White SW Computer Law Intellectual Property, Information Technology & Telecommunications Newsletter - September 1998

An interesting legal dispute has been commenced in the US arising from a dispute over the responsibility for Year 2000 faults in third party software installed and customised by a contractor. The matter involves Anderson Consulting LLP, who were the consultants and J Baker, Inc. J Baker, Inc is a clothing and footwear retailer who engaged Anderson Consulting in 1989 to select, design, customise and implement a computer-based merchandising systems. This work was carried out by Anderson Consulting over the period 1989-1991 to the satisfaction of J Baker, Inc at the time. It has been subsequently found that the third party software installed and customised has Year 2000 faults that would have impacted the operations of J Baker, Inc and which cost in excess of US$3 million to remedy. J Baker, Inc sent a letter of demand to Anderson Consulting requesting compensation for the damages it had incurred. Anderson Consulting was unable to settle the matter out of Court and so issued a complaint, which would lead to the Courts having to make a decision in the matter. The outcome of the case will be important for consultants who deal in the installation and customisation of third party software. It will be interesting to see whether the vendor of the third party software will become involved in the litigation, or whether their indemnity clauses in their supply agreement protect them from such a claim.

The Copyright Act 1968, provides that the copyright in a photograph is owned by the photographer where the photograph is taken for valuable consideration pursuant to an agreement to take the photograph. If at the time the agreement was made, the purpose of the work was made known to the photographer, the photographer can restrain the use of the photograph for any other purpose. In the Federal Court matter of Grant Matthews and ACP Publishing Pty Ltd, Matthews was engaged to take photos of Kate Fischer to be published in an article in the magazine Cleo. A photograph was supplied to the publishers of the magazine New Idea and was used on the cover of this magazine. Matthews was successful in obtaining damages from ACP in the sum of $1,500, which was the Court's estimate of the likely payment Matthews would have received for the use of the photograph, together with interest of $150.00. ACP also gave an undertaking to the Court that it would not reproduce or authorise the reproduction of the photograph other than in the December 1995 edition of Cleo Magazine. The Court made no order as to costs, but allowed the parties to make written submissions on costs. The commencement of Federal Court proceedings is expensive so in the absence of an award for considerable damages, if the Court does not make an order for costs in your favour, litigation is likely not to be financially rewarding. When there is a likelihood of a small award for damages, alternatives to litigation should be explored wherever possible. Consideration must be given to obtaining Intellectual Property ownership at all times rather than leaving it to chance, to avoid expensive legal costs.

An increase in custom software development and the globalisation of the software market has increased the importance of having a well drafted software licence and software development agreement. The developer needs to reach a balance between minimising its exposure and loosing a potential customer due to insisting on the inclusion of clauses, which may be too oppressive for the customer. As with all commercial agreements, if given the opportunity to draft the engagement agreement, the wording chosen should give you the best protection possible. It is likely that the customer will request amendments that will reduce the protection afforded to the developer. It is then a matter of weighing the commercial risk against the importance of securing the engagement to determine how insistent the developer will be to keep to the original prepared agreement

Software developers should not forget to consider issues that are commonly not included in agreements that are supplied by the customer. These include:

• Is the copyright to be assigned?
• Do you wish to reuse your development libraries?
• When has the customer accepted the product?
• How are variations handled?
• How will you charge new release fees?
• What are the support fees and normal support hours of operation?
• Does the agreement adequately address confidentiality issues and intellectual property ownership?
• Have you considered disaster planning and source code escrow?
• Does your insurance cover software failure and professional negligence?
• Does the agreement include holding fees for customer delay?
• Is the customer going to indemnify you for Y2K work and unauthorised modifications to third party software?

When entering into a contract with another party that is a company, it is important to determine whether the person you are dealing with has the authority to bind the company to a contractual obligation. In the matter of Liberty USA Pty Ltd v Telstra Corporation Ltd and Anor, Liberty claimed that contractual obligations had arisen as a result of correspondence sent to them by a Telstra employee and that the resulting contractual obligations were breached. Liberty were involved in the purchasing of second hand telephones from Telstra for subsequent resale overseas. Liberty claimed that they had been given the contractual right of first refusal over certain future stocks of telephones. The Court found that Telstra had not acted in a way that would have made Liberty expect that the employee had the necessary authority to contractually bind Telstra, and nor had the correspondence given rise to contractual obligations.

The question of employees' authority is also important when negotiating a settlement of a dispute with a company to determine whether the person you are negotiating with has the necessary authority to bind the company to the terms of settlement you are proposing.