THE CONSTRUCTION INDUSTRY AND THE COMPUTER AGE: RISK EXPOSURES FOR THOSE DEPENDENT ON SOFTWARE
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THE CONSTRUCTION INDUSTRY AND THE
COMPUTER AGE: RISK EXPOSURES FOR THOSE
DEPENDENT ON SOFTWARE
I.
Clickwraps and Shrinkwraps: Warranties, Disclaimers & Remedies
Issue: What risks do your clients assume as a result of electronic technology?
Short Answer: Substantial risks unless insured against or lessened by contract
negotiation.
Analysis and Practice Tips
1. Contractors
Contractors increasingly rely on computerized tools to assist construction, and these tools
may impact the risk assumed by contractors.1 For example, a contractor using computerized
tools will generally be responsible to the owner if failure results.2 Accordingly, a contractor’s
exposure to liability is affected by agreements with the software providers, ASPs, ISPs, and
project owners.
The standard warranties provided by software manufacturers are often very limited. Such
standard warranties are often contained in either “shrinkwrap” or “clickwrap.” The term
“shrinkwrap” refers to a notice of terms contained on or inside the software box.3 The term
“clickwrap,” by contrast, refers to a notice of terms that appear on the computer screen when the
software user attempts to install the software.4
In many situations (due to the license language of the shrinkwrap or clickwrap), a
purchaser of equipment is limited to recovering the cost of the software. In a landmark case,
Mortenson Co., Inc. v. Timberline Software Corp., 998 P.2d 305 (Wash. 2000), a general
contractor who had a $2 million dollar bid bust as a result of a glitch in his bid analysis software
was limited to recovering the costs he had paid for the software licenses. Specifically,
Mortenson, the general contractor, had purchased a bid analysis program from Timberline
through Timberline’s local authorized dealer. Mortenson used the program to prepare a
1
Paul M. Lurie, Responsibility for Computer-Aided Defects, CAD in the Construction Industry, 21- FALL
Construction Law 23.
2
Id.
3
106 A.L.R.5th 309 (2003).
4
Id.construction bid. On the day of the bid, the program gave Mortenson 19 error messages which
stated, “Abort: Cannot find alternate.” Nevertheless, Mortenson submitted the bid generated by
the software. After Mortenson was awarded the project, it learned that its bid was $1.95 million
lower than intended. Mortenson then filed suit against Timberline alleging breach of express and
implied warranties. Timberline, in response, argued that the limitation on consequential
damages in the licensing agreement barred Mortenson’s recovery.
The full text of the license agreement was set forth on the outside of each of the nine
diskette pouches Mortenson purchased and on the inside cover of the instruction manuals. In
addition, the first screen that appeared each time the program was used referenced the license.
Further, a protection device had to be connected to each computer to enable the software.
Wrapped around each protection device was a license to use the device. Among other things, the
license agreement stated:
LIMITATION OF REMEDIES AND LIABILITY:
NEITHER TIMBERLINE NOR ANYONE ELSE WHO HAS BEEN INVOLVED IN
THE CREATION, PRODUCTION OR DELIVERY OF THE PROGRAMS OR USER
MANUALS SHALL BE LIABLE TO YOU FOR ANY DAMAGES OF ANY TYPE,
INCLUDING BUT NOT LIMITED TO, ANY LOST PROFITS, LOST SAVINGS,
LOSS OF ANTICIPATED BENEFITS, OR OTHER INCIDENTAL, OR
CONSEQUENTIAL DAMAGES ARISING OUT OF THE USE OR INABILITY TO
USE SUCH PROGRAMS, WHETHER ARISING OUT OF CONTRACT,
NEGLIGENCE, STRICT TORT, OR UNDER ANY WARRANTY, OR OTHERWISE,
EVEN IF TIMBERLINE HAS BEEN ADVISED OF THE POSSIBILITY OF SUCH
DAMAGES OR FOR ANY OTHER CLAIM BY ANY OTHER PARTY.
