Introduction
In the commercial world, contracts are the backbone of business relationships. Not only do they set out the respective parties’ rights and obligations, they also apportion risk and define the available recourse if things go wrong. For that reason, one of the most important aspects to deal with in any technology contract is that of liability: who is responsible when a party suffers loss (in particular, where the other party breaches its contractual obligations) and to what extent?
Liability in Australian commercial contracts is a nuanced and developing area of law. Careful drafting, a robust understanding of statutory requirements, and proactive risk management are vital to protect business interests and maintain fair commercial dealings. As legal and business environments change, so too must the contractual tools used to manage liability - demanding vigilance, adaptability, and a commitment to best practice from all parties involved.
This release takes a deep dive into the topic of liability in technology agreements, and explores the relevant legal principles, common contractual provisions, limitations and exclusions, and practical strategies for managing risk within Australia’s legal landscape.
Understanding Liability in Contracts
Going back to first principles, what exactly do we mean by “liability”?
In short, liability simply means legal responsibility for acts or omissions, especially those resulting in loss or damage to another party.
Almost every commercial transaction gives rise to a risk of liability through the interactions between the parties. Most commonly this can come about through breach of contract, but there are many other types of legal liability, including liability for misrepresentation, negligence, infringement of intellectual property rights, regulatory offences, and breach of statutory duty. Importantly, liability does not necessarily require fault of the relevant party, and can even arise through the acts of others.
Typically in contractual scenarios, where one party has assumed liability for loss suffered by the other party, the liable party may be required to financially compensate the other party for the losses suffered, and it is this potential financial exposure which drives the need to use contractual mechanisms to limit, and even exclude certain, liability under the contract.
The risk of not addressing liability, or having a liability regime stacked against you
If there are no provisions in your technology agreement limiting or excluding liability, the starting point is that there is no financial limit on the damages that can be awarded for losses suffered. Of course, there are certain legal or practical restrictions on a party's ability to claim from the other party.
For example, if the party making the claim cannot provide the existence of the duty or obligation and the relevant breach, as well as the causal link and the amount of its loss, it will have difficulty recovering from the other party. In addition, not all types of loss or damage are claimable - for example, you cannot claim for the stress suffered in dealing with a dispute - and if a party does not mitigate its loss then the recoverable amount will likely be reduced.
However, beyond these practical or legal limits, the law does not intervene, and if, as is usually the case, a party wants to limit its potential liability, a liability regime needs to be negotiated, agreed and included in the agreement.
The effectiveness of carefully drafted contractual liability regimes (and the corresponding negative implications where absent) is regularly observed in WK’s technology disputes practice. On the one hand, we have assisted a managed service provider manage over 30 claims arising from a cyber breach primarily in reliance on various limitation of liability provisions in its standard contract.
On the other hand, we have seen several instances where failure to pay proper regard to the importance of contractual liability regimes has led to negative dispute outcomes, particularly where the limitation clauses do not refer to negligence claims or fall foul of the Unfair Contract Terms regime in the Australian Consumer Law (ACL).
Our experienced Technology Law team can assist customers and vendors or technology solutions with tailored advice and strategies to optimise your position in IT contracting, including in relation to liability.
If you would like any technology law assistance, or have any questions or comments on this release, please contact Technology Special Counsel Nick Martin below.
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