Liability Issues

Express terms on Quality and Performance

The matter of quality and the performance standard of an IT system or software, should be provided for, in the contractual terms. The conditions may define the nature and extent of the supplier’s obligation, whether in providing an overall result or objective or just providing particular deliverables, irrespective of how they work in the context of the customer’s business

The supplier’s standard terms are likely to exclude or limit liability to the extent possible. In a supply contract, it is common for the supplier to exclude or limit its liability, particularly in relation to consequential loss due to the breakdown or non-functioning of the system.In the case of consumer supplies, legislation limits the extent to which liability can be excluded.

Under general contract law principles, liability for consequential loss arises only where it is the natural and probable consequence of the breach. Beyond this, the party in breach is not liable for loss caused by its breach of contract, unless ot (usually the supplier) is aware of particular circumstances which may cause further or other loss to the other party.

Exclusion and Limitation of Liability

See generally the contract law chapters in relation to the incorporation of clauses which exclude and restrict liability. There will be no issue as to incorporation where the terms are clearly included in the contract document. If, however, they are simply referred to or come to the customer’s attention after the contract is entered, they are unlikely to be incorporated.

By the contra proferentum principle, courts interpret clauses against the interests of the party who has put them forward and seeks to rely on them. Accordingly, if a term is contained in a standard form document, it is generally interpreted against the interests of the party who prepared proffered this document. This remains so, even if there is an opportunity to negotiate some aspects of the contract.

The courts have interpreted exclusion clauses, and to a lesser extent limitation of liability clauses narrowly. The first question is whether the matter excluded is within the scope of the clause at all. The courts require this to be clearly so. Even if it is within the scope, the courts may interpret that the clause covers one type of liability only (e.g. negligence), unless it also mentions other types of liability breach of another duty. It is unlikely the clause to cover a deliberate or reckless breach.

Software as Goods or Service

Statutory law makes different provision respectively, for the supply of goods and services. Obligations in respect of goods are in more absolute terms under the Sale of Goods and Supply of Services Act. The question arises in the context of the supply of a computer system as to whether the provision of software constitutes the sale of goods or the supply of a service.

The circumstances in which the software is acquired is a key factor in determining whether it constitutes a supply of goods or services. Where software is purchased as a bespoke system, the elements of design prevail and it is more likely to be seen as the supply of services. In contrast, the purchase of off-the-shelf computer program is more likely to be interpreted as the sale of goods.

There is support in England and Wales in a number of cases for the position that computer programs and software comprise goods. Other cases have held that the supply of shrink-wrap licensed software is not the supply of goods.

The move from providing software on disk and like hard media to provision over the internet militates against a sale of goods finding. Cloud computing services comprise a range of software type services. Most such arrangements are more likely to be classified as a service, given the absence of the supply of anything tangible.

In the United Kingdom, the law in relation to consumer protection and the supply of services has been substantially amended in 2015. Specific provision has been made for digital content. Similar provision may be made in the Republic of Ireland in due course.

Implied Terms on Sale of Goods and Supply of Services

Where, if and to the extent that the supply is one for the sale of goods, the general Sale of Goods Act conditions and warranties, apply. This includes conditions as to merchantability and fitness for purpose. In the Sale of Goods Act, these obligations are in unconditional terms and may not be excluded in consumer cases. In non-consumer cases, they may be excluded to the extent that the exclusion is fair and reasonable.

Where services are to be provided, it is implied by the Sale of Goods and Supply of Services Act that they will be performed with due skill, care, and diligence. The implied term applies to all aspects of the contract and not just the main purpose.  In a consumer contract, the term may be excluded only where and to the extent that is fair and reasonable to do so.

The obligation is to use due care, skill, and diligence. There is no implied obligation that the services must be fit for purpose or achieve any specific result. The court may find that the duty to use due care and skill, in fact, requires this outcome in the circumstances. However, this is not necessarily so.

Exclusion of Statutory Terms

In the consumer context, the Sale of Goods and Supply of Services Act prohibits the exclusion of the key implied terms relating to quality and fitness for purpose. The Act permits exclusions in in relation to these key implied terms, only where and to the extent that they are fair and reasonable.

The Sale of Goods and Supply of Services Act permits exclusions in the supply of services in consumer cases, where they are fair and reasonable. The legislation sets out criteria as to what is fair and reasonable. In a consumer case, unfair contract terms legislation limits the extent to which exclusions may be provided.

