Technology supply chains are a risky business

Stuart Corner

Smaller suppliers of technology goods and services are increasingly finding themselves between a rock and a hard place when contractual agreements turn sour.

In any commercial agreement there is always the possibility of conflict or litigation, most often when the recipient alleges that the product or service they have contracted for does not meet the contract terms. The risk of conflict is greater when those agreements relate to technology goods or service, with all their complexity.

These risks were explored in a recent Australian Society for Computers and Law (AUSCL) webinar, AI – to Zero Day, which focused on “the changing risk profile of technology products and services, across the supply chain.”

No place to hide: Supply chains getting trickier for SMEs

Delta Insurance New Zealand group claims manager Petra Lucioli explained how these changing risks were impacting smaller suppliers.

“One of the biggest things I see is an increasing mismatch in the contractual terms down the supply chain,” Ms Lucioli said. “And it’s getting worse as the bigger players at the top of the chain impose stricter terms and restrict liability on their own part.

“Then the technology provider in the middle can only put terms to their clients that those clients are prepared to accept. They end up taking on a lot of liability that actually rests with potential errors and omissions at the top end.”

Brisbane-based barrister and specialist in commercial litigation Nick Ferrett QC laid a fair portion of blame for technology contracts going bad at the door of the customer.

“Customers often lack the capacity to precisely state what they want from a technology service contract. Maybe the person negotiating on behalf of the customer is just not sufficiently technically adept to be able to talk to the contractor and tell them what they want,” Mr Ferrett said.

“Or it might be that they don’t have the skills, or the support to understand the problem they’re trying to solve,” he said.

“Those are things that I’ve seen in litigation in this area. And it might be that the customer just hasn’t done the work to understand its own needs before it enters into negotiations with the technology provider.”

He suggested many disputes could be avoided if people in the IT industry were able to explain their projects and explain their concepts in a way the uninitiated could understand.

“I think it probably matters at the front end in contract negotiation. It certainly matters at the back end when you’re having fights about it.”

Many organisations take out insurance to cover contractual liabilities, but Ms Lucioli said technology contracts were suffering from “accelerating complexity”, the sometimes subtle but important distinction between technology products and technology services.

This distinction, she said, caused considerable difficulty in the case of insurance.

“A technology product might be a piece of hardware but could equally be software. And technology services, which typically would be advice, could equally be software. This makes the distinction between the two quite difficult.

“A company developing software is providing services while it’s carrying out that development, but once it’s delivered that software, it becomes a product. So there’s quite a quite a lot of overlap between the between the two concepts.”

She said the inability of most professional indemnity policies to cope with this situation and led to the creation of a bespoke technology liability insurance products.

Gilchrist Connell special counsel Nitesh Patel – who specialising in cyber and technology – said the situation was being further complicated by companies not traditionally seen as providers of technology products or services joining the ranks.

“You’ve got your traditional software developer or hardware company, and telecom and media companies. But then you’ve got organisations like ediscovery providers and business support services companies,” Mr Patel said.

“So the concept of technology provider is now getting fairly broad. I think it’s going to keep getting broader, because the reality is that, for many businesses, even if their core business isn’t technology, some parts of their business could be seen as making them a technology provider.”

Holding Redlich partner Angela Flannery, who specialises in technology, media and telecommunications, gave a telling example.

“When an enterprise hires a marketing agency for an advertising campaign, typically they wouldn’t see that marketing agency as providing a technology service, but most advertising now is done digitally,” Ms Flannery said.

“A technology service involves the use and exploitation of data. And that’s what ad tech services do: they use data to more accurately target advertising.”

InnovationAus is a media partner of the Australian Society for Computers and Law.

Do you know more? Contact James Riley via Email.

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