Contract Disputes Involving Cybersecurity Breaches: Key Insights for Business Owners

Cybersecurity breaches are a major concern for businesses of all sizes and in all industries. Whether attackers target customers’ information or a business’s own proprietary data, the financial and reputational costs can be devastating. As a result, cybersecurity breaches will often lead to litigation—and businesses will often need to hire a Miami breach of contract lawyer to both defend them against customer claims and pursue claims against their cybersecurity vendors.

Contract Disputes with Customers: What Does the Contract Say?

If a cybersecurity breach compromises customers’ data, a careful review of all relevant customer contracts will be essential for assessing the company’s obligations and risks. Sophisticated customers are increasingly negotiating cybersecurity provisions into their commercial contracts, and if companies are not careful, they can find themselves facing significant liability exposure.

When reviewing customer contracts in response to a cybersecurity breach, some of the key questions are:

• Does the company have standard cybersecurity language in its customer contracts?
• Have any customers negotiated this language?
• Have any customers successfully requested the addition of cybersecurity language to their contracts?
• In all relevant contracts, what are the company’s cybersecurity-related obligations?
• In all relevant contracts, what is the scope of the company’s potential liability exposure?

Along with assessing potential liability related to the breach itself, companies must also assess potential liability related to any breach notification obligations or other affirmative contractual obligations they may have. After a cybersecurity breach, an informed, cohesive, and comprehensive strategy is key—and this starts with gaining a clear understanding of all relevant facts and circumstances.

In addition to the types of substantive questions we just discussed, companies that are facing potential contract disputes with their customers will also need to address a variety of other legal considerations as well. For example:

• Acknowledgements and Waivers – Beyond examining any contract provisions that are specific to cybersecurity, companies should also examine their contracts’ general acknowledgements and waivers. If the company’s cybersecurity obligations or its customers’ breach-related claims are subject to any of these more general provisions, this could provide a clear defense to liability. If a contract contains detailed cybersecurity provisions, these provisions may include various breach-specific acknowledgements and waivers as well.
• Damages Caps – Any contractual damages caps in customers’ contracts could come into play in this scenario as well. Damages caps can be key risk mitigation tools; and, in many cases, companies will cap their liability at the value of the contract (or some other amount)—which may be significantly less than the losses resulting from a breach.
• Insurance Coverage for Cybersecurity Breaches – If the company is liable for a cybersecurity breach, its insurance coverage could play a critical role in resolving any breach-of-contract litigation. If any customer contracts include mandatory insurance provisions that apply to cybersecurity breaches, these provisions should be reviewed to ensure that the company has the requisite coverage available.
• Indemnification and “Hold Harmless” Language – It will be important to review all relevant contracts’ indemnification and “hold harmless” language as well. If, for example, customers have agreed to hold the company harmless for cybersecurity breaches involving sensitive data that they voluntarily or inadvertently shared with the company, this could also play a central role in any ensuing dispute resolution proceedings.
• Dispute Resolution – If a company’s customer contracts include dispute resolution provisions (i.e., provisions for mandatory mediation or arbitration), these provisions will need to be carefully reviewed to ensure that they apply to the circumstances at hand. If they do, then enforcing customers’ obligations to mediate or arbitrate could be a key cost-mitigation strategy. On the same token, if customers have the ability to seek emergency relief in court (i.e., to enforce compliance with cybersecurity or data recovery obligations), this is something that will require careful and immediate consideration.

These are just examples of the types of contractual issues that can come up in disputes with customers following cybersecurity breaches. As cybersecurity has become increasingly important, cybersecurity provisions in commercial contracts have become increasingly complex, and it is imperative that business owners have a comprehensive understanding of the specific risks and protections at hand.

Contract Disputes with Cybersecurity Vendors: Indemnification, Insurance, and More

Most companies rely on third-party cybersecurity vendors to help protect the data they store. With this in mind, when faced with a cybersecurity breach, companies will often need to assess their own potential breach-of-contract claims as well.

Here, too, a careful review of the relevant contract language is essential. While cybersecurity vendors often go to great lengths to protect themselves, companies that experience breaches will still have grounds to pursue claims in many cases. With that said, the potential value of these claims—and whether they provide coverage for the company’s contractual liability to its customers (if any)—depends on the specific contract language at hand.

All of the contract provisions discussed above are relevant here as well. However, in the context of potential customer claims, cybersecurity vendor contracts’ indemnification provisions can be especially important. Indemnification clauses shift liability between contracting parties, and they are used specifically to address third-party claims. If a cybersecurity vendor agrees to indemnify for third-party claims (i.e., customer claims in the event of a breach), this can play a huge role in ensuing litigation or alternative dispute resolution (ADR) proceedings.

Insurance clauses, “hold harmless” clauses, mandatory ADR clauses, damages caps and other relevant provisions can also play a major role in determining a company’s risk level and the legal options it has available. Dealing with a cybersecurity breach is a complex scenario that requires an informed and strategic approach, and assessing the relevant contract language is a critical first step in the process.

Request a Call with a Miami Breach of Contract Lawyer at Edelboim Lieberman

Is your company dealing with the fallout from a cybersecurity breach in Florida? If so, we can help, but it is important that you contact us promptly. To speak with an experienced Miami breach of contract lawyer at Edelboim Lieberman in confidence as soon as possible, call us at 305-768-9909 or request a call online now.