Common Law Implied Terms

The issue is not solely determined by statute. There may be implied terms in contracts for the sale of goods and the supply of services where no specific provision is made for the quality of what is to be provided.

At common law, the implied terms in relation to the provision of goods and services generally required the exercise of due skill, care, and diligence on the part of the supplier, much like the statutory test. It was and remains the position that in the case of a service, the result is less readily presumed to be contractually promised whether as a condition or warranty.

In most circumstances, the obligation of a service provider is equivalent to that which applies in negligence, where a service is provided to another for payment. The obligation is to exercise due care and skill, appropriate to a person undertaking that business, trade or profession or so holding himself out. Where a person holds himself out as having a higher level of skill or a specialism, he will be expected to meet the standard of a person with that level of skill.

The courts will also imply terms which give business efficacy in the circumstances to the contract. They may impute that the parties must, had they adverted to the matter, have agreed such implied terms. The implied terms may include obligations to the effect that goods or service will be of satisfactory quality and fit for purposes.

Fair and Reasonable Test I

The burden of proving that the clause is fair and reasonable rests on the party who asserts it. The extent of prior discussions and negotiations may be relevant.

The reasonableness test under the UK Unfair Contract Terms Act is similar to that in the Sale of Goods Act and Supply of Services Act 1980 in Ireland. The interpretation of clauses in relation to the reasonableness of exclusion and limitation of liability both in contracts for the supply of goods and services has been interpreted in England and Wales under the equivalent wording in the Unfair Contract Terms Act.

A wholesale exclusion of liability is unlikely to be considered fair and reasonable. An exclusion which has a rational basis, covering, for example, cases where the supplier is not at fault, where the customer is at fault or for unforeseeable losses is more likely to be valid.

In several cases, the courts have found that the fact that parties are of equal bargaining power, have taken legal advice and referred the matter to an insurer is relevant. On the other hand, countervailing factors include the parties’ relative insurance capacity (relevant to a liability cap at or below this level), their ability to take the loss and the risks involved.

Fair and Reasonable Test II

The courts weigh the factors which support the clause being reasonable against those which support the clause being unreasonable. The knowledge of the parties of the clause, it terms and effect are highly relevant.

The relative resources of the parties are significant. A large entity may have significant financial resources and a high level of product liability insurance. Certain types of organisations might reasonably be expected to insure against the risks. In the case of others such as public bodies and charitable organizations, there might be less of an expectation.

Where the parties are of large scale and capable of negotiating on their own behalf, this is not necessarily determinative in relation to the reasonableness of the limitation. If a particular system is the best available and cannot be obtained elsewhere without significant cost, this may detract from the reasonableness of the limitation.

The courts have also taken the view in some cases, that the fact that terms are common might indicate that it is not possible to obtain alternative terms from others. This tends to indicate unreasonableness.

In other contexts, the fact that terms and conditions are in standard terms in the industry may be a factor which might make it more likely to be held to be reasonable. Some courts have held that existence of similar clauses in competitor’s terms and conditions, is a factor which tends to uphold their reasonableness.

Fair and Reasonable Test III

Some cases have taken an interpretation that is more favourable to upholding exclusion and restriction of liability clauses. The supplier might appreciate that the product might not meet the requisite standards but the customer may be a better position to quantify and insure against the loss arising. The courts have rationalised that as between commercial parties, the loss might be best covered by insurance, in particular, the consequential loss arising from disruption of an information technology system.

On this approach, where the parties have equal bargaining power, the courts are more reluctant to hold that the term is not reasonable. The courts rationalise that parties are in the best position to determine what is or is not reasonable under the circumstances.

It is more reasonable to exclude liability, where the supplier has the means to assess the suitability of the system and satisfy itself. In contrast, where the supplier is in a better position to assess the suitability, the exclusion of liability is, all things being equal, less likely to be reasonable.

Unfair Contract Term (Allocation of Risk)

Where a term places a risk on the consumer which is more properly borne by the supplier, it may be rendered void as an unfair contract term. This is particularly so if the consumer is unlikely to be aware or fully appreciate the term and the risk and the supplier can more economically insure against and manage it

Clauses which purport to place risks on the consumer prior to delivery are likely to be unfair. It is now statutorily provided that risk cannot pass until the delivery of the goods in consumer contract cases.

Generally, the consumer should only be liable for loss arising from his actions, fault or neglect. Contractual terms which purport to increase the consumer’s obligations beyond taking reasonable care may be void as unfair. Terms which place a risk on the purchaser which could be easily avoided or mitigated by the supplier may be unfair.

