When was the last time you lied to a customer? Today? Last week? Lasts no defence. Can you afford to be ignorant? month?
You've almost certainly already told at least one fib this year and most dealers will be surprised to learn that during the course of any working week, they could, and probably will, break the law. How? By not being fully aware of liability law.
IT law is complex, diverse and ambiguous. More than almost any other subject, it makes people the industry palpably uneasy. Even researching the subject feels like sneaking around in the shadows investigating a top-secret matter of national security. Suffice it to say that the information contained here is not inaccurate. It's just that no one - with the exception of Matthew Warren, an IT specialist lawyer at Bristow's - wanted to go on the record.
It's said that necessity is the mother of invention. IT law seems to be the perfect illustration of that point. However, the industry appears to be uniformly unaware of its legal responsibilities to customers, probably because of its lack of knowledge and understanding of the subject. 'Few people have a clear understanding of the legal structure of the channel or their rights and obligations to their customers,' Warren says.
One source adds: 'For an industry with such a broad, deep pool of technical knowledge and expertise, there are surprisingly few people in the business who know anything about its laws. In my experience, most seem to have little or no knowledge of the legal workings of their companies, the channel or the industry at large. They are legal Luddites who know nothing of their legal responsibilities to their customers. More worrying, perhaps, is that many have neither the time nor the inclination to care.'
According to more than one insider, some sections of the industry are more guilty than others. The channel is singled out in particular. 'Resellers are especially guilty of taking a laissez-faire approach to business where legality is concerned and, contractually speaking, many take their life in their hands every time they supply a piece of kit,' the source claims.
More often than not, it seems the problem comes down to dealer misconceptions as to exactly what their responsibilities are to a client in a given set of circumstances. Another source says: 'I've been made aware of several situations where dealers clearly had a legal responsibility to the customer, only for them to say something along the lines of: "It's nothing to do with me - it's the manufacturer's problem because it made the kit."
'Not only is this kind of attitude doing untold damage to the channel's already marginalised reputation, but it is also grossly incorrect, as many dealers have found to their not inconsiderable cost. When a dealer supplies a piece of kit - regardless of its origin - a legally binding contract comes into existence between the business and the customer. The contract doesn't involve the manufacturer directly on any level, so the reseller is liable. That resellers have no contractual liability to users is probably the single biggest misconception in the business. Ironically, this seems to be a point of law that is understood neither by resellers nor - more surprisingly - consumers.'
In recent months, the lack of legal awareness in the industry has been of particular relevance where year 2000 services and installations are concerned.
Many customers are asking for cast iron assurances that the products supplied by resellers are millennium-compliant. Accordingly, more are putting legal measures in place to ensure they have some kind of legal recourse should things go awry. For obvious reasons, this type of situation has the potential to become extremely hazardous for the reseller whose legal position isn't completely watertight.
Another IT law specialist says the lack of clarity is threatening to become a serious problem for the channel. 'In real terms, the dealer has no way of knowing exactly what will happen at the turn of the year. And yet despite this, many are risking what could turn out to be extremely costly legal battles.'
The consensus seems to be that unless resellers manage to shore up their legal defences sooner rather than later, many will find themselves landed with potentially massive legal bills come the year 2000. Warren warns: 'Many resellers, particularly hardware dealers, are going to find that they have substantial liability to their customers in respect of non-compliant PCs they may have sold over the past few years.'
To further complicate matters, the law isn't limited to contractual responsibility.
By all accounts, there are legal pitfalls and dead ends in all sorts of other areas. Negligence is one of them. Negligence law can play a significant part in the channel and is a bigger minefield than contracts.
In the case of negligence, the plaintiff must prove the reseller or manufacturer owed them a duty of care which was breached, resulting in direct physical loss. It is much more difficult to prove than breach of contract, but the potential cost to the defendant may well be significantly higher on occasions where it can be proven.
Another factor to remember is that consumers - or individuals as opposed to companies - have a great deal more protection under statute and under legislation such as the Consumer Protection Act 1987. Surprisingly, supplying to consumers can be significantly more risky than supplying to companies.
The need for the industry to become more vigilant seems clear. According to one legal expert: 'Every reseller that values its business ought to be thinking seriously about taking precautions to ensure it is legally protected.'
In the first instance, protection can be provided by business insurance, additional business insurance and/or some kind of professional indemnity plan, which should also be arranged by a specialist. The costs and the extent to which these measures should be taken will vary greatly according to the kind of business being conducted, the products being supplied, the types of policy employed and the level of legal cover required.
