Bearing the brunt
Service providers must consider contractual obligations in the face of unexpected events
Andrew Scott: Risk of infrastructure failures will grow proportionally with the rise of e-trading
This year the London Stock Exchange (LSE) suffered its worst systems failure in eight years on what might have been one of the busiest trading days of the year. Connectivity problems meant trading was suspended for seven hours.
The incident shook London’s claim as financial capital of the world; billions of pounds of business were left undone. Meanwhile, rival New York’s stock exchange saw its third-highest trading day ever.
Who was to blame, considering the LSE has some statutory immunity from liability?
Technology has become increasingly vital in stock exchanges as automated trading programs replace the old system of orders taken over telephone or shouted in the pit. Timing is key, as traders expect to complete their orders within milliseconds.
The UK Financial Services Authority states that the risk of such infrastructure failures will grow proportionally with
the rise of electronic trading and straight-through processing.
Who is most able – the supplier or the customer – to bear the risk of major losses through technical incidents?
To a degree, parties to a contract are free to allocate the risk of loss, for instance through service levels, describing the types of recoverable loss, and excluding or limiting one party’s liability. The law of damages also allocates risk, according to a rule that loss is only recoverable if caused by the breach and by prescribing the degree and amount of compensation.
Statutory immunity aside, contractual and legal rules make it very difficult to claim for trading losses from a major IT outage.
It may be impossible even to quantify the loss, let alone prove that the outage was the cause, and a supplier may exclude
liability for trading losses in any event.
Generally, this works efficiently. Customers are typically more able to manage the risk of disruption, by finding alternative means of trading, and imposing trading losses on the supplier of the network invariably results in disproportionate risk compared to the return on investment.
However, with a restricted source of supply – as with the LSE – users do not have much choice. So competition is to be
welcomed. Although excessive competition may result in costly multiple networks, market forces should improve things.
Anticipating problems, though, can make a difference. Maintaining pressure on IT-based platforms is crucial.
Careful attention can stop incidents interfering with normal processes. It might be impossible to eradicate the unexpected, but it is prudent to prepare for any eventuality.
Andrew Scott is a partner at UK top 50 law firm Dickinson Dees LLP