TIMBERLINE’S LIABILITY FOR DAMAGES IN NO EVENT SHALL EXCEED
THE LICENSE FEE PAID FOR THE RIGHT TO USE THE PROGRAM.
Id. at 308-09 (emphasis added).5
5
It is interesting to note that the Microsoft Project 2000 Warranty, Disclaimer and Remedies are even more
limited. The End-User License Agreement (EULA) warranty states, in part, that Microsoft warrants the product
“will perform substantially in accordance with the accompanying written materials for a period of 90 days from the
date of receipt” and support services “shall be substantially as described in applicable written materials.” The
EULA provides the user’s “exclusive remedy” and Microsoft’s “entire liability” shall be either a) return of price
paid or b) repair or replacement of product. However, in the same package there are two Supplemental EULAs.
Both of which state “To the maximum extent permitted by applicable law, Microsoft and its suppliers provide to you
the components and any (if any) support services related to the components as is and with all faults. . . .” The
Supplemental EULAs go on to disclaim any warranties, for, among other things, “correspondence to description,”
“workmanship effort,” “accuracy or completeness of responses.” Just to make sure, Microsoft adds “The entire risk
arising out of use of performance of the components and any support services remains with you.” The users remedy
is limited to the greater of $5.00 or the cost of the software. Although an argument can be made for the
unconscionability of these provisions, there is some authority upholding this type of language. See Moore v.
Microsoft Corp., 741 N.Y.S.2d 91 (N.Y. Sup. Ct. 2002) (holding that an End User License Agreement contained in
a software manufacturer's software program was a binding contract, where the plaintiff user was required to click on
an "I agree" icon before proceeding with the download of the software, and that the warranty disclaimers and
limitations of liability contained in the agreement precluded the user's claims).
2The court held that Mortenson, a nationwide construction contractor, had ample
opportunity to read and understand the terms of the shrinkwrap and clickwrap licensing
agreements before using the software, and found the limitation on remedies provision
enforceable.
The rationale of Mortensen was later followed in I.Lan Sys., Inc. v. Netscout Serv. Level
Corp., 183 F.Supp.2d 328 (D. Mass. 2002). In Netscout, the court held that a clickwrap
agreement was binding on a computer network support provider that purchased software from a
software distributor. In that case, the plaintiff support provider and defendant distributor entered
into a Value Added Reseller (VAR) agreement whereby the support provider agreed to resell the
distributor's software to customers. The software resold by the support provider included a
clickwrap agreement. The support provider sent a purchase order to the distributor for software,
then sued the distributor after a dispute arose over the transaction. The distributor contended that
under the VAR agreement and the clickwrap agreement it had disclaimed all warranties except
for a limited warranty with a term of 30 days, and that under the clickwrap agreement any
damages were limited to the cost of the license fees paid. To buttress this argument, the
distributor cited the following specific language:
LIMITATIONS OF LIABILITY . . . [DISTRIBUTOR] DISCLAIMS ALL
WARRANTIES AND CONDITIONS, EITHER EXPRESS OR IMPLIED,
STATUTORY OR OTHERWISE, WITH RESPECT TO THE LICENSED
PRODUCT, INCLUDING ALL IMPLIED WARRANTIES AND
CONDITIONS, STATUTORY OR OTHERWISE, OF MERCHANTABILITY,
NONINFRINGEMENT AND FITNESS FOR A PARTICULAR PURPOSE, OR
ARISING FROM A COURSE OF DEALING, USAGE OR TRADE PRACTICE.
[DISTRIBUTOR’S] LIABILITY FOR DAMAGES TO LICENSEE FOR
ANY CAUSE WHATSOEVER, REGARDLESS OF THE FORM OF ANY
CLAIM OR ACTION, SHALL BE LIMITED TO THE LICENSE FEES
PAID FOR THE LICENSED PRODUCT
Id. at 335, fn.3 (emphasis added).