There are more immediate precautions that resellers can take. As one IT lawyer explains: 'First of all, resellers should check their existing insurance policies carefully, find out exactly what they are and are not covered for and increase their cover if necessary. Second, they should try to limit the extent of potential liability. The reseller should negotiate a ceiling on the amount for which it can be held liable in the event of legal action and include a clause in the contract to that effect. Limiting the amount of liability to the overall invoice value of the initial contract is a common practice and a sensible precaution, if the customer will agree to a limit.
'It's always advisable to think about what additional conditions can be built into the contract to provide further protection. Try to encourage the customer to take some of the logistical responsibility for the system's safety because a reseller's liability could be mitigated or avoided altogether if it can prove the customer has failed to carry out a contractual duty. This might, for instance, involve a clause that obliges the customer to fully back up its systems on a particular frequency for the contract to be legally binding. This could even be narrowed down to backup using particular products if required.
A reseller's recommendation of peripheral system protection measures, such as Raid, virus protection or a UPS, may also come into play. If the customer chooses not to buy a UPS, the court may consider it a mitigating factor in the case against a dealer.'
Unsurprisingly, one lawyer emphasises that resellers without contingency should take immediate and expert advice. Peter Bradley, general manager of Hewlett Packard's user group, points out: 'The area is a profitable free-for-all for the legal eagles and a complicated and expensive headache for the rest of us.'
Another lawyer responds, saying: 'Admittedly, I have a vested interest in resellers employing the services of a legal professional such as myself. But the fact that lawyers may or may not have an axe to grind scarcely matters when you look at the bigger picture. In the end, there's too much at stake for resellers not to give their legal position some serious thought. To say lawyers are the only people to profit in such situations seems slightly churlish - it's like saying: "I've decided I'm not going to die because the undertaker will make a fortune."'
In full agreement, the anonymous industry insider says he too has seen several dealers making desperate attempts at legal damage limitation after the fact. 'By the time legal assistance is sought by many resellers, it's often too late - the damage has already been done. Even in the event that the court finds in favour of the reseller - which is rare because the law has less sympathy with businesses that sell to the consumer market than to other companies - the reseller's reputation may have been done irreparable damage.'
Warren adds: 'When companies buy or even lease their premises, they will take legal advice as a matter of course. Why is it, then, that the same firms will risk millions of pounds on supplying technology without taking similar precautions? In IT, the legal pitfalls are just as great and probably more so.'
But surely the channel must have some legal comeback against the vendors?
Not, apparently, at the customer end of the contract. Even where a problem seems clearly and directly attributable to the manufacturer, the reseller will probably be held liable in the first instance and will be answerable to the customer in court. It is then usually up to the reseller to bring subsequent legal action against the vendor, to claim back costs, damages and any other expenses.
'With this in mind, it is essential that resellers ensure their contracts with vendors are weighted as much in their favour as possible,' adds Warren.
'That way, if the client sues, the dealer has some legal bargaining power with the vendor. If the level of legal comeback for the reseller against the vendor is significantly less than for the customer against the reseller, common sense dictates that the reseller is taking a greater legal risk. Unless the contracts match, or nearly match, the reseller is asking for trouble.'
It's a difficult balancing act. 'If the contract is weighted too heavily in the vendor's favour, the customer may not risk signing up to the deal and some of the exclusions may even be legally invalid.'
Persuading resellers to take a greater legal risk can be hidden in contractual legalese and dressed up to look more attractive with cheaper prices and/or better margins.
Clearly, then, the channel should beware, and take steps to avoid, contracts that ostensibly seem too good to be true - it means they probably are.
On the other hand, taking a greater risk than one's vendors - be it legal, financial, inventory-based or logistic - is part and parcel of channel business and ultimately part of its raison d'etre. Part of the justification of the channel's mark up over the vendor's selling price to them is the added risk it takes to sell it on.
Then comes software, which is an altogether more complex proposition than hardware. For one thing, software is much harder to qualify in legal terms and a legal problem is not one that is easily remedied. Warren says: 'The distinction between treating software as goods and treating it as a licence copyright has yet to be clarified.'
The confusion tends to arise because of the way individual software packages are defined - is the software a product, a licence or a service? If it can be defined as a product, the same general rules apply as with hardware.
But if the software can be defined as a service or licence for intellectual property, the rules change considerably to those that govern licensing and the provision of services. Unlike normal contract law, where a licence is conferred, the contract usually resides between the vendor and the user, not the reseller.
There is a basic rule of thumb regarding the supply of software. If the software is shrink-wrapped and/or bought off the shelf, it will generally be considered a product. If, however, the system must be developed and/or modified to meet the company's requirements - as is the case with line of business systems such as enterprise resource planning or enterprise database applications - it will generally be considered a licence or service-related package.
