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You’ve just suffered a ‘cyber’ incident – What Are the Legal Risks?

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You’ve just suffered a ‘cyber’ incident – What Are the Legal Risks?

While it is natural to focus on restoring internal systems and security processes if a cyber incident arises, consideration must be given to the potential legal ramifications.

Here are our top four cyber incident legal risks that should be considered by every business.

1. Privacy Breach

If a cyber incident involves unauthorised access to, loss, or destruction of personal information, then a breach of obligations contained in the Privacy Act 1988 (Privacy Act) may have occurred1. In Australia, personal information means “information or an opinion about an identified individual, or an individual who is reasonably identifiable: whether the information or opinion is true or not; and whether the information or opinion is recorded in a material form or not”2. Businesses generally hold two categories of personal information, that of employees and that of clients or customers.

If an entity is required to comply with Australian privacy laws, a breach of privacy may expose the entity to a financial penalty, litigation by the individual concerned to receive compensation for the loss and damage suffered, and potentially, the requirement to report the breach.

On 22 February 2018, a mandatory reporting regime will commence in Australia3. Under the new regime, if an entity has reason to suspect that personal information may have been accessed or disclosed without authorisation, or could be lost, then the entity must undertake an assessment to determine whether the incident must be reported. If the outcome of the assessment is that the breach should be reported, then the entity must report the breach to the Office of the Australian Information Commissioner, the affected individuals and even to the general public, through a website statement4.

Businesses that must comply with the Australian privacy regime should have risk management and response procedures in place to ensure that when a cyber-incident arises, consideration is given to the obligations contained in the Privacy Act.

2. Breach of confidentiality

A cyber-incident could result in access to, or theft of, commercially sensitive information. Most (if not all) commercial contracts will contain confidentiality clauses, a breach of which will give rise to a breach of contract. A contract will generally set out the ramifications of a breach, which could include payment of financial compensation and termination of the agreement. The breach could also give rise to common law damages, payment of which could be pursued through the courts.

Confidentiality clauses are generally broad and will extend to the entities’ agents, sub-contractors and employees. This means that not only is the entity itself exposed to an action for breach of confidentiality, but so are third party providers or sub-contractors that are engaged by the entity.

3. Loss of funds with no recourse

We are increasingly seeing instances of invoice fraud occurring through unauthorised access to business servers or email systems. After monitoring your emails, the intruders gain an understanding of your accounts procedures, allowing them to send an email invoice to pay a regular supplier which appears normal on its face. However, the invoice has a different account number, to which payment is sent. Subsequently, your supplier sends the real invoice, and a dispute arises because you believe that payment was made. Wasn’t it? No, you’ve paid a false invoice – and the supplier still wants the real invoice to be paid. Who is responsible?

In any commercial dispute, the first place to look for an understanding about liability is the contract or terms of service. Hopefully they have been drafted to address invoice fraud. In the absence of any commercial terms, generally making a payment to a third party as a result of a fraud committed on your organisation is unlikely to relieve you of your obligations to pay the real invoice for the goods or services supplied.

The position is not as clear if you paid a false invoice sent from the supplier’s system which had been compromised. In which case, do you still have to pay the real invoice? Generally, the fact that you paid a false invoice will not automatically relieve you of a contractual obligation to pay for goods or services provided. If you don’t pay the real invoice you could be in breach of the contract.

There is certainly scope for a dispute of this nature to be argued before the courts, at the further cost to both parties. Some strategies that can be used to minimise this risk to avoid litigation are addressing invoice fraud in contracts and considering a combination of fraud and cyber insurance policies.

4. Loss of availability to perform

In one weekend last year the world was subject to an “unprecedented” cyber-attack which is reported to have affected approximately 200,000 users in 150 countries5. The “wannacry” virus locked down affected systems unless a financial ransom was paid. Without appropriate risk management measures in place, a business subject to a virus of this nature would not be able to operate. While not operating causes loss of income to a business, it could also expose the business to legal claims where services or goods are not provided in accordance with contractual time-frames. In Australia, the failure to provide a service to a consumer within a reasonable time can give rise to a breach of the law resulting in the obligation to provide a refund and potentially compensation6.

We recommend that assessing and addressing legal risks should be included in any cyber-resilience policy, so that steps can be taken to ensure that any legal exposure arising from a cyber incident can be managed.

You should also review your insurance policies to understand the coverage that is provided for cyber-incidents, and any litigation that might arise as a result. Similarly, you should undertake a review of your contracts, to understand whether they address these legal risks, or should be amended. Finally, once procedures are developed we also recommend that staff are sufficiently trained in those procedures.

We have developed cyber resilience template procedures for Australian Financial Services and Australian Credit licensees that can be used to assist you address particular cyber resilience requirements. We have also  developed a Data Breach Response procedure to assist you and your staff in complying with the New Data Breach Reporting laws for all businesses that are caught by the Privacy Act.

If you have any questions or would like to know more about how you can protect your business, please contact our Melbourne or Sydney office, or you can contact the author directly.

This article is based on a version that was first published by BRINK Asia on 7 February 2018.

Author: Fiona McCord (Senior Associate)

1 11.1, Schedule One Privacy Act 1988 (Cth)
2 Privacy Act 1988 (Cth), s.6
3 Privacy Amendment (Notifiable Data Breaches) Act 2017
​4 Subdivision B Privacy Amendment (Notifiable Data Breaches) Act 2017
5 http://www.bbc.com/news/technology-39913630
6 s.62 Competition and Consumer Act 2010