The court noted that the terms of the clickwrap agreement provided that the agreement
did not affect existing written agreements, and held that the clickwrap agreement, if enforceable,
would serve to fill any void where the VAR agreement and purchaser order were silent. The
court held that the clickwrap agreement was accepted by the service provider on two alternative
grounds. First, the court found that "money now, terms later" was a practical way to form
contracts for the purchase of software, and that the contract was therefore formed when the
support provider clicked the "I Agree" button that appeared on the computer screen while it was
installing the software. Second, the court held that even if the clickwrap agreement were
considered a proposal for additional terms under Uniform Commercial Code § 2-207, the support
provider had implicitly accepted the additional terms because both parties were merchants and
the additional terms were not material. The court noted that the support provider could not claim
surprise at the terms, because the VAR agreement contained terms virtually identical to the
clickwrap regarding warranty disclaimers and limitations of liability, and the VAR further
expressly incorporated the terms of the clickwrap agreement.
3The logical thrust of Mortensen and Netscout has been followed by various courts. See,
e.g., Forrest v. Verizon Comm., Inc., 805 A.2d 1007 (D.C. 2002) (upholding a forum selection
clause in an online clickwrap agreement for internet access services because the clause had been
reasonably communicated to the plaintiff subscriber prior to his acceptance of the agreement
through use of an “I Agree” screen); Moore v. Microsoft Corp., 741 N.Y.S.2d 91 (N.Y. Sup. Ct.
2002) (holding that an End User License Agreement contained in a software manufacturer's
software program was a binding contract, where the plaintiff user was required to click on an "I
agree" icon before proceeding with the download of the software, and that the warranty
disclaimers and limitations of liability contained in the agreement precluded the user's claims);
Barnett v. Network Solutions, Inc., 38 S.W.3d 200 (Tex. App.—Eastland 2001, no pet.)
(upholding a forum selection clause in a clickwrap agreement because the plaintiff domain name
registrant had adequate notice of the terms contained in the clickwrap registration, as he was
required to scroll down through the terms of the agreement before accepting the agreement and
proceeding to make his purchase; noting also that, as with paper contracts, a party that enters into
a contract will not be excused from the contract's terms because of a failure to read the contract).
Despite the foregoing authorities, some cases find grounds to avoid shrinkwrap and
clickwrap limited warranties. For example, In Caudill Seed and Warehouse Company, Inc. v.
Prophet 21, Inc., 123 F.Supp.2d 826 (E.D. Pa. 2000), the United States District Court for the
Eastern District of Pennsylvania found that a software manufacturer’s limited warranty to repair
or replace the software failed of its essential purpose because the software could not be repaired.
Therefore, the court held that under Pennsylvania’s version of the UCC, the plaintiff could avail
itself to any remedies allowed by the UCC, including consequential damages and that the license
agreement’s limitation of damages to the cost of the software was unenforceable. See also,
Klocek v. Gateway, Inc., 104 F. Supp.2d 1332 (D. Kan. 2000) (court found that computer
purchaser was offeror and that the vendor accepted the offer by shipping the computer; the
vendor’s enclosure of the license agreement in the computer box acted as an acceptance even
though it contained different terms and that the vendor had not made acceptance of the license
agreement a condition of the computer purchaser’s acceptance of the computer).
The logical thrust of Caudill Seed and Klocek has been followed by various courts. See,
e.g., Specht v. Netscape Comm. Corp., 306 F.3d 17 (2d Cir. 2002) (holding that plaintiffs, by
acting upon an invitation to download free software, did not agree to be bound by the software
license agreement—which contained an arbitration clause—because plaintiffs could not have
learned of the existence of those terms unless, prior to executing the download, they had scrolled
down the web page to a screen located below the download button); Softman Prod. Co., LLC v.
