13 Dec 2008

Misleading Conduct Risk in Software Sales

Submitted by Troy Rollo

Most people in the computing and information technology industries have heard a joke that goes as follows:

Q: What is the difference between a used car salesman and a computer salesman?

A: The used car salesman knows when he's lying.

This problem is even greater in the software industry

, and in Australia section 52 of the Trade Practices Act 1974 (Cth) (the Act), and similar laws in each State, ban "misleading or deceptive conduct in trade or commerce." "Deceptive" means deliberately giving a false impression, but "misleading" covers even accidentally giving a false impression. A salesperson whose information misleads the customer breaches this law even if the salesperson does not know that the information given to the client is misleading.

Today's computer software is extremely complex. The fact is that in all but the simplest of software applications nobody, not even the head of the development team, will know all of the software's capabilities and limitations. Realistically, a software salesperson will inevitably breach section 52 of the Act no matter how hard they try not to. This creates an insurmountable barrier for somebody who strives to obey the law at all times.

In the context of section 52 the impossibility of knowing everything about an application is a serious problem, but a bigger obstacle can be the imprecision of customer requirements. When a customer tells a salesperson that theywant a "dot net" solution, or a "web services" or "SOA" solution, they are describing such a broad field that it can be difficult for even a technical person to know what the customer is asking for. Often the customer will not even know what they are asking for since they are just asking about buzzwords they have seen in a magazine or have heard from a competing salesperson. Even if the salesperson can answer "yes" to one of these questions, the exact way in which the software meets the description may be quite different to what the customer expects. The customer may, rightly or wrongly, believe they have been misled.

Tender documents with detailed question and answer sections provide an additional risk of breaching section 52 of the Act. Sales departments responding to these documents believe that if they answer "no" to even one requirement in the question and answer section they will not be considered for the business. There is a temptation to answer "yes" when that is technically a correct answer (or at least arguably technically correct) when it is clear from the question and the surrounding questions that the answer is wrong based on the meaning the customer has for the question. Being technically correct does not prevent the answer from being deceptive under section 52 - if the salesperson intends to create a false impression, the conduct is deceptive even if the words are literally true.

The real risk with misleading conduct is that where a customer is misled by conduct and suffers losses, they can bring an action to recover damages under section 82 of the Act. These damages can be much, much more than the value of the sales - it is easy to imagine a case where the damages would reach tens of millions of dollars. In the case of misleading conduct before entering into a contract, even a clause that limits the liability of the vendor may not be effective to prevent or limit liability under the Act.

It is possible to write a contract that does protect against some of the liability arising from section 52 of the Act using a form of words that puts responsibility back on the customer. Organisations selling enterprise software need to take care in drafting their contracts to ensure that they deal with this issue effectively. A software vendor who does not do so is open to liability that could destroy the business on even a single breach.

If you are accused of misleading conduct, it may be possible to establish one of a number of defences depending on all the circumstances, but the most effective step you can take to protect yourself is to write the contract to protect you.