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Avoid a $50,000 fine every time you sell a product or service for less than $40k with a warranty!

Monday, March 19, 2012

Many people still do not know about the new Regulation 90 (issued under the Australian Consumer Law), and its impact on suppliers' pricing of warranty services, contracts, websites and warranty cards.

It applies to all goods and services, not just ICT goods and services.

Regulation 90 came into force on 1 Jan 2012 and prescribes the form and content of a “warranty against defects”.  A failure to meet the requirements of Regulation 90 can be either a criminal offence or a civil contravention and can result in fines of up to $50,000 for a corporation and $10,000 for an individual per contravention.   In addition, providing incorrect statements about the existence or scope of warranties can result in penalties of up to $1,100,000 for corporations and $220,000 for individuals under other sections in the Australian Consumer Law (also known as the Competition and Consumer Act 2010).

This Regulation applies to all consumer contracts in Australia, which essentially is any contract for the supply of goods or services where the price is less than $40,000, or the goods or services are for domestic, household or personal use, irrespective of whether the buyer is an individual, a company or even a government body.

So what is a "warranty against defects"?

A 'warranty against defects' is any statement given at or about the time of supply of the goods or services to the effect that a person (not necessarily the supplier) will repair or replace the goods or part of them, rectify services or provide them again, or wholly or partly recompense the buyer for defective goods or services. 

The statement which comprises the warranty against defects could be oral (in which case it needs to be documented) or could be:

• in your terms and conditions (this includes your standard licence agreement or services contract).
• if the goods/services are purchased on a website, any statement made on the website.
• on any ‘warranty card’ that is included with your products.
• on product packaging, if you provide a warranty against defects on that packaging.
• at the point of sale, if you provide a statement about warranties at the point of sale.

What is required?

Where a ‘warranty against defects’ is given, Regulation 90 must be complied with.  Importantly, the warranty must be in a complying document which includes the exact text highlighted in bold below. 

'Our goods come with guarantees that cannot be excluded under the Australian Consumer Law. You are entitled to a replacement or refund for a major failure and for compensation for any other reasonably foreseeable loss or damage. You are also entitled to have the goods repaired or replaced if the goods fail to be of acceptable quality and the failure does not amount to a major failure'.

Presumably due to oversight, this text applies EVEN if you are only selling services despite the wording in Regulation 90 only referring to “goods”.   In addition to providing this text, there are a number of other requirements relating to providing certain pieces of information relating to the identity of the provider of the warranty services, the process of obtaining warranty services, what the service is and what costs are involved.

Based on our experience in amending IT suppliers contracts to comply with Regulation 90, there are usually at least a dozen specific amendments to be made to any 'standard' contract, and in some cases a significant review of business practices and pricing may also be required.

The Regulation 90 requirements also apply to both retailers and manufacturers. So if you resell other peoples’ goods and services, and the manufacturer’s terms and conditions, warranty card, packaging or similar have not been updated to comply with the regulation, you may be liable, as well as the manufacturer.

 

Need Help?

We would be pleased to assist you to review your current business practices, amend your contracts and/or provide advice in relation to how to become compliant with Regulation 90 and other aspects of the Australian Consumer Law.  For help, please call us on 02 9251 9664. 

Author: Mike Pym, Director, Pym’s Technology Lawyers.  A member of the Panel of Expert Bloggers on commun-iT and an expert on www.aiia.biz

Disclaimer: This is general information only. It is not legal advice, and is not a substitute for legal advice. Specific advice should be sought to take into account your particular circumstances. Pym’s Technology Lawyers Pty Ltd is a specialist IT and commercial law firm. It has liability limited by a scheme approved under Professional Standards Legislation.

 

Top IT Contract Misconceptions!

Saturday, November 19, 2011

We continue to be surprised at how often we have conversations with experienced business people who have an incorrect understanding of fundamental legal issues that can leave their business exposed to unnecessary risk.  A few important examples:


Liability: My liability is limited even if I don't sign a contract....

