Horatio opened an account with a foreign exchange broker, Smart FX, and downloaded a software trading platform to access Smart FX’ brokerage services. Horatio also used expert adviser software to help him trade. Expert adviser software allows traders to conduct automated trades based around predetermined trading rules. Both pieces of software were developed and provided by third party software developers.
Horatio downloaded a software update to his trading platform. The update contained a bug. The bug interacted with Horatio’s expert adviser software and forced a number of trades outside of the trading rules which Horatio had authorised. Horatio lost USD $20,000 on these trades and complained to Smart FX.
Smart FX denied any liability to compensate Horatio for his losses. Smart FX said that it was not at fault: the bug was caused by the third party software developer, and in any case there were disclaimers and limits of liability in Smart FX’s standard trading contract with Horatio.
Horatio said the terms of the trading contract were unfair and he was not aware of them and, in any case, that Smart FX bore some responsibility.
FSCL investigated the complaint. The investigation required a review of the application of contract law, tort law, and the Consumer Guarantees Act 1993 (“the Act”) to the circumstances of the complaint.
Did the trading contract between Horatio and Smart FX exclude or limit Smart FX’s liability?
FSCL found that the parties were bound by the standard trading contract, however, the specific terms of the trading contract did not disclaim any liability that Smart FX may have at law, in the circumstances of this complaint.
Did Smart FX owe the Complainant a duty of care?
To find that Smart FX had breached a duty of care to Horatio would require an extension of the law of negligence. While FSCL could not make such an extension, a court could on the facts of this complaint.
Relevant factors for considering whether a duty of care existed, and whether it had been breached, were:
- There were no recognised duties at law directly applicable to customers of an online foreign exchange share trading platform in similar circumstances to this complaint.
- The Courts have decided in previous cases that an intermediary involved in the supply of a defective product can be liable where the intermediary has:
- sold products they know to be harmful, or
- failed to pass on manufacturer’s warnings or disclose the product’s potential for harm, or
- failed to take reasonable steps to actively inspect the supplied product.
- There was no evidence that Smart FX knew or could have known of the bug in the software update before making it available to traders.
- Smart FX clearly outlined and attempted to disclaim the risks of software problems in a risk disclosure document.
- The loss was somewhat remote as the faulty software had to interact with particular software used by Horatio before it was capable of causing loss. That is to say, not all Smart FX's clients using expert adviser software were affected.
- Smart FX did not actively inspect software before making it available to clients and took steps to make clients aware of any issues as soon as they arose.
- Smart FX was in the best position to test software updates, and was in a direct contractual relationship with the software developer.
These factors were also relevant to consider whether Smart FX had (and breached) a duty of care to ensure its service, broadly considered, did not harm Horatio.
Did the Consumer Guarantees Act apply?
FSCL found that Smart FX breached the guarantee of acceptable quality of goods in the Act as it supplied Horatio with a defective product.
However, there was a difficult question of law as to whether Horatio was a “consumer” capable of receiving the protection of the Act. For Horatio to be considered a “consumer” under the Act, Horatio needed to prove that either the share trading platform or Smart FX’s brokerage services were goods or services of the kind “ordinarily acquired for personal, domestic or household use”.
FSCL’s view was that it would be very difficult for Horatio to prove this point, given the lack of evidence of the use of this type of financial service by New Zealanders, and the degree of sophistication required of an investor to engage with the service in the first place.
Outcome: a negotiated settlement
FSCL negotiated a $10,000 settlement agreement between Horatio and Smart FX.
Accepting either Horatio or Smart FX’s arguments would require an expansion or elaboration of existing law. FSCL can apply the law. FSCL cannot expand or elaborate on the law where it is grey.
So, while FSCL could not uphold the complaint in a formal decision, FSCL could negotiate an outcome. The parties agreed to settle the complaint to avoid costly and time consuming litigation.