Australia: Some Sanity Returns To IT Disputes?

Key Point

• Claims for damages for breaches of section 52 of the Trade Practices Act can now be reduced because the claimant carelessly relied upon a misrepresentation or otherwise contributed to the loss.

Recent changes to the Trade Practices Act could shift the balance between acquirers and suppliers in IT projects if disputes arise.

The complex nature of IT implementations means that what happens before the contract is signed might not be particularly relevant to the parties during the project. Nonetheless, representations made at the start of the contract can amount to a breach of section 52 of the Trade Practices Act if they are misleading and deceptive and cause loss. We've looked before at the use of section 52 as an increasingly popular remedy in IT disputes (see our article in the last edition).

Following the Federal Government's introduction of proportionate liability and contributory negligence in claims under section 52, those who carelessly rely upon misrepresentations will now see their damages reduced accordingly, and will lose the benefit of deep pocket defendants. As a result, acquirers of computer systems who rely upon misrepresentations will not be able to recover all the damages caused by their reliance if they were careless in relying upon them in the first place. The reforms give acquirers an incentive to carefully assess and advise suppliers of their current real information technology circumstances and future requirements when issuing requests for tender, and taking care when entering into contracts to negotiate their terms carefully.

The new provisions complement the reforms made by State Governments and are contained in a Schedule to the CLERP 9 Act. They apply to claims arising on or after 26 July 2004. As it is common for civil actions to include claims for misleading and deceptive conduct as well as claims of negligence and breach of contract, it will be important to consider the interaction between these Federal reforms and the specific State reforms dealing with proportionate liability and contributory negligence.

The new laws apply to claims for damages made under section 82 of the Trade Practices Act arising from breach of section 52 - and their equivalents in the ASIC Act and Corporation Act - for economic loss or damage to property.

Excluded from the new laws are:

• cases in which the defendant intentionally or fraudulently caused the economic loss or property damage;
• claims under section 52 where there is personal injury or death and
• product liability claims under the Trade Practices Act, which are already subject to proportionate liability and contributory negligence rules.

In a series of cases the High Court has held that claims for damages for breaches of section 52 cannot be reduced because the claimant carelessly relied upon a misrepresentation or otherwise contributed to the loss.

This has now been reversed: damages for economic loss or property damage are to be reduced to the extent to which the court thinks just and equitable, having regard to the claimant's share in the responsibility for the loss or damage.

In the IT context, this means that, for example, failure to properly scope a project or changing requirements by the acquirer could result in a reduction of damages as these actions might be considered to have contributed to the loss.

Previously, if there were multiple suppliers or contractors working on a project and all breached section 52, all would be liable to the claimant for the entire amount of the loss flowing from that breach. In effect, however, the one with the deepest pockets would be the obvious target for litigation. The introduction of proportionate liability provisions to claims where there are concurrent wrongdoers will mean that each defendant will be liable for only that portion it is responsible for. A concurrent wrongdoer is a person who is one of two or more persons whose acts or omissions caused, independently of each other or jointly, the damage or loss that is the subject of the claim.

Furthermore, there can be a single apportionable claim in proceedings even if the claim for the loss or damage is based on more than one cause of action (whether or not of the same or a different kind). Where there is an apportionable claim and one that isn't in the same proceedings, liability for the apportionable claim is governed by the new laws, and liability for the other by whatever laws are relevant to that claim.

The liability of a defendant who is a concurrent wrongdoer is limited to an amount reflecting that proportion of the damage or loss claimed that the court considers just having regard to the extent of the defendant's responsibility for the damage or loss. The court cannot give judgment against the defendant for more than that amount.

Once liability has been determined, the defendant

• cannot be required to contribute to any damages or contribution recovered from another concurrent wrongdoer in respect of the apportionable claim (whether or not the damages or contribution are recovered in the same proceedings in which judgment is given against the defendant); and
• cannot be required to indemnify another concurrent wrongdoer.

The successful claimant can still bring another action against any other concurrent wrongdoer for that damage or loss. Damages in those subsequent actions will be limited with regard to any damages previously recovered so that the claimant cannot be compensated for damage or loss that is greater than the damage or loss actually sustained

The reforms do not:

• prevent a person being held vicariously liable for a proportion of an apportionable claim for which another person is liable; or
• prevent a partner from being held severally liable with another partner for that proportion of an apportionable claim for which the other partner is liable; or
• affect the operation of any other Act to the extent that it imposes several liability on any person in respect of what would otherwise be an apportionable claim.

A good working relationship is one in which both parties actively participate, communicate and take responsibility for its own interests and actions, throughout the development. Part of this relationship in the IT sector must involve collaboration to resolve issues, such as an inability to achieve performance objectives, due to unforeseen constraints within software or hardware. However, it is essential to getting any relationship in the IT sector on the right footing for both parties to actively consider and agree upon – or agree to reject - mandatory performance requirements. With these changes to the Trade Practices Act, acquirers will have a greater incentive to do so from the start of the relationship.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.