Many businesses enter into arrangements without an agreement.  Example: a small web design project for low dollar value.  Why waste time and money getting an agreement when we can just get the job done quickly?  Because if there is a problem or disagreement and there often is, you have unlimited liability!  Even if you have a contract and it fails to deal with your liability, you have unlimited liability.  Silence is not golden. 

Solution: Consider as a minimum preparing simple terms and conditions to apply to all work you do.  A small investment may save your business from significant risk.

 

Intellectual Property: I paid for it therefore I own it.

Wrong! Example: you have paid to have a website developed.  Despite paying for the work to be done you do not own the website unless this is agreed in writing.  Lawyers call it an assignment of intellectual property.  Without an assignment you may only have an implied licence to use the website.  The developer owns the intellectual property

Similarly if you are a business that uses contractors to work for you rather than employees, you need an assignment of intellectual property or they own the intellectual property in the work they create for you even though you have paid them to do the work.  This has an obvious flow on effect and may mean that you are purporting to pass on ownership to your customer when in fact you are not able to do so.  There may be tricky legal arguments available but who needs to go down this path?

Solution: Even if you do not have a formal agreement make sure that you get all service providers and contractors to sign an IP assignment and a confidentiality undertaking.  It doesn’t need to be complicated!

 

The Sales Pitch: it cant be relied on by the customer....

Whatever you say to your customer in the sales process can come back to bite you.  This is the case even though the customer signs an agreement later that does not include your sales pitch and even if the contract has what we call an 'entire agreement clause'.  This section of the contract might say that the contract is the whole or entire agreement between the parties and any prior representations, documents etc which are not set out in the contract are of no effect.  But they are! If you have misrepresented your product or service, you may be liable including under the misleading and deceptive conduct provisions of the Competition and Consumer Act (formerly section 52 of the Trade Practices Act).  A Director (and others) can potentially be personally liable too.  A disclaimer or exclusion clause in your contract will not necessarily negate your liability.  Although with care a misrepresentation it may be possible in some circusmtnces to have a representation qualified or corrected.  Note in addition that silence can amount to misleading and deceptive conduct.

Solution:  Preferably before contracting carefully review with your sales staff all pre-contract documents (including proposals, emails and presentations) and conversations with the customer.  Record any representations made.  Consider whether any representations need to be retracted, qualified or corrected and if so how best to do it.


Company name: You own it.

No you DON'T! Registration of a company name does not give you a proprietary interest in the name. If there is another company or business using a similar name you could find yourself in trouble if people are confused about who you are.  This is particularly problematic if your company name is similar to a registered trade mark.  You may be infringing the registered trade mark and be liable to the owner.

Solution: Always check trade mark registrations before you decide on a company or business name.  If you are aware of a business using a similar name, check it out.  It is a simple and inexpensive process.  Why waste good money and effort building a brand you may not own and cannot use.  Consider registering a trade mark if you have a distinctive name that you associate with your products or services or a logo.


Pym's Technology Lawyers has provided advice to many IT suppliers on all of these issues and can assist you with advice on any of these issues! 
 
Author: Peta Maloney, Director, Pym’s Technology Lawyers.  A member of the Panel of Expert Bloggers on commun-iT and an expert on www.aiia.biz

 

What risks are you taking if you engage a consultant to create software with no contract?

Monday, October 24, 2011

Consulting is seen as a simple agreement where one party provides consulting services, and one party pays.  So simple in fact, that many consulting engagements are done without an agreement.  In our experience this is a recipe for disaster, and whist things may go well for a few projects, sooner or later the parties will be caught out.  The potential consequences of not having an agreement are likely to far outweigh the benefits of avoiding the cost of having put an agreement signed in the first place. 

And the risks of not having an agreement fall on both parties, not just the consultant.

We have set out below three of the top issues that we see when things go wrong and there is no agreement in place.

There may be arguments as to how much is to be paid for the project.

The key issue here is: Is the work done on a fixed price basis (with a defined specification and defined deliverables) or on a time and materials basis (where the customer is paying the consultant based solely on the time that the consultant spends working on the project)?
 
