August 29, 2014

Risks for Businesses around ‘Reasonably Forseeable Damage’ to ‘Consumers’

Introduction

It’s easy for businesses, particularly technology businesses, to underestimate the risks they’re taking on when they provide services.  It’s a little known fact that there’s real potential for businesses to use consumer law to aggressively pursue consequential loss claims where they would always otherwise be excluded, since in many circumstances, you can’t contract to exclude liability for consequential loss under the Australian Consumer Law (ACL).

Suppliers of software and data management services are usually unaware that, under the Australian Consumer Law, even large corporations can be ‘consumers’ in certain circumstances.

When are Your Customers ‘Consumers’?

Even if you are involved in arms-length commercial dealings with large players, your customer may still be able to use consumer rights against you.

If a customer purchases a good or service of a value of $40,000 or less, for use within the business, for the purposes of the ACL the customer is a ‘consumer’ who will be able to rely on the guarantees and protections provided under the ACL.  The guarantees include a guarantee that the product must be safe, durable, free from defects, fit for purpose, acceptable in appearance, matches its description and matches sample/demonstration models of the good.

Even where the goods or services are of a value that is greater than $40,000, under the ACL a customer may still be a ‘consumer’ for the purposes of the ACL if the goods or services are ordinarily used for personal, domestic or household purposes.

Imagine you are a small startup providing customer relationship management services.  You have several contracts worth $1,000 or $2,000.  Business goes well, and you attract a very large corporate customer, who pays you $39,000 to take over their CRM. That customer is likely a ‘consumer’ for the purposes of the ACL.

Potential Liabilities for Suppling Goods or Services

Two factors combine to allow consumers to make potentially large damages claims under the ACL.

The first is the consumer guarantees provided under the ACL, which we addressed above.  The second is the risk that if your business is found to have breached one or more of the consumer guarantees, you may be required to pay additional damages for ‘consequential losses’ caused by failure to meet those guarantees.

Most importantly, damages are not limited to recovering the loss in value of the good or services caused by your failure, but may also include compensation for losses that are ‘reasonably foreseeable’ as a result of your failure to meet the consumer guarantee, which are referred to as ‘consequential losses’.

The ACCC gives the following example of a ‘reasonably foreseeable loss’ caused by failure to meet a consumer guarantee of fitness for purpose.

A faulty toaster sets fire to a consumer’s house or burns the consumer’s hand.  The consumer is entitled to compensation to make up for that loss and damage, not just to a refund for the faulty toaster.

(ACCC, Consumer guarantees: A guide for businesses and legal practitioners, p 28).

What This Means for Tech Businesses

Loss caused by something outside your control, like an act of an independent third party, or even a natural disaster, will not, ordinarily, be considered a loss that is reasonably foreseeable.  That said, in the technology industry, there are many kinds of losses that may be considered a reasonably foreseeable consequence of a breach of consumer guarantees.

Let’s return to the CRM database management example.  If you provide data management software that does not work properly, this may be considered a breach of the consumer guarantees of fit for purpose or acceptable quality of goods.  If you provide customer relationship management services, and an inexperienced employee accidentally deletes a client’s customer database, this may amount to a breach of the guarantee of due care and skill.

In those circumstances, the affected consumer might, as well as having received a faulty or defective good or service, suffer further losses – for example, they may not be able to contact their customers to make sales; perhaps they have to spend time and money collecting all the relevant information again.  That kind of loss is arguably a foreseeable consequence of your employee’s carelessness, or your faulty software.

Ironically, the fact that you do not charge significant sums for your service (less than $40,000) may put your customer in the protected position of a ‘consumer’.  Your ‘consumer’ may actually have very large sums of money on the line, even when the price of your services is comparatively low.  Accordingly, the protections afforded to your consumer puts you at risk of having to cover significant losses or costs should your good or service breach any of the consumer guarantees.

To illustrate just how big these costs can be, here are two real life examples.  Recently, a serious data loss by a company providing offsite servers to an internet hosting businesses led to claims of $10 million for consequential losses, the claim was eventually settled for $2 million.  An Australian insurer also claims to have covered an insurance claim for $7.8 million in lost revenues and $2.2 million in data replacement costs for a company as a result of data loss. These are both losses that could be categorised as consequential losses.

How to Protect Yourself

With a few exceptions, you cannot limit or exclude this kind of liability if, for the purposes of the ACL your customer is considered a consumer, and the losses they suffer a reasonable and foreseeable consequence of a breach of the consumer guarantees.  The best ways to guard against this risk and potential liability and costs are:

  • understand the consumer guarantees and develop systems to comply with them; and
  • ensure that you have effective liability insurance that includes cover for any loss, damages or liability that you may incur in connection with the consumer guarantees or a breach of those guarantees.

Data storage and management businesses, for example, need to put in place good backup systems to avoid data loss, and then get insurance in case the loss happens anyway.

Takeaway Points

  • You are legally required to comply with the consumer guarantees when supplying goods or services to consumers;
  • Customers who might not fit your idea of a vulnerable consumer may still be covered by consumer guarantees and may expose you to more significant liability;
  • You may have to pay for ‘reasonably foreseeable losses’ caused by your failure to meet consumer guarantees; and
  • You should get insurance to cover this kind of liability.