Watford Electronics Ltd – v- Sanderson CFL Ltd [2001] EWCA CIV 317
Court of Appeal (Civil Division)
Peter Gibson LJ, Chadwick LJ, Buckley J
Facts
Watford Electronics Limited ("Watford") bought a software system from Sanderson CFL Limited ("Sanderson") to use in its mail order business. The agreement was formed using three separate documents and incorporated Sanderson's standard terms. At a later date, an extra obligation on Sanderson to use its best endeavours in allocating appropriate resources to the project and therefore minimise any losses that might arise from the contract was incorporated into the agreement as an addendum. The software did not operate in the way it was supposed to and Watford issued proceedings for £5m loss of profits and increased costs of working against Sanderson, claiming misrