Buyer beware… of getting what you ask for

A recent UK technology case gives a good example of “buyer beware” and “you get what you pay for” in technology procurement.

The case is London Borough of Southwark v IBM UK [2011] EWHC 599 (TCC). Computerworld has a good write-up of the facts.

In short, Southwark Council embarked on an ambitious systems integration project to build a Master Data Management (MDM) system. Such projects have been fertile ground for legal disputes. The Court noted (in typically understated fashion):

In practice, it has been found by a number of the London boroughs which have introduced or tried to introduce MDM systems that they are complex.

In March 2006, the council’s IT dept drew up a Project Brief. The next month, the council met with IBM, which proposed a solution to meet the Project Brief that would cost between £1.5 million and £2 million. However, Southwark had a budget of only £500,000. As a result, it was agreed that a more limited solution would be carried out, to meet the council’s budgetary constraints.

During 2007 the project got underway and some progress was made, but problems soon ensued (as detailed in the judgment). In October 2007, a council staffer notified the first complaint against IBM, alleging that “the MDM ‘solution’ procured from IBM is not fit for purpose”.

“Fitness for purpose” is a legally loaded term. In New Zealand, it is an implied condition of sale (via the Sale of Goods Act 1908) that goods known to be bought for a particular purpose must be fit for that purpose. This applies to business and consumer goods (and “goods” includes software). There is a similar provision in the Consumer Guarantees Act 1993, though importantly, that Act applies to services as well as goods, and (in the case of consumers) cannot be contracted out of.

It is interesting to see from the judgment that after significant problems emerged, the council simply blamed IBM for delivering software that was “not fit for purpose”, apparently without looking at whether it (the council) selected the right solution for its purpose. (The fact is, it compromised on its requirements from the outset in order to meet its budget.)

I have been involved in a number of major IT implementation disputes where this has happened, with remarkable similarity. Part of it, no doubt, is corporate CYA culture, but the bigger part of it was (once you reduce it all down) the simplistic mindset that “we paid you truck loads of money, and you’re the IT experts, so if anything’s gone wrong it must be your fault”. Given what actually happened in these projects, this is quite unbelievable.

IBM reasonably responded to the council as follows:

At the time of purchase [the council] chose not to take a total solution/system option due to the cost implications and decided to contract the individual software and services items separately. In addition, [the council] chose to project manage the MDM implementation with assistance from the IBM software services team … and to date the IBM services contract has had only approximately 50% utilisation.

In Court, the judge echoed IBM’s comment above, saying:

[IBM’s software] does “what it says on the box”. An analogy is the potential car purchaser who might want an off-road vehicle but, having looked at the brochure for an on-road vehicle, says to the salesman “that’s what I want” and buys that vehicle. There will be no cause of action against the garage that the car is no good off the road. The salesman will reply, with justification: “you got exactly what you asked for”. That is essentially what has happened in [the council’s] case.

In my judgement, [the council] got by way of [IBM] exactly what its then team knew that they were getting and what it decided that it wanted and needed within its budgetary constraints.

As a result, the council had its case against IBM thrown out, and was ordered to pay costs to IBM. Moreover, the judge awarded indemnity (full reimbursement) costs in favour of IBM because of the council’s failure to accept a reasonable “walk away” settlement offer before the trial, in circumstances when it should have seen that its case had serious defects.

In other words, the pre-trial evidence put forward by IBM should have made the council realise that neither IBM nor its software was to blame, but that the client had itself simply chosen a cut-down solution that was “unfit” for what it later said it wanted – a situation I have witnessed on a number of occasions (and all of which we successfully settled out-of-court on favourable terms, I might add).

Tech law update 30 July 2010

Consumer guarantees & online auctions

The Government is now accepting submissions on its reform of the Consumer Guarantees Act, which will extend standard consumer protections to online auction sites such as TradeMe. The proposed text is as follows:

Supply by auction or competitive tender under subsection (3) does not include supply of goods and services by a supplier through a competitive bidding process using an online trading facility.

This will be a welcome change for consumers, and one I expect will be supported by many retailers.

Jailbreaking iPhones deemed legal

The US Copyright Office has ruled that jailbreaking (or unlocking) iPhones or other devices does not infringe copyright law. This clears the way (for now at least) for consumers in the US to legally use third-party tools to install  “unsanctioned” apps on their devices. To date, Apple has kept a very tight grip on which apps can – and cannot – be installed on iPhones (all via its official AppStore). Jailbreaking involves removing or bypassing Apple’s built-in restrictions that prevent unauthorised apps from being installed. Apple (and others) have argued that this breaches copyright law, by bypassing DRM restrictions and unlawfully modifying their code (similar in some ways to the “technological protection measure” provisions in New Zealand’s Copyright Act 1994). Proponents claim that jailbreaking is fair use.

