By Jacqueline Monk, Special Counsel

While we don’t know the specific terms of the software agreement between CrowdStrike and Delta Airlines, the accusations that have been flying between the two are a good reminder to make sure your agreements deal with loss appropriately.  

Presumably at the time they were negotiating, neither CrowdStrike nor Delta expected a global outage of the nature that occurred on 19 July 2024. The clauses of a software agreement which deal with limitation of liability are generally heavily negotiated between supplier and customer. While at the time it can seem a waste of time (and money!) to look at these provisions, you can see that getting them right can provide protection if something ultimately goes wrong. It is important to be aware of your exposure to loss to avoid a situation where you are on the hook for significantly more than the benefit you are receiving under the agreement. 

At Walter Baden we are familiar with the risks facing software suppliers and their customers and have significant experience in addressing those risks with different structures of liability limitations. We’re careful to explore your unique objectives so that we can focus on them in any negotiations.  

Consequential Loss 

Usually a software provider will insist on the exclusion of ‘consequential loss’ so that it can manage its exposure. In Australia, there has been significant judicial debate as to what losses are encompassed by this term ‘consequential loss’. The key is to tailor the exclusion to fit the circumstances of the particular arrangement and the risks it poses to both the customer and supplier. In some circumstances it may be appropriate to exclude things like loss of profits, loss of reputation and loss of data. In other circumstances excluding these losses may present significant concern to a customer and will need to be addressed differently. If Delta pursues its action against CrowdStrike it is likely that the exclusion of consequential loss in their agreement will be tested to determine whether the losses suffered by Delta as a result of the outage were indirect and consequential or whether they are direct losses for which CrowdStrike should be responsible. 

Liability caps 

A supplier and customer will usually agree to a cap on liability under the agreement but the amount of this cap and the form it takes differs from agreement to agreement. Sometimes a customer will insist on carving out particular heads of liability (such as fraud, gross negligence, breach of intellectual property or personal injury) or including a supercap for particular types of liability where there is greater risk for the customer. 

Australian Consumer Law

It is important to bear in mind that when dealing with a ‘small business’ with a standard form contract there are restrictions on the types of clauses that you can include. Certain clauses that deal with limitation of liability that are perfectly acceptable in the usual course may be considered ‘unfair contract terms’ in an agreement with a small business. In November 2023 the thresholds for what constitutes a small business were increased so that a small business is now one that has fewer than 100 employees or makes less than $10 million in annual turnover. If you suspect that you are engaging with a small business we recommend reaching out so that we can check that your agreement doesn’t have any unfair contract terms. Business relying on unfair contract terms face significant financial penalties.  

Takeaways 

There are many ways to address possible loss in a commercial arrangement but it is important to identify your particular risks and appropriately address those in each unique agreement. You may also want to ensure if you are onboarding a particularly important piece of software (or supplying it) that you speak to your broker about the most appropriate forms of insurance to have in place. It is also key to look at the service level agreement which relates to the software and ensure that it provides appropriate support for the particular arrangement.