On 16 August 2006, the Minister for Communications, Information Technology and the Arts, Senator Helen Coonan released Guide to limiting liability in Information and Communication Technology (ICT) contracts with Australian Government agencies.
The guide reflects the Australian Government’s new ICT liability policy that unlimited supplier liability is only to be included in ICT contracts when there is a compelling reason, rather than as the norm.
The guide will be good news for ICT suppliers although some will no doubt reserve judgment until they experience how the guide is implemented in practice. It seems clear that while the policy might bring about a more sensible capping regime for low risk ICT contracts, caps for high risk ICT contracts will still be significant and well over the capping norms in the private sector.
Goods and services to which the policy applies
The policy will apply to the purchase of all ICT goods and services such as hardware, software, IT services and major office machines.
The policy does not apply to goods and services procured under the Australian Government’s Whole of Government Telecommunications Arrangements as this has its own liability regime.
Liabilities which may be capped
The guide provides a quick reference guide on how agencies should approach the decision on capping different types of liability. In summary, liabilities are categorised as falling into the following three categories.
Liabilities which are usually capped
Breach of contract by the supplier.
Negligence of the supplier.
Liabilities which may be capped
Breach by the supplier of its intellectual property obligations.
Breach by the supplier of its confidentiality and privacy obligations.
Breach by the supplier of its security obligations.
Liabilities which should only be capped if there is a compelling reason
Unlawful or wilfully wrong full acts or omissions of the supplier.
Personal injury, sickness or death caused by the supplier.
Damage to tangible property caused by the supplier.
The guide recommends that the starting position for caps be a per event rather than an aggregate cap and although not definitive on the point, seems to contemplate the possibility of accepting total exclusion of supplier liability for indirect loss.
Determining the appropriate caps
The policy requires agencies to implement a risk management process involving consultation with internal and external stakeholders as well as monitoring and reviewing the risks and the risk assessment process. The guide provides various sample risk analysis, each involving:
identification of the particular risk
identification of any controls that will mitigate risk
an estimate of the costs which are likely to be incurred if the risk eventuates
an estimate of the likelihood of the risk occurring, and
a determination of an agreed cap for liability.
The risk management framework is mainly targeted to ‘low risk’ ICT procurement. The guide states that medium and high risk ICT procurements may require additional risk modelling to calculate caps and may even result in a liability clause with several caps.
The guide provides some practical sample case studies. In one, the low risk procurement of wireless hand held devices for under $80,000 attracts a default liability cap of $50,000. In another, the high risk procurement of a $2.5 million management system attracts a supplier liability of $25 million. Whether suppliers find a liability regime based on a multiple of 10 times the contract value a step forward, remains to be seen.
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