The matter will not end here. Given the revenue involved it is likely to be a contentious issue for years to come. The US Copyright Office is not a Court, so its ruling is susceptible to legal challenge. Also, jailbreaking is still a breach of the iPhone’s EULA:

“You may not and you agree not to, or to enable others to, … modify … the iPhone Software or any services provided by the iPhone Software …”

However the enforceability of such a provision is greatly limited, and in practice largely useless if jailbreaking software and service providers become mainstream.

s92A rolls on

IT lawyer Rick Shera blogs on the New Zealand Law Society’s submission on s92A of the Copyright (Infringing File Sharing) Amendment Bill. He notes the Society’s recommendation that the Bill “should be amended to provide the Court with the power to order that the account holder may not open an account with another ISP during the period of any suspension”. That the existing Bill does allow someone to simply get another account could be seen as a loophole – but part of the reason why I have always thought disconnection was a red herring. In any case, the Law Society’s proposed change is simply draconian.

Law reform for online auctions

The Ministry of Consumer Affairs has released a discussion document on the proposed reform of New Zealand’s consumer law. One of the areas to be addressed is online auctions. Issues include whether online auctions should be regulated in some form, and whether the Consumer Guarantees Act should apply to goods and services bought via online auctions.

Regulation of online auction

A preliminary (and, lets be honest, entirely academic…) issue raised in the document is whether online auctions are presently subject to the Auctioneers Act. The document says no, on the basis that the Act only applies to auctions “by outcry”, which is defined as 6 people being physically present:

The reference to “outcry” in the beginning of the definition [of “auction”] applies to the various different auction methods referred to in the definition.

Based on that conclusion the documents goes on to say “the Auctioneers Act definition of auction only applies to auctions where it is possible for the bidders to be physically present with the auctioneer”. I take a different view from the good people at the Ministry. As I wrote previously, in my view “outcry” is not a necessary part of the definition:

there does not appear to be any reason … why the words “by outcry” must apply to the entire definition [of auction] while the other sub-clauses of the definition are read as alternates. Furthermore, to do so would limit the final key words “or where there is a competition for the purchase of any property in any way commonly known and understood to be by way of auction.” These final words are clearly a catch-all intended to prevent anything “commonly understood to be an auction” from being inadvertently excluded by the definition.

So my view is that online auctions are currently covered by the Auctioneers Act (which, as I said, is entirely academic). However, I also noted the craziness that online auctions should be “subjected to rules formulated decades ago and premised on a traditional, physical auction process”.

The fact is that specific regulation of online auctions is not currently enforced. Nor is it not necessary. Practical enforcement would be difficult. The UK, New South Wales and Victoria (among others), get by quite well without special legislation covering online auction providers. Hopefully, our new law will clearly exempt online auctions and other forms of e-commerce from unnecessary red tape.

Consumer Guarantees Act

The reform will also address the perennial issue of whether the Consumer Guarantees Act (or whatever its replacement will be) should apply to online auctions. There is no doubt that, generally, the same rules should apply for online “buy now” sales as for bricks-and-mortar sales. But what about online auctions?

The document says that whether online auctions are presently covered by the Consumer Guarantees Act is a “grey area”. But in my view there has never been much doubt: online auctions, if they are in fact conducted as an “auction” with bids etc, are not covered by the Consumer Guarantees Act (Trade Me probably wisely leaves it open for now). However the document gives a strong indication (for a discussion paper) of the preferred view:

There would appear to be justification, accordingly, to clarify that Trade Me style auctions should not be exempted from the Consumer Guarantees Act.

That would be a very sensible proposal, and my bet is this will be an outcome of the review. There will likely be some push-back from Trade Me-exclusive dealers, but most medium/large retailers (who also operate bricks-and-mortar shops) will support it. They already have full consumer obligations for all goods and services sold in their stores and online (non-auction style). So does every corner dairy and most small mum-and-dad shops. There are too many stories of shonky internet-only dealers who are only too happy that they are exempt from the consumer protection obligations that all these other retailers have. Trade Me does a great job in helping out where it can, but the answer is simple: close this unintended loophole. And it doesn’t create more red tape – it simply levels the playing field between dealers and simplifies the consumer protection regime.

Note that the proposal is not to extend the CGA to private online sellers and auctions. As per the current law, it will only apply to sellers “in trade” – i.e. shops, retailers and dealers.

There is debate as to whether online Trade Me style auctions are true auctions of the type intended to be exempted from the Consumer Guarantees Act because they do not meet the definition of auction in the Auctioneers Act. For instance people are not actually physically present for the online auction which is a key component of the “outcry” which is required under the definition of an auction in the Auctioneers Act. As noted, however, the Consumer Guarantees Act does not define auction by reference to the Auctioneers Act, so whether Trade Me style auctions are “auctions” for the purposes of the Consumer Guarantees Act is a grey area, open to interpretation.There is debate as to whether online Trade Me style auctions are true auctions of the type intended to be exempted from the Consumer Guarantees Act because they do not meet the definition of auction in the Auctioneers Act. For instance people are not actually physically present for the online auction which is a key component of the “outcry” which is required under the definition of an auction in the Auctioneers Act. As noted, however, the Consumer Guarantees Act does not define auction by reference to the Auctioneers Act, so whether Trade Me style auctions are “auctions” for the purposes of the Consumer Guarantees Act is a grey area, open to interpretation.

