How sale conducted may finger liable party

For the London Free Press - June 14, 2010 Read this on Canoe

A UK court ruled it would be unfair to enforce a limitation of liability clause where the buyer relied on the company’s advice

Commercial software purchases can be major investments. If problems arise or the buyer ultimately finds the software is not the right solution, either the buyer or seller must bear the cost of the product, lost profits and additional staffing.

Software companies include limitation of liability clauses in their standard terms and conditions, but this has not stopped courts from awarding damages to buyers in some situations.

The recent United Kingdom court decision of Red Sky v. London Kingsway Hall Hotel suggests that how the sale is conducted may determine which party is liable.

The court said it would be unfair to enforce a limitation of liability clause where the buyer relied on the software company's advice in deciding to purchase the product and the product was inappropriate for the buyer's intended use.

The software in question was meant to provide reservations and point-of-sale functions for hotels. After installation, the buyer found it did not meet its needs, and replaced it with other software.

The court also said that standard terms including a limitation of liability clause are predicated on the fact that a prospective customer would investigate the software and make up its own mind whether to purchase based on demonstrations and the operating documents.

UK courts have placed a heavy onus on software companies to provide the buyer with all relevant information if they wish to rely on limitation of liability clauses. What is relevant or sufficient will necessarily vary from case to case.

But it is clear - at least in the UK - that software companies are expected to take steps to ensure that the buyer has a fair chance to assess the product before purchase.

In this case, the court said the limitation of liability clause was unfair under the UK's Unfair Contract Terms Act, as the software was not fit for its purpose. Basically, the software vendor was not transparent enough to give the buyer enough information to make an informed decision on the suitability of the software for its particular needs.

In the end, the court found the vendor liable for 110,000 pounds in damages for software that it had been paid 50,000 pounds.

Though Canadian courts may not have gone this far based on the same reasoning, Canadian courts have found liability despite limitation clauses where they find them to be unconscionable in the circumstances. Unconscionable means that it has to be more than unfair or unreasonable. Essentially, courts won't allow vendors or their products to be incompetent, or cavalier in their claims, then hide behind limitation clauses.

Every product vendor, whether it sells software, online services, or other products, clearly wants to market their products in their best possible light. But it is wise to be as transparent as possible about the products, especially when it comes to helping purchasers make buying decisions.