Adobe Sys., Inc., 171 F.Supp.2d 1075 (C.D. Cal. 2001) (holding that a reseller of software
packages was not bound by an end user license agreement because it never installed the software
and thus never had the opportunity to view or accept the terms of the license, which were not
contained in the packaging, but presented only when a user installed the software; holding
further that reading a notice on the outside of the software box that indicated that the transaction
was subject to a clickwrap license contained in the media was not sufficient to show assent to
such terms) (emphasis added).
42. The Design Professionals
Design professionals should also be aware of potential risk exposure associated with using
computerized tools.
The Fall 2001 issue of CONSTRUCTION LAW provides an interesting hypothetical.
Suppose an architect employs a computer tool that is commonly used among similarly situated
professionals, its program generates an error, the error is not known among designers, and the
generated output is checked and is not suspicious. The architect may be able to defend on the
basis that it was professionally reasonable to use an engineering structural analysis program,
despite a flawed output caused by an undiscovered programming error.6 However, using the
computer program as a negligence shield could fail if the design problem resulted in a code
violation, which in some states could breach an implied warranty.7
A recent Houston case provides an excellent example of a case where a flaw in the
software left the user of the information generated by the software without recourse for its
substantial economic loss. In Hou-Tex, Inc. v. Landmark Graphics, 26 S.W.3d 103 (Tex.
App.–Houston [14th Dist.] 2000, no pet.) an oil and gas company hired a geological contractor to
do the seismic testing to determine the drill site. The geological contractor used a computer
program to interpret the seismic data. A bug in the computer program resulted in the drilling of a
dry hole. It was later discovered that the software company knew about the bug before drilling
ever commenced but did not alert the geological contractor to the problem although it sent
corrected software to other customers. The geological contractor had disclaimed all liability
resulting from the use of the software in its agreement with the oil and gas company. Therefore,
the oil and gas company sued the software company for negligence and breach of express and
implied warranties. The court poured the oil and gas company out because it had no contract
with the software company and because the software company owed no duties to the oil and gas
company.
Landmark Graphics provides an excellent reason why design professionals should
consider negotiating liability terms with the software vendors or project owners as well as
obtaining insurance for exposure resulting from software problems.
Finally, like contractors, the design professionals should ensure that they have the proper
type of insurance coverage available to respond to software related losses should they either
suffer damage to their own property or business or become liable for damages to a third party.
3. Insurance and E-Commerce Losses
Because the insurance framework for e-commerce losses is in its infancy, there are many
unknowns as to whether traditional business polices will provide coverage for losses resulting
6
Lurie, supra note 1 at 24-25.
7
Id.
5from computer viruses, software glitches, or system crashes.8 An architect’s or engineer’s
professional liability coverage would generally cover a claim based on failure to catch a mistake
generated by a computer program unless the policy expressly excludes such coverage.9
Commercial general liability coverage might provide coverage for architects, engineers,
or contractors if the threshold requirement of property damage to another’s property is met.10
Moreover, first party property policies may provide coverage for e-commerce related losses.11
Business interruption coverage, which is generally included in an endorsement to a
comprehensive insurance policy, insures against business losses sustained as a result of business
interruption.12 In addition, extra expense coverage is available for costs necessary to ensure that
operations can continue without interruption.13 Extra expense examples include: the costs of
operating a web page through an alternate ISP or restoring lost data.14
Insurance coverage for such losses has been found by a few courts. In American
Guarantee & Liab. Ins. Co. v. Ingram Micro, Inc., No. 99-185 TUC ACM, 2000 WL 726789
(D. Ariz. 2000), the court held under an all risks property damage policy that where a computer
system physically lost the programming information and custom configurations necessary to
function due to a power outage, the computer suffered physical property damage. In addition,
Centennial Ins. Co. v. Applied Healthcare Systems, Inc., 710 F.2d 1288 (7th Cir. 1983) held
that the allegation that computerized customer billing and patient information was lost as a result
of a wiring-connection defect constituted an allegation of property damage under a commercial
general liability policy.