Is software “goods”?

A New South Wales appeals court has ruled that downloaded software is not “goods” under that state’s Sale of Goods Act (not dissimilar to New Zealand’s act of the same name). Case link: Gammasonics v Comrad Medical Sysytems [2010] NSWSC 267. Interestingly, the ruling means that software bought over the counter would be included as “goods” (and be covered by statutory guarantees), but the same software downloaded over the internet would not be.

A while back I discussed the consumer liability of software developers in this country. In essence, New Zealand’s Consumer Guarantees Act has, since 2003, included “software” in the definition of goods, which means that (consumer) software receives the same consumer protections as other consumer goods. One thing I didn’t mention was that software is also “goods” under the Sale of Goods Act 1908. In fact, this change was implemented at the same time that software was expressly included in the Consumer Guarantees Act.

The New South Wales version of that act does not mention software, and the New South Wales Supreme Court ruled that downloaded software – not having any tangible element – could not be “goods” falling within the act. However, software provided on physical media would constitute “goods”, because the necessary tangibility is present.

This does result in an inconsistent and illogical state of affairs, but one which will soon be partially corrected. The Australian consumer protection laws (similar to New Zealand’s Consumer Guarantees Act) is soon to be overhauled, and as part of the update, software will be specifically included as “goods”.

One point of interest is that the New Zealand amendments in 2003 which expressly added “software” to the definition of goods, only added software “to avoid doubt“.  (The phrases “to avoid doubt” and “for the avoidance of doubt” are common in legal documents, although mildly controversial. I have encountered some lawyers who refuse to use it, which is a bit extreme – it’s fine if used sparingly). By adding software to the definition of goods only to “avoid doubt” (i.e. clarify the law – a common use of that phrase in legislation), parliament was saying that it considered software to be already included “goods”.

The judge in this case did acknowledge:

it is productive of injustice if consumers purchasing software in the form of CDs or DVDs, either sold in retail shops or via the internet, are protected by the statutory warranties in the Sale of Goods Act, whereas consumers who download the same software directly from the internet or from a supplier, (as was the case here), would not.

A simple law change in Australia will remedy this situation.

Cash for crash – McAfee’s antivirus compensation

Antivirus company McAfee has done the right thing by offering to reimburse “reasonable expenses” for home users hit by its faulty update last week. Without intending to derogate from this good gesture, it should be noted that McAfee is (arguably) simply doing what it is legally required to do.

In New Zealand, software is covered by the Consumer Guarantees Act 1993 (see my post here). If a software product (in this case, the McAfee antivirus software) is sold in a situation covered by the Act (which for home users it would be), and the software is not of “acceptable quality” (which this incident would, I think, qualify as), a consumer can seek compensation from the developer for:

“… any loss or damage to the consumer … resulting from the failure … which was reasonably foreseeable as liable to result from the failure.” (section 27, CGA)

Under this provision, what compensation could be claimed from a commercial software developer who delivered “unacceptably faulty” code? Well, it depends on several factors, but in the McAfee case it could include:

  • The cost of hiring a technician to disable the faulty software;
  • The cost of hiring a replacement PC while another was being fixed;
  • Telephone support charges, etc.

Business-related losses, such as “lost profits” and business interruption costs, would be more difficult to prove and recover, given the “consumer” orientation of the Act and other factors, but would not be impossible. (In addition, it is often overlooked that businesses can be consumers too.) It would also be unlikely that compensation could be claimed for, say, a lost Trade Me deal due to the faulty software crashing a bidder’s computer – in most cases, such specific losses would not be sufficiently “forseeable” (to the developer) in the circumstances.

A consumer could also seek a refund for the software from the retailer (section 18(3)(a) CGA).

However, while the Consumer Guarantees Act provides a range of pro-consumer rights, in practice it can be difficult to enforce those rights – as anyone who has seen Fair Go or Target, or has tried to deal with a dodgy store-owner, will have seen. In some cases going to the Disputes Tribunal or even court may be necessary. Compensation can obtained where due, but the time and effort may deter some from doing so. Of course, a reputable business would never allow its reputation to be tarnished in this way, and ideally would proactively meet its obligations.

This is why it is good to see McAfee front-foot this situation by offering to reimburse expenses. Problems like this can and will happen from time to time with software products, and McAfee sets a good example for other software companies that face similar incidents.

Their offer does not, however, extend to business users – non-cash compensation has instead been offered for businesses. It is standard for licenses (and/or other sales terms) to exclude consumer warranties for business users. The offer of limited compensation for business users (where it is not legally required) is therefore again a welcome step, although some business users who incurred significant business interruption may be left out of pocket.