Where payment is required in the event of supplier’s insolvency before the delivery of goods or the supply of services, the term is likely to be unfair. Indemnities for costs arising to the supplier through no fault of the customer, even in cases of force majeure, will be generally permissible.

Unfair Contract Term (Onerous Compensatory Obligations)

It is a potentially unfair term under the Unfair Contract Terms Regulations to require a consumer who fails to pay or perform his obligation, to pay a disproportionately high sum in compensation.

The following type of clauses on the part of a supplier may be unfair:

  • allowing the supplier to claim a fixed sum which is not linked to the damages in some cases;
  • giving the supplier discretion to determine the sum payable;
  • allowing the supplier to claim costs and loss of profit, thereby giving double compensation;
  • charging unreasonable interest;
  • passing on legal costs on an indemnity basis or where it is unreasonable to make the consumer responsible for cost which may arise when it is not the consumer’s fault;
  • measures of loss or damage which fail to involve mitigation.

Clauses which purport to give rights that are only available by way of court order, such as an irrevocable licence to enter a dwelling-house are unlikely to be valid, in view of the constitutional protection of the dwelling-house.

IP and Force Majeure

The supplier of software and information technology services will wish to protect its intellectual property rights and prevent them from being abused. It would be legitimate to seek to prevent infringement of copyright by use outside the terms of the licence such as by copying rather than loading and taking other steps which may facilitate dissemination.

The supplier of IT services is unlikely to be able to fairly exclude liability for breach of any intellectual property provided or to require indemnities for claims by third parties for IP infringement.

The exclusion of liability for force majeure matters outside the supplier’s control is usually fair and reasonable. Exclusions for liability for matters within the supplier’s control is less likely to be fair and reasonable. It is more likely fair if supplier notifies the customer of the circumstances and is afforded additional time or other allowance to deal with the consequences of the unforeseen events.

Unbalanced Termination Clauses

Clauses which authorise the supplier to terminate the contract on a discretionary basis where there is not an equivalent facility for the customer are likely to be unfair and invalid. Similarly, clauses which

  • enable the seller or supplier to terminate a contract of indeterminate duration without reasonable notice except where there are reasonable grounds;
  • automatically extend a contract of a fixed duration where the consumer does not opt out

are likely to be invalid.

Termination clauses may be unfair if

  • they are unbalanced in terms of the rights of termination which they grant;
  • they seek to limit the customer in terminating where there is a material fundamental breach;
  • allow the supplier on discretionary grounds or on short or no notice;
  • require long periods of notice for customers exercising the equivalent right;
  • provide for automatic renewal;
  • allow termination on grounds that are not linked to the customer and are outside his control.

Terms which uphold the ordinary default right termination in the case of fundamental breach are unlikely to be invalid.

Restriction on Assignment

The general principle is that the benefit of contractual rights may be assigned. There may be good objective reasons why assignment should be restricted in certain cases. The burden of performance of the contract cannot be assigned. The performance may not be subcontracted where the identity of the party is critical key and the intention is that the service or supply is to be that particular party.

If the consumer’s right to assign is restricted but the supplier has broad rights to assign and subcontract its rights and obligations, this may be unfair. The regulations provide that a term may be unfair which has the object or effect of giving the seller or supplier the possibility of transferring his rights and obligations under the contract where this may serve to reduce the guarantees for the consumer without his agreement.

Terms requiring criteria in relation to permitted assignment may be legitimate such as proof of ability to perform or the requirement for a guarantee, or a provision that consent to assignment is not to be unreasonably withheld may make an otherwise unfair clause, fair.

If there are protections which do not prejudice the consumer’s rights, an assignment clause for the benefit of the supplier may be fair and reasonable.

Dispute Resolution

Dispute resolution mechanisms which operate in an unfair and unreasonable manner are likely to be void under the regulations. The regulations specifically include as potentially unfair terms those which have the object or effect of excluding or hindering the consumer’s rights to take legal action or exercise of their legal remedies particularly by

  • requiring the consumer to take disputes exclusively to arbitration not covered by legal proceedings,
  • unduly restricting the evidence available or
  • placing the burden of proof on the party which by law would lie on the other party.

In consumer contracts, there are mandatory rules of jurisdiction and forum. Clauses which seek to change the law applicable or the forum in the case of a consumer, to other than his home State are usually invalid.