There are ways to avoid becoming embroiled in time-consuming contract negotiations, for example by addressing potential sticking points from the outset of the contract. According to Warren, one of the most simple and effective ways for dealers to limit contractual ambiguity and protect their businesses is to revisit their company's standard terms and conditions of doing business.
'Resellers should ensure that their standard terms and conditions are up-to-date, clear, concise and legally correct. It seems like a simple precaution and appears to be easy enough to follow through, but a disturbingly high number of channel businesses still have ambiguous, out-of-date and otherwise poorly drafted terms and conditions which - as legal documents at least - may be more of a hindrance than a help. Putting this right should be the first priority for any reseller reviewing its legal standing,' says Warren.
However, dealers should resist the temptation to be too clever by trying to exclude everything from their liability through disclaimers or other contractual 'tools'. Courts tend to take a dim view of such practices and will be more likely to find against a company that is obviously trying to avoid any responsibility.
Setting too low a ceiling on a contract's limitation of liability figure is also equally risky. But there is one golden rule, according to Warren.
'The thing to remember is that prevention is definitely better than cure. If the contract is complex, of high value, high risk or both, then make sure you seek legal advice.'
But what about the reseller for which taking precautionary measures has come too late? All agree that the first priority must be damage limitation - it is vital to assist the customer in every possible way if a problem occurs. The reseller should provide stand-in equipment, on-site support and advice, and make human and other logistical resources available if necessary. In short, it should do everything possible to mitigate the client's loss and its own culpability. This will protect the reseller's relationship and reputation with both the client and the outside world.
It will demonstrate its commitment to helping the customer recover, keep the potential cost to a minimum and work in the reseller's favour should the case come to court.
Resellers should try to assess the damage as early as possible. 'Whatever happens, it is a good idea to have an early assessment of the potential liability under the terms of the contract - the papers should be passed to the reseller's lawyer and they will advise,' says Warren.
Once this has been done, resellers should go over the supply contract with a fine-tooth comb, preferably with legal expertise and representatives from the relevant vendors. They should look at it in terms of what they may be held liable for and what they may be able to claw back from the vendors.
There are other benefits in maintaining close contact with the manufacturer during this process. It may be able to provide legal expertise not ordinarily at your disposal and it's not unheard of for vendors to take on the legal burden to protect their business partners. But to make these contingencies a possibility, it is essential that resellers keep communicating with both the vendor and the customer. Letting these relationships deteriorate during legal proceedings is a sure-fire way to exacerbate an already volatile situation and will help no one in the end.
It is essential to keep talking, no matter how fraught the situation may become, because in today's high-octane climate, everyone concerned stands to lose too much. All except for the lawyers.
Just 10 years ago, professional indemnity insurance was still something that - with the exception of lawyers, accountants and others of their ilk - nobody wanted or needed, much less understood.
But times have changed. Anything a company designs, creates or is nominally responsible for can become a liability to it in the event of legal action. This is especially relevant for resellers because grey areas in IT insurance policies are not uncommon - and that's where professional indemnity (PI) comes in.
Mike Fitzgerald, PI specialist at insurance consultancy Avondale Fitzgerald, says that with the year 2000 looming large on the horizon and issues such as European union barely around the corner, PI for IT companies is, out of necessity, one of the fastest growing areas in the insurance industry. But it isn't growing quite as fast as it might - and for one very interesting reason.
'Recognising the need to protect themselves from risks known and unknown, many IT companies are now looking to extend their insurance cover. But it isn't always that simple,' Fitzgerald says.
Under the circumstances, one might reasonably expect that any insurance company worth its salt would be falling over itself to offer PI services to businesses at the present time. Not according to Fitzgerald. He says many insurers view year 2000 protection as unjustifiable and a bad risk, and are biding their time before increasing their presence. Of those that will provide cover, most charge four-figure premiums and make resellers go through an incredible number of complex and, in Fitzgerald's view, often unnecessary questions and form-filling exercises.
Once the year-end has come and gone, he adds, the industry can expect to see a massive boom in interest from the insurers. They will have a captive audience of IT companies all looking for PI cover, having seen their competitors be sued and/or go out of business because of millennium problems.
'Some of the less scrupulous insurance companies are very clever,' Fitzgerald says. 'Like the rest of us, they are there to make a profit and it doesn't make sense for them to take what they see as untenable risks. That's why they have stayed unusually quiet until now and will continue to do so until after the turn of the year. Even in situations where companies think they are covered, when it comes to making a claim, they may find the small print excludes almost everything. Some insurance companies will even go out of their way to avoid paying out on a claim - that's why some of them are making a fortune.'
Unfortunately, it seems that not having PI is no longer an option for many businesses. The alternative may be too great a risk to take - companies just have to be careful where they go for advice.
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