TOPIC – Liability for Software Failure MBA 8520 – Management and Application of Information Technology

Liability In a society that depends on computers to do such things as monitor a hospital patient’s well-being, assure our national defense and report on the cash flow of businesses, an important issue relates to who should bear the financial loss when computer software fails.

Software Failure - 1 ‘Software failure’ has been defined as the occurrence of either –deficient functionality, where the program fails to perform a required function, or –deficient performance, where the program performs a function too slow or in an insufficient manner.

Liability Exposure To some extent the potential exposure to liability either for the party who makes the software or the consultant whose expertise a customer relies on in buying the software depends on such things as: –whether the law treats the contract between the parties as a sales contract covered by Article 2 of the Uniform Commercial Code (UCC) or one covered by the common law of contracts; and –the language used in the contract to limit the manufacturer’s or consultant’s exposure to liability.

Software Failure - 2 Failure may also occur when software is not –compatible with other software or hardware, or –it is difficult to maintain or upgrade due to insufficient care by the designer

Distinguishing Between a Sales and Service Contract The law of contracts is effectively divided into two categories: –sales contracts –common law contracts.

Sales Contracts Sales contracts, according to the UCC, involve goods which are defined as movable, tangible personal property. The UCC provides that certain warranties (promises) may arise when a party sells goods. These express and implied warranties are designed to protect the buyer’s interests and involve such things as warranties of merchantability (goods are of at least average grade and quality) and fitness for a particular purpose (seller knows buyer’s needs and is assuring goods will meet those needs.)

Sales Contracts Failure to meet those promises can, assuming the warranties have not been disclaimed, allow the buyer to sue for damages. Buying software off the shelf would most likely be treated as a sale of goods.

Common Law Contracts Basically all contracts that are not sales contracts are covered by the common law of contracts. This would include such things as a sale of an interest in land, sale of intangible rights (i.e. copyright) and service contracts.

Common Law Contracts In dealing with a computer consultant whose expertise is depended on to get a system up and running, it is possible that any software he includes in the system would be viewed as part of the service that he provides and thus covered by the common law. This distinction can be important because of measures sellers can take under the UCC to limit a customer’s right to sue for failure. These same measures may not provide the same protection to the defendant if the contract is governed by the common law.

Disclaimer of Liability Sales Contracts The UCC permits a seller to disclaim warranties otherwise provided for under the Code. If the seller follows the Code’s procedure for doing this, it may defeat the plaintiff’s ability to realize any meaningful recovery for losses the buyer suffers as a result of software failure.

Disclaimer of Liability Service Contracts Service contracts open the door to potential suits based on a notion of fault (negligence) when software fails. The common law does recognize that a party providing a service can act, in some cases, to limit their exposure to liability for ordinary negligence.