If the customer thinks the work is being completed on a fixed price basis, and the consultant thinks the work is on a time and materials basis, there is a significant likelihood of a dispute when the consultant invoices more than the 'fixed price'.  It is essential that the 'agreed' basis of providing the work is set out in the agreement, and if the work is being done on a fixed price basis, it is essential to properly define the work, how the deliverables are going to be 'accepted' by the customer, when payment is to be made, what the consultant is rely on the customer to do to assist during the project and what assumptions underpin the price. 

In our experience not having a clearly defined specification and inappropriate acceptance testing are the main points of dispute in fixed price IT contracts.

Without an agreement the customer's right to use the output from the consulting services may be inadequate for the customer's intended use of the software. 

The key issue here is: Who owns the intellectual property rights in the output from the services? And what rights does the customer have to use the output from the services?

It is a commonly held belief that the customer who pays a consultant to develop software for them owns the intellectual property rights in the software that is developed. This belief is usually wrong. 

Software and other 'literary works' are protected by copyright law, and copyright law in Australia provides (with few exceptions) that in absence of a contract to the contrary, the first owner of copyright in software is the author of the software, or if that author is an employee, then the first owner is the author's employer.  Who makes payment is irrelevant to the issue of who owns the copyright in software. 

As a consequence when a customer engages a consultant to develop software for them and there is no written agreement, the first owner of the copright in the software that is developed is the consultant and not the customer.  This leaves the customer with an 'implied licence' to use the software that has been developed.  The courts have been very restrictive in defining the scope of an 'implied licence', and whilst the exact scope of the licence will depend on the circumstances of the case, customers should not assume that an implied licence is broad enough to allow the customer to modify or onward develop the software, nor to licence it to others (including their own related companies or to their own customers). 

Clearly it is essential for the customer to agree the nature of its rights to own and/or use the intellectual property (IP) that is developed by a consultant, and this must be done by an agreement which sets out the rights carefully. 

Without an agreement the consultant (and the customer) have unlimited liability

One of the usual clauses in an agreement for consulting services is a limit of liability.  Usually this clause is drafted to limit the contractor's liability to the customer, although in some cases the clause is mutual.

Accordingly if there is no agreement, then each party's liability to the other is unlimited.  This means that if a party breaches the agreement the other party is entitled to claim all its losses against the other, subject only to the laws relating to the calculation of damages that can be recovered.  From the consultant's point of view, it is a poor business practice to expose itself to unlimited damages, potentially including all foreseeable losses that the customer may suffer as a result of any defective software that is provided. Consultants usually want to have a balanced risk/reward arrangement whereby they are only exposed to an amount of liability for failure to deliver that is commensurate with the income/profit derived from the work.  And indeed most customers now accept it as a standard feature of an IT contract that the contractor's liability for defect product is capped. 

A further complication is the Australian Consumer Law (Competition and Consumer Law 2010) which provides that suppliers have to provide certain statutory guarantees to consumers (and th term 'consumer' includes companies and governments if the supply is worth less than $40,000).  In this case there needs to be very specific language in the agreement to manage the supplier's liability for defective products.


So if you are a supplier why take the risk of exposing your entire company's assets (or if you are a sole trader/individual with no company structure, you are exposing your entire personal assets) to a potential claim from your customer?  A simple agreement could significantly manage this risk.

Getting an Agreement is Easier Than You Think.

As we have shown, there are significant disadvantages to both the customer and the consultant for not having an agreement, so both parties should want an agreement to protect themselves. 

All that is needed is an agreement that is appropriate to the work that is being done.  Pym's Technology Lawyers have provided numerous agreements for consulting engagements, and they vary from a very simple 1 page document (usually in the form of a letter) that deals with only the essential issues, to a a more complex agreement that deals with all the issues associated with a large fixed price project.  In the middle are shorter form agreements of 2 or 3 pages which provide adequate coverage for time and materials contracts.  When drafted in line with 'usual business practice', these agreements are often acceptable to customers without amendment. 

For the sake of getting a short consulting agreement, why you would take the risk of not having one?



Author: Mike Pym, Director, Pym’s Technology Lawyers. A member of the Panel of Expert Bloggers on commun-iT and an expert on www.aiia.biz

Disclaimer: This is general information only. It is not legal advice, and is not a substitute for legal advice. Specific advice should be sought to take into account your particular circumstances. Pym’s Technology Lawyers Pty Ltd is a specialist IT and commercial law firm. It has liability limited by a scheme approved under Professional Standards Legislation.

 

Procure IT is ready to use. The new NSW Government contract for ICT procurement

Thursday, October 20, 2011
The much awaited new standard agreement that is to be used by NSW Government for buying ICT products and services (known as Procure IT version 3.0) can now be used. The publication of the first five Modules means that the benefits that the NSW government and the IT industry hope to achieve can now be realised, though the use of this agreement.

Whilst the 'legal boiler plate' terms and conditions such as liability, indemnity, insurance, ownership and licensing of intellectual property, confidentiality and privacy have been settled for some time, the agreement could not be used because the "Modules" had not been been finalised.  The Modules provide the terms and conditions that are specific to particular types of product or service that is being bought.

Just how important is this?

The IT industry, represented by the AIIA (Australian Information Industry Association) has been working with the NSW Government over the past 18 months to re-draft Procure IT to better reflect the way NSW Government buys, and the IT industry sells, ICT products and services, and to make the agreement fairer to industry.  By making the agreement fairer to industry the government expects to reduce the costs associated with negotiating changes to the agreement on every occasion, increase the competitiveness of tenders through increased industry participation, encourage industry development and innovation, and reduce prices (through a reduction in the risk premium that suppliers apply to onerous contracts).  NSW Government expects to save 10s of millions of dollars each year through the implementation of Procure IT version 3.0. Industry expects to save even more!

The Resellers' Business Model is Included: a Government First 

In addition Procure IT will include clauses which provide for resellers to provide hardware and software to NSW Government customers in accordance with the "reseller business model".  This means that resellers will be able to provide hardware and software using one of the following business models:
  • by supplying the hardware or software with full warranties and indemnities, in the same way as the Original Equipment Manufacturer (OEM) would provide the products and services; or
  • by supplying the hardware and software with "pass-through" warranties only; in other words the reseller is only obliged to give the Customer the warranties that it obtains from the OEM under the distribution agreement between the OEM and the reseller; or
  • by simply providing a "introduction and facilitation service", with the Customer entering into an agreement for the supply of the hardware or software directly with the OEM.
Of course whilst it is acknowledged by all that the different agreement profiles come with different prices, the flexibility of this approach will allow an entire industry sector to a participate in NSW Government procurement.  NSW Government is the first Australian government to acknowledge and embrace the reseller business model in its standard IT contracts.

Open Source Software

Procure IT also facilitates the supply of open source software and support for open source software, whilst acknowledging the primacy of the Open Source License. This is also a major improvement in the contract, enabling the supply of hundreds of open source solutions to NSW Government, under appropriate contact terms.

Which Products and Services can be Purchased under Procure IT Now?

The five Modules that have been approved for use are Hardware Acquisition, Hardware Maintenance and Support, Software Licensing, Software Development and Software Support Services.  It is expected that Modules for Data Management Services, IT Personnel (IT Recruitment and contractor/body shopping services) and Professional Services will be published in the next few months.  Additional Modules dealing with managed services, telecommunications services, hosting, SAAS, IAAS and PAAS are expected to follow laster this year.

Will Procure IT apply to current contracts?

NSW Government will use Procure IT for new tenders as they are issued. There is no expectation that Procure IT will apply retrospectively to existing agreements that have already been entered into.

Where can I find the version of Procure IT version 3.0

The new version of Procure IT version 3.0 is published on the NSW Government Procurement website at:http://nswprocurement.com.au/Tenders/Goods---Services-Standard-Form-Documents.aspx 


Pym’s Technology Lawyers has been the primary legal adviser to AIIA during the discussions with NSW Government on Procure IT.

Author: Mike Pym, Director, Pym’s Technology Lawyers.  A member of the Panel of Expert Bloggers on commun-iT and an expert on www.aiia.biz

Disclaimer: This is general information only. It is not legal advice, and is not a substitute for legal advice. Specific advice should be sought to take into account your particular circumstances. Pym’s Technology Lawyers Pty Ltd is a specialist IT and commercial law firm. It has liability limited by a scheme approved under Professional Standards Legislation.




 

10 Commercial Issues to get Right in your Software Licence.

Monday, October 17, 2011


We have been drafting software licenses for more than 20 years, and these are some of the key commercial issues you need to consider when drafting a software licence.  Of course you need to get the legal issues (including limit of liability, indemnity, intellectual property issues (IP), privacy etc) right as well, but lets start with the commercial issues!

10 Key Commercial Issues for your Software Licence

  • Be very precise about the right of usage.  The clearer and more carefully drafted, the more likely it is that the software supplier will be able to obtain further licence fees for additional usage.
  • Wherever possible, enforce the licence usage right through technological means (e.g. if you are providing a licence based on time (e.g. three year term), ensure that there is a technological means of preventing access to the software (or if appropriate, creating warning messages) at the end of the agreed term.
  • Ensure that there is an audit clause in the agreement that enables you to audit the customer’s use of the software.
  • Make sure that the agreement you provide complies with the Consumer and Competition Law (CCA), and in particular that any warranty complies with the minimum statutory guarantees (broadly, where the license or support fee is less than $40,000), and that where you charge for support services, the support service is a better or different service to the statutory guarantee for correcting defects that apply under the CCA.  There are significant penalties for companies and individuals for breach of the relevant provisions of the CCA.
  • Ensure that it is clear whether support fees are chargeable during any warranty period of the software licence.  It is common practice that the support fees for the support period to commence on the date that the software licence was granted (or if supplier installation is required, on the date of installation).  It is uncommon for the support period to commence at the end of the warranty period.
  • Ensure that it is clear as to who bears the cost of installing updates and new releases.  In particular, there may be a significant cost associated with installing a new release.
  • Ensure that it is clear whether your price includes or excludes GST.
  • Ensure that it is clear as to whether your next “upgrade” is defined as a new release (which is typically paid for as part of support and maintenance) or if the functionality is so different from the current functionality that it constitutes a new product (for which you would be entitled to charge a new licence fee).
  • Ensure that it is clear what rights the customer has to copyand use the supplier’s documentation. Can the supplier edit selected parts of your documentation and incorporate them in their own user manuals and training materials?
  • Make sure that your software licence is enforceable and is actually binding on the customer.  Particular care should be taken with ‘online’ clickwrap agreement and shrinkwarp agreements, as the law requires that the terms and conditions of the agreement to be drawn to the attention of the buyer at the time the contract is entered into.

How does your licence deal with these issues?

 

Mike Pym of Pym’s Technology Lawyers has been advising on software licensing for more 20 years, both as senior in-house counsel for global software companies and as part of Pym’s Technology Lawyers.   If your software license needs reviewing please contact him on 02 9247 9459.

Author: Mike Pym, Director, Pym’s Technology Lawyers is a specialist IT lawyer.  A member of the Panel of Expert Bloggers on commun-iT and an expert on www.aiia.biz

 

Disclaimer: This is general information only. It is not legal advice, and is not a substitute for legal advice. Specific advice should be sought to take into account your particular circumstances. Pym’s Technology Lawyers Pty Ltd is a specialist IT and commercial law firm. It has liability limited by a scheme approved under Professional Standards Legislation.

 

 

Procure IT v3.0 Expert Review

Tuesday, September 27, 2011

Procure IT v 3.0 - NSW Government's new standard ICT contract: A new direction

Procure IT version 3.0 is the new standard contract that will be used by NSW Government Departments and Agencies to buy nearly 2 billion dollars of ICT products and services each year.  Version 3.0 is a significant departure from the previous standard contract, in that NSW Government has taken a policy decision to make the terms and conditions more commercially acceptable to IT suppliers.  This contract represents a new direction in government procurement of ICT products and services.

IT suppliers will be asked to accept its terms and conditions without amendment in future tenders. 

