, however, in most circumstances under the TPA and the Goods Act any clause which excludes or limits contractual liability that cannot be excluded or limited is void. The exclusion clauses are interpreted strictly against the party seeking to rely upon same. Accordingly, many limitation of liability clauses, especially clauses drafted in the USA, will not hold under pressure in Australia.

In brief, an action in the tort of negligence requires:

• a duty of care to be owed by one party to another
• that there has been a breach of that duty
• that as a result of that breach the plaintiff has suffered damage which is not too remote.

The definition usually adopted of the standard of care required is that of a reasonable man. A problem that often arises with IT projects is that due to the complexity, speed of delivery and secrecy of the products involved, customers often have limited knowledge of the goods and services being offered. Reliance is therefore placed on the advice of vendors, who know that their advice is being relied upon and may fail to qualify it. Tort is not limited to contractual situations and indeed extends beyond the vendor and its customers to parties who are not too remote including, for instance:

• health care patients who are being treated using medical software and suffer personal injury,
• office workers in a building whose air conditioner is computer controlled and who contract disease;
• exporters whose products end up at the wrong destination due to a faulty computer generated manifest.

Tortious liability for negligent misstatement can be excluded in certain circumstances by making it clear that the information or service provider is not assuming a duty of care. Typical efforts include warnings of limitations of liability at logon and during use of the service including warnings on all printed materials. Such clauses may provide some protection against a cross claim from a hospital or doctor that is being sued by a patient.

The damages that may be recovered from the supplier will be the amount of money necessary to restore the injured party to the position it was in before the statement, subject to the loss being foreseeable.

It is not all bad news for the supplier, at common law there is a duty on a party to minimise the loss suffered as a result of a breach of contract. That obligation may extend as far as co-operating with the other party to resolve problems and this is often overlooked in heat of the dispute. One Judge has said: “Trust in the infallibility of a computer is hardly a defence when the opportunity to avoid the error is apparent”.

Suppliers will always have to consider the possible consequences of a software defect. Loss of life is one of the most serious consequences that could occur as a result of software failure, however, with a proactive program of risk assessment, monitoring, prevention and insurance the waters are not as murky as they may first seem.

This article is a guide only and should not be used as a substitute for proper legal advice, readers should make their own enquires and seek appropriate legal advice.