4. Practice Tips for Contractors and Design Professionals
I. Attempt to negotiate better liability terms & warranties with software
vendors;
II. Attempt to limit contractual liability for failures associated with
computer software in agreements with owners and other contracting
parties;
8
David R. Cohen & Roberta D. Anderson, Insurance coverage for “Cyber-Losses”, 25 TORT & INS. L.J.
891, 892.
9
Lurie, supra note 1 at 26.
10
Id.
11
Cohen & Anderson, supra note 8 at 893.
12
Id.at 914-915.
13
Id. at 918.
14
Id. at 896-897.
6III. Attempt to obtain insurance coverage for e-commerce risks; make sure
that business interruption and extra expense coverage does not exclude
such losses
5. ASPs and ISPs
An application service provider (“ASP”) provides access to application programs and
related services that would otherwise have to be located on the customer’s own computers or
servers, such as payroll or project management software.15 ISPs are companies which provide
internet access or internet presence to individuals, businesses, and other groups. As with software
and hardware manufacturers, the warranties provided by ASPs and ISPs are often very limited
while the disclaimers are very broad.
An example of a warranty found in a form contract book for drafting internet contracts
provides:
Warranties and Disclaimer
a. Host Warranties. Host warrants to Client that: (i) Host has the right and
authority to enter into and perform its obligations under this Agreement; (ii) Host
shall perform the Services in a commercially reasonable manner; and (iii) that the
Services, throughout the term of this Agreement shall conform substantially to the
specifications as set forth at Exhibit A. Client’s sole remedy in the event of any
breach of this warranty will be for Host to take reasonable commercial
efforts for thirty (30) days to cause the Services to conform substantially to
the specifications as set forth at Exhibit A.16
Put simply, your client wants to avoid being stuck with an illusory warranty such as this one.
6. Practice Tips for Negotiating ASP and ISP contracts
Below is a checklist if issues unique to ASP agreements which can be consulted when
negotiating ASP (and ISP where applicable) agreements.17
Issues to Address:
I. Make sure the “User” or “Customer” includes all entities for whose
benefit the service will be used such as subsidiaries or parent companies;
15
JANE K. WINN & BENJAMIN WRIGHT, LAW OF ELECTRONIC COMMERCE, § 2.05 (4th ed. 2001).
16
Tobey B. Marzouk & Thomas M. Parry, INTERNET CONTRACTS EXPRESS, Agreement No. 5 (emphasis
added).
17
Tobey B. Marzouk & Thomas M. Parry, APPLICATION SERVICE PROVIDER CONTRACTS EXPRESS.
7II. Define who corrects and pays for the repair of bugs in the software
application;
III. Define availability of service: how is up-time and downtime defined;
IV. Set performance requirements for speed (bandwidth/transmission speeds,
processing times, response times);
V. Determine the ASP has sufficient capacity (number of transactions per
month, surge limits, database size);
VI. Define terms for expansion and costs for doing so (many ASPs charge by
the size of the database);
VII. Determine the security is sufficient (passwords, access levels, data
encryption, firewalls, intrusion detection, log files, monitoring and
reporting);
VIII. Make sure the ASP provide backups (real time redundancy and data
storage). This is especially important as hard drive destroying viruses
increase;
IX. Commitment to upgrade software/what schedule; and
X. Find out who does system performance monitoring; what are reporting
standards and obligations.
Support Services and Training
I. What training and support is offered and for what price?
II. Availability of telephone support services (both end-user help desk
services and technical support services).
III. Define response time for problems (both work around and fix).
Warranty/Remedy.
I. Define remedy for nonperformance relative to specifications/service level
agreement. The remedy which may vary with the type of breach, could
include:
8A. Adjustment to the fee;
B. Early right to terminate; or
C. Right to recover damages.
7. Collaborative Project Software Database Issues
Contractors sometimes worry that their scheduling and pricing data, when entered into
the project software, may be used by other users for purposes not restricted to that project.