New Contract Positions


The new Procure IT version 3.0 contract reflects new Government policy positions, including that the IT supplier retains ownership in newly created intellectual property (IP), narrower indemnities, more commercially acceptable warranties and clauses that deal with the new Australian Consumer law.  

New Business Models


The new contract also provides clauses that allow open source software and related services to be provided to NSW Government, and clauses that allow for resellers to sell ICT products and services without taking extra contract risk over and above the limited warranties that get from their Original Equipment Manufacturer. 

Check out the Article


Our AIIA.biz IT contract law expert, Mike Pym, Director of Pym's Technology Lawyers has attached an article on what the new Procure IT includes, and why it is of huge importance to both IT suppliers, and NSW Government Department and Agencies alike.  The article is based on Mike's recent publication in NSW Computers and Law Journal, "Good Governance generates best practice Module Form contract".  Check out Mike's article here.

If you sell ICT products or services to NSW Government you need to read this article.  And if you are in a NSW Government Department or Agency and are involved in government procurement of ICT products and services you should read it too!

Mike Pym represented the peak IT industry association, the Australian Information Industry Association (AIIA) over the past 18 months in their discussions and drafting of the new version of Procure IT. 


Consumer Law: Impact on Warranties

Tuesday, June 14, 2011

The new Consumer Law came into force on 1st January 2010 and has left many IT suppliers without adequate protection in their contracts and potentially exposing their companies and their directors to serious penalties and fines of up to $1,100,000 (for a company) and $220,000 for an individual). 

New Statutory Guarantee of Acceptable Quality.

Amongst the new laws is a new statutory guarantee where IT suppliers guarantee that their goods are of an “acceptable quality”.  This statutory guarantee includes an obligation for the goods to be:

  • fit for all the purposes for which the goods of that kind are commonly supplied
  • acceptable in appearance and finish
  • safe
  • durable,

as a reasonable consumer fully acquainted with the state and condition of the goods (including any hidden defects), would regard as acceptable……”

How does this apply to IT Suppliers?

So how will this be interpreted for IT products?  For example, does this mean that software has to be defect free?  How long does the statutory guarantee to provide a “defect-free” product last?  And how does this impact your current “Warranty Period” in your contract?  Whilst there is a useful guide issued by the Government, it does not provide much guidance on how the new Consumer Law impacts IT suppliers and their contracts.  The new Consumer Law prevents you contracting out of its obligations.  And many IT suppliers are surprised to know that despite the law being called “The Competition and Consumer Act 2010”, it applies to many business to business contracts and business to government contracts.  A “consumer” includes any contract with a price of below $40,000.

Amongst the statutory remedies for breach of this statutory guarantee are unlimited damages, including foreseeable loss.

Review your contracts urgently!

IT suppliers should be reviewing their contracts urgently to ensure they comply with the new Consumer Law.  There are ways to minimise your exposure to the new Consumer Laws by including certain clauses in your IT contact. 

Consequences if you don’t comply

There are three primary consequences if you don’t comply.  The first is that your company will almost certainly have unlimited liability for defective products or services if the contract is subject to the new Consumer Law.  And your company will be liable for any foreseeable loss (which we all used to call consequential loss), without any limit.

This in turn may cause your company to have issues with your professional indemnity insurance, as insurers don’t like insuring companies who do not have effective limits of liability for defective products. You should check with your insurer.

It is also possible that IT contracts that provide misleading information (for example, a contract that states that the IT supplier excludes warranties that cannot be excluded under the new Consumer Laws or provides sole remedies or remedies that are inconsistent with the Consumer Laws, will expose the company (and their directors) to serious penalties and fines of up to $1,100,000 (for a company) and $220,000 for an individual).

Pym’s Technology Lawyers has provided advice to many IT suppliers on how to amend their contracts to minimise the risks presented by the new Consumer Laws. 

Author: Mike Pym, Director, Pym’s Technology Lawyers.

Disclaimer: This is general information only.  It is not legal advice, and is not a substitute for legal advice.  Specific advice should be sought to take into account your particular circumstances.  Pym’s Technology Lawyers Pty Ltd is a specialist IT and commercial law firm.  It has liability limited by a scheme approved under Professional Standards Legislation.

 


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