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Software development is a constantly evolving area, and like all software companies, you may experience various bumps along your journey when developing technology for your clients. So, what happens when you provide a product with software flaws that fall short of client expectations? For some guidance in these cases, this article will explain whether your company is liable if it develops bad software.

Responsibilities When Developing Software

Whether your software is ‘bad’ will depend on various factors, many of them being subjective and not necessarily relevant to your business’ liability. From a developer’s perspective, what bad software looks like may not align with what the law deems as insufficient. Therefore, whether your company engages any legal liability will depend on the nature of the software defects and software liability.

If your company sells software and the product you have developed falls short of what you promised, there can be legal consequences. However, this depends on:

  • who the problem affected;
  • how severe the problem was;
  • what the problem covered; and
  • how you tried to fix the problem.

Bugs in software are common, so you need to develop a response process for listening to customer complaints and fixing those software defects as soon as possible. As a result, your company will update your software product with new release versions to account for these fixes. Additionally, ensure that robust testing and quality assurance processes are part of your release schedule.

Company Liability

If you set up your software development business as a company, that will affect who is liable if software defects lead to legal action. A company is a separate legal entity, which means that in legal matters it can do many of the same things an individual could, such as:

  • entering into contracts;
  • owning assets;
  • pursuing legal action against others;
  • providing goods or services; and
  • being the subject of legal action.

As a result, the company itself could be liable for your software rather than you or your team personally. As such, your company may own the intellectual property rights of the software and be the legal party that users engage with when they purchase your software or its licensing.

Therefore, you may personally avoid liability if there are any legal issues with your software. However, you can protect your company’s liability in some of the same ways you would protect an individual, such as with:

  • indemnity insurance; and
  • appropriately drafted licensing agreements.

A software licence agreement (which you may know as an end-user licensing agreement, or EULA) sets out the terms that users agree to when they purchase a licence to use your software. A well-drafted agreement can protect your company and limit its software liability.

However, to adequately protect your company, you need to know your legal obligations when you provide software for a customer or client. If you fall short of these obligations, then you may be liable, depending on the situation. The following paragraphs outline some of these duties.

Software for Consumers

If you sell software to members of the public for their personal or domestic use, then your software will likely be a consumer good or service, depending on your distribution model. 

If you offer software under a browser-based subscription model, it will likely classify as a consumer service. On the other hand, if you sell your software as something that customers download as a one-off, it is likely to be a consumer product.

Regardless, when you sell to consumers, you need to ensure that your software is:

  • fit for purpose;
  • of appropriate quality;
  • carried out with reasonable skill and care as a service;
  • delivered or completed within a reasonable amount of time;
  • priced reasonably where there is no agreed-upon price;
  • legally sold; and
  • the same as any demonstrations or descriptions you give.

Accordingly, you are legally obliged to listen to customer complaints and give them remedies where appropriate under consumer law.

Data and Privacy

When your software deals with personal information, you must comply with your legal obligations under New Zealand privacy law. As such, you need to:

  • tell customers when you collect their information, and why;
  • store the information securely;
  • use the information legally and transparently;
  • delete information you no longer need;
  • report serious privacy breaches;
  • not share personal information without customer consent; and
  • comply with other requirements of the Privacy Act.

If you do not, your company can face legal fines and civil action.

Contractual Obligations

If you are developing bespoke software for a particular client, you will likely have a service contract or similar document outlining what you provide. Depending on the clauses of that contract, if you provide software that does not meet what the customer wants, your company could be liable. Keep an eye out for the key clauses in your contract that can determine this, such as:

  • cancellation;
  • limitation of liability;
  • indemnity;
  • dispute resolution; and
  • performance definitions.

Key Takeaways

What qualifies as ‘bad’ software can be subjective, so it will be highly fact-specific whether your company will be liable when you develop such a product or service. However, there are clear legal areas that you need to ensure you do not cut corners on, or else you can engage legal liability in those ways. If you would like more information or help with your liability when developing software, contact LegalVision’s data, privacy, and IT lawyers on 0800 005 570 or fill out the form on this page.

Frequently Asked Questions

What is personal information?

Personal information is any information that you can use to identify a living person. Examples include names and addresses.

Who is liable for software errors?

If you develop software, who is liable for any software errors will depend on the facts of the situation and the nature of the error. Well drafted legal documents and software liability insurance can help in these situations.

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