While owners and architects typically have the same data in paper form, in electronic form that
information is much easier to manipulate and to extract for use on other projects. For example, a
national developer could conceivably revise schedule and cost data from different projects
around the county to assist in negotiating future project or to price extras. In the public domain,
one of the self-announced objectives of the state of Texas is to collect data on bids and contracts
for use in future bids and to set budgets.
Currently, absent contractual provisions, there is no bright line rule defining what is a
permitted use of project data and who has ownership rights to that data. Historically, pure
databases, compilations or arrangements of facts, measurements, data or other information
without any element of creativity or originality received little or no protection as intellectual
property.18 In Feist Publ’ns, the Supreme Court held that a white pages telephone directory was
not entitled to copyright protection.19 In reaching this conclusion, the court explained that the
facts themselves which are contained in a database do not constitute intellectual property.
However, the manner and method in which the facts are presented can be considered intellectual
property. Additionally, property rights may attach by virtue of the labor expended in collecting
the data. Thus, while others may be free to extract facts from a database, they may not be entitled
to copy with impunity the way these facts are assembled and presented.
The law recognizing intellectual property rights with respect to databases is in its infancy.
Additionally, various legal theories are still being applied to protect databases. Examples of
cases where various theories have been alleged in attempts to protect databases are as follows:
a. Verio
In Register.com v. Verio, Inc., 126 F.Supp.2d (S.D.N.Y. 2000), Verio used software
robots to access and collect registrant information from Register.com’s online database of
18
Richard Keck & Damon Goode, Misappropriated Manure Heaps, Rude Robots and Broken Promises,
THE BUSINESS LAWYER Vol. 57, 514 (2001) citing Feist Publ’ns, Inc., Rural Tel. Serv. Co., Inc., 499 U.S. 340
(1991).
19
Feist Publ’ns, Rural Tel. Serv. Co., Inc., 499 U.S.362 (1991)
9internet domain registrants and used that information for mass marketing purposes.
Register.com sought to enjoin Verio from using its database information under the following
theories: breach of Register.com’s terms of use, trespass to chattels, computer fraud and abuse
under the federal Computer Fraud and Abuse Act and a Lanham Act claim.
The Lanham Act prohibits the use in commerce of any reproduction, counterfeit, copy, or
colorable imitation of a federally registered mark in connection with the sale, distribution, or
advertising of goods or services in a manner that is likely to cause confusion.20 The court ruled
for Register.com under this theory and enjoined Verio from making representations that might
mislead Register.com’s customers. The court rejected all other theories.
b. Ticketmaster
In Ticketmaster Corp. v. Tickets.com, Inc., No. 99 CV-7654, 2000 WL 1887522 (C.D.
Cal. Aug. 10, 2000), Ticketmaster attempted to stop Tickets.com from using factual information
on its database which Tickets.com obtained from Ticketmaster’s database. Ticketmaster alleged
breach of contract (based on its browse-wrap agreement on its website), misappropriation,
trespass, unjust enrichment, copyright infringement, federal unfair competition, reverse passing
off, false advertising, state unfair business practices, and interference with business advantage.
The court refused to grant an injunction on any of the grounds asserted by Ticketmaster. In
particular, the court found that Tickets.com’s copying of database information was likely to fall
within the fair use exceptions of copyright law exception.
c. eBay, Inc.
In eBay, Inc. v. Bidder’s Edge, Inc., 100 F. Supp.2d 1058 (N.D. Cal. 2000), the court
granted a preliminary injunction against Bidder’s Edge which prohibited it from copying eBay’s
auction database. The court granted the injunction on the ground that eBay had a strong
likelihood of proving a trespass claim. Notably the court had to tweak the traditional elements of
trespass.
20
Winn & Wright, supra note 15 at §11.02[A][I], citing 15 U.S.C. §114(1)(a).
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