Liability of software developers
Ever wondered what might happen if your product kills someone or causes expensive-to-repair damage? There are several ways to reduce the amount you would have to pay and ways to protect your assets in case of lawsuits and claims.
What is liability?
Civil liability, like criminal liability, is a consequence of wrongdoing by the party who is liable. Both liabilities are aimed at repairing the damage committed.
Civil liability may be contractual or extra-contractual.
Contractual liability arises from the breach of the contract that binds the signing parties. As an example we have the lack of payment on the date agreed in the contract, that the Software works worse than what was established in the contract, creation of more copies than allowed in the contract, failure to provide the maintenance services established in the contract, etc. This is the failure to comply with the contractual obligations due to fraud, fault or negligence..
Non-contractual liability is the obligation of individuals to repair damages caused to third parties due to fault, negligence or fraud. It does not require contracts between the parties that generate and suffer the damage. If you break a stranger's window you will have to repair the window even if you have no relationship with the owner of the window.
How is liability calculated?
This liability may fall either on the Developer who creates the Software or on the party who acquires the Software or a license to use it.
Liability is calculated in money, and is established by the valuation of the damages produced calculated in money. If you break a vase valued at $100, the way to repair the damage is to pay the $100.
It is not the same if your client has a limited liability than if you have it as a developer, it is a matter of personal interests.
There is the risk that the Developer, due to errors in the Software, receives claims that it cannot afford, because the amount claimed as compensation is much higher than the Developer's Assets.
Let's remember that according to article 1911 of the Civil Code, for the damages caused, one will respond unlimitedly with all the present and future assets. If the present assets are not sufficient, the responsible debtor will have to assume the debt, even to suffer seizures in a personal capacity.
When facing liabilities it may be convenient to have incorporated a Limited Liability Company.
Although for a freelance developer or freelancer it may seem a complex issue, it has many benefits such as only responding with the assets of the company, not assuming in a personal capacity the developer any debt or obligation to pay for the acts of the company.
Can liability be limited?
It is common for contracts to have clauses limiting liability, so the Developer signing any kind of contract has to be aware of whether such a clause is present and whether it is in his interest to have it.
When dealing with civil liability, many contracts add clauses such as: “The total liability of the Developer shall be $500, or the value of the Contract multiplied by 3, or the sum of the last 3 license payments”.
It is also not uncommon to add a full disclaimer clause for causal and consequential damages, where permitted by law, as these are often the most difficult damages to predict and can reach totally unexpected amounts.
The risks of incalculable or difficult-to-predict damages
Indirect or consequential damages are those that are not directly related to the action that causes damage, but arise from the consequences. If the Developer creates Software that malfunctions and destroys the customer's computer, the Developer indemnifies the customer for the value of the computer up to the contractually stipulated limit.
But the destruction of the computer may cause other problems such as the customer not being able to attend to his business for 5 days, and the customer may not be able to invoice 10 million dollars as a result of this lack of activity.
As these risks are beyond the scope of Developer's control, it is recommended that Developer agree that it will not be liable for such consequential damages. Although this limitation cannot be an exclusion to respond for damages caused by fraud, since it will be null and void according to article 1102 of the Civil Code.
Let us remember that for there to be malice, the breach must be intentional, motivated and the breaching party must be fully aware of its acts. It is fraudulent the non-fulfillment of the agreed benefits in spite of having full economic capacity to carry them out and not having a just cause that justifies the non-payment of the same.
How is the liability cap calculated?
The amount by which the civil liability is limited has to be the product of negotiation between the parties and is arbitrary, although it is logical that the amount arises from a study of possible risks during the contract. The party that has a possible risk much higher than the benefit it will obtain by joining the contract will have no incentive to participate, much more knowing that the tortfeasor will not be liable for the damages.
Furthermore, in the event that the limit would be excessively lower than the damages caused, there is a risk that a judge would declare the limitation clause as abusive, causing it to be null and void. This would cause the Developer to respond without limits, something very dangerous. As an example, would you drink a liquid that at best tastes good, but at worst gives you gum pain for the rest of your life?
Better yet, the person who sold you the drink doesn't even offer you a pain reliever or promise to take you to the dentist to fix the pain.A standard used in the industry is to limit liability to the value of the contract, and depending on the bargaining power of the parties, the client will look for the value to be by 1, by 2, by 3, and so on.
The logic of this way of calculating is that the Developer will not have to indemnify the client for more money than he has obtained from the client. The calculation does not have to be based on what would be fair, but on the economic capacity of the Developer to respond, in case he does not have liability insurance.
Not everything is fair game
All damages do not originate from the same source. It is not the same that the Software is defective because the Developer wanted it to be so, or because it has negligently made mistakes.
Or it may also be that the damage arises from something totally unrelated to the Software, such as that the Developer has breached the confidentiality agreement, does not assume his responsibility to protect the customer from third party claims or that he has used IP that he was not licensed to use.
Therefore, it is natural that the limits to civil liability set out above do not apply to intentional or malicious behaviour of the Developer. Making the customer sign a limitation of liability and then purposely causing damages is not admissible, nor is it admissible to do so to the Developer.
There are clients who will seek to exclude gross negligence from the limitation of liability. The practice would be to hold the Developer liable for all non-felonious negligence, even if the negligence is not grossly negligent or it is unclear to what extent the negligence is at fault for the damage.
The Developer should take care to make very clear what negligence it is willing to be liable for and what it is not, including a graduation of negligence. Excluding Intellectual Property infringements from the Liability limit may also be beneficial to the Developer. Imagine that the Agreement states that the Customer may only make 5 copies of the Software, but the Customer makes 20,000 copies. If each unauthorized copy has a value of $20, the damages caused or profits not obtained would be $400,000, for which the Customer would be liable.
However, if the Agreement established that the indemnity limit is 10,000 dollars, it would be very cheap for the customer to violate the Developer's IP. Practically, it would be a free license. The same would be to exclude from the limits the amounts unpaid by the customer for the subject matter of the contract.
Keep an eye on what's beyond your customer
I would like to remind that the Civil Liability only operates between the parties, so, despite establishing limits, this does not protect the Developer from fines for infringements that may arise during the activity of the Contract or claims from third parties outside the contract.
For example, sanctions imposed by administrative entities for infringement of labor rights, environmental regulations, data protection within the European framework, tax, etc.
The rights of users as consumers
Taking into account the above will be useful to protect your assets as Developers when dealing with your customers. However, these ways of limiting liability will not work when your customers have the status of Consumers and Users within the European Union.
The consideration of Consumers gives these persons a legal protection above the usual, reducing the ability of companies to reduce their civil liability through the use of contracts, as set out above. In particular, the European Directives seek to make companies liable for the marketing of defective products and products with hidden defects.
It remains that during the next years, due to the advances of Artificial Intelligence, the liability of the Developers that provide free Software to consumers, that is, Software that is provided without a commercial relationship and free of charge, will be defined. Although part of the doctrine considers that the developer who provides code for free should not be held responsible, developers are advised to be cautious with the programs they distribute.
What is a Consumer? As consumers we can consider the majority of the population, those who buy and use products and services without seeking to perform an economic activity.
In a practical way, if you buy a steak to eat, this regulation protects you, if you buy a custom-made product ordered to a company to carry out your profession, it does not protect you.
In your dealings with your clients, make sure that they are Companies, so that they do not have the consideration of Consumers. And if in any way your market is Consumers, be extremely careful with the safety of the product you sell, as there will be little limitation in case of damage.
AND YOU MIGHT BE INTERESTED IN A LIABILITY INSURANCE ;)