You’ve just suffered a ‘cyber’ incident – What are the legal risks?

Ask Optus.  Its 14-hour national outage on 8 November 2023 led to a Parliamentary inquiry, the resignation of its then CEO, and loss of trust across the market.

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 for customer harm, and the legal ramifications for your business.

Here are our top four cyber incident legal risks that you should consider.

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 may have occurred^[1].  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 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.

The mandatory reporting regime has now been in force for over six years in Australia.^[3]  Under the 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 (OAIC), the affected individuals and the general public, through a website statement.^[4]

In the same month of the Optus data breach, Parliament passed amendments to increase penalties for serious or repeated interferences with privacy, expand enforcement powers of the OAIC, and give greater information sharing powers to the OAIC and Australian Communications and Media Authority (ACMA).

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.

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.

Loss of funds with no recourse

We are increasingly seeing instances of invoice scams or 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 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 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.

Loss of availability to perform

Optus has revealed that during its national outage of phone and internet services, 2,697 customers tried and could not connect with “000” emergency services.[5]

Without appropriate risk management measures in place, a telecommunications business subject to an outage 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 the terms of the contracts.  In Australia, the failure to provide a service to a consumer with due care and skill or that is fit for purpose, or within a reasonable time, can give rise to a breach of the law resulting in the obligation to provide a refund and, potentially, compensation.^[6]  In the Optus example, we also see the potentially grave costs to the business’s customers and to the business in circumstances where they were foreseeable.

How do businesses prepare for cyber incidents?

In preparing for a cyber incident, businesses should note:

• Australian Privacy Principle (APP) 11 requires that businesses take reasonable steps to ensure the security of personal information held, and to actively consider whether businesses are permitted to hold that information, and for how long, .
• Australian Prudential Regulation Authority (APRA) standard CPS 234 requires that APRA-regulated businesses take measures to maintain an information security capability commensurate with information security vulnerabilities and threats.
• Assessing and addressing legal risks should be included in any cyber resilience policy, so that steps can be taken to ensure that any potential harm to customers arising from a cyber incident can be minimised and legal exposure managed.
• Regular review of insurance policies assists businesses to understand the coverage that is provided for cyber incidents, and any litigation that might arise as a result.  Similarly, regular reviews of contracts to understand whether they address these legal risks, or should be amended, is recommended.

In working through the implications of a cyber incident, businesses will need to report to regulators as necessary and respond to the consequences in accordance with their legal obligations and policies and procedures.  Depending on the nature, scale and complexity of your business, this may include:

• Notifiable Data Breaches Scheme requirement for businesses to notify affected customers and the OAIC when a data breach is likely to result in serious harm, and to complete the assessment of same within 30 days.
• ASIC’s breach reporting regime requirement for businesses to report within 30 calendar days of a cyber incident that is a reportable situation.
• APRA’s requirement for APRA-regulated businesses to notify no later than 72 hours after becoming aware of an information security incident that materially affects the business or its customers, and within 10 days of becoming aware of a material information security control weakness which will not be able to be remediated in a timely manner.
• ASX Limited Listing Rule 3.1 requirement for ASX-listed businesses to immediately disclose to the ASX on becoming aware of information that a reasonable person would expect to have a material effect on the price of the business’ securities.

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 recently developed a Data Breach Response procedure to assist you and your staff comply with the New Data Breach Reporting laws for all businesses that are caught by the Privacy Act, and the ASIC Breach Reporting tool to identify reportable situations.

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.

Authors:  Ursula Noye (Senior Associate) and Jesse Vermiglio (Partner)

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

[1] 11.1, Schedule One, Privacy Act 1988 (Cth).

[2] Privacy Act 1988 (Cth), s.6.

[3] Commenced by the Privacy Amendment (Notifiable Data Breaches) Act 2017.

[4] Subdivision B Privacy Amendment (Notifiable Data Breaches) Act 2017.

[5] Optus admits gross error on 2697 emergency calls (afr.com) (23 January 2024).

[6] s.62 Competition and Consumer Act 2010.