Judge tears up vendors' get out of jail free card

Software vendors may lose their get out of jail free card after a UK High Court judge ruled that claims to fitness for purpose were legally binding on a...

Software vendors may lose their get out of jail free card after a UK High Court judge ruled that claims to fitness for purpose were legally binding on a supplier, write Gartner analysts French Caldwell and Richard Hunter.

On 6 May 2010, judge John Toulmin of the Technology and Construction Court of the High Court of England and Wales ruled against software vendor Red Sky IT in a suit filed by London's Kingsway Hall Hotel, which had purchased hotel management software from Red Sky. In his ruling, the judge said:

"Kingsway, as I have found, relied on Red Sky's advice that [the] Entirety [software package] would be fit for the purpose of use in a busy central London hotel. Red Sky's employees knew that group bookings formed an essential part of the system which it was supplying. I conclude, therefore, that Red Sky's standard terms excluding liability or limiting damages do not apply."

The judge ordered Red Sky to pay the hotel £110,997.54 for what he ruled was wasted expenditure on Entirety, plus losses in revenue and additional staff costs due to the software's failure to accurately reflect the availability of rooms when managing group bookings.

This ruling is a sign that software vendor liability is changing significantly. In our 2007 report "Childhood Ends: Legal Liability and the IT Industry" we predicted that by 2015 in the US, and soon after in the European Union, representations of software product and service capabilities and specifications (including descriptions of fitness for purpose) would become legally binding on vendors, and would confer liabilities on vendors that far exceeded contract values.

This ruling shows that customers can win damages for business failures caused by software that is not fit for purpose and which vendors misrepresent. The court agreed that Red Sky had promoted the out-of-the-box functionality of its front office software Entirety to manage bookings, and the judge also agreed that the software did not work as promised.

Although the damages were relatively small, this case is noteworthy because it went before a judge in a specialty court rather than being settled out of court. In a 1997 vendor liability case, the judge decided that the Unfair Contract Terms Act of 1977 (UCTA) did not apply to software. However, in the Red Sky case, the judge decided that the UCTA does apply, and that Red Sky's liability limitations were unreasonable.

Earlier this year, this same court ruled in favour of the plaintiff in another high-profile software case, BSkyB's £700m suit against EDS, which cost litigants at least £80m over three years.

Software vendors typically try hard to settle lawsuits out of court to avoid setting precedents and casting doubts over whether their limits on liability are reasonable.

Software vendors depend on these limitations in their standard license agreements to protect them from liability for business failures related to their software. Typically, vendors limit reimbursing their customers to the actual cost of the software, but do not cover business losses. If jurists in larger cases were to take this ruling as a precedent, software vendors would need to market and sell their products more responsibly.

As a result, vendors should prepare for transparency and product/price differentiation based on quality, certified fitness for purpose and timely delivery. They should also provide documentation of the software's appropriate use during the sales process and retain proof that the customer has reviewed this documentation.

Pre-sales, sales and marketing staff and partners should ensure that the software is fit for the purpose for which customers plan to use it. We recommend that software vendors look to the pharmaceutical and banking industries for examples of sales and marketing conduct standards related to fitness for purpose.

Customers, especially enterprises, should include terms and conditions that consider timeliness and functionality before accepting work and releasing final payments.

They should also be prepared to litigate if a vendor misrepresents how software would meet their requirements and if this misrepresentation leads the business to incur losses.

They should consider changing their software acquisition contracts to stipulate disputes will be settled in a specialty court such as the Technology and Construction Court of England and Wales.

Read more on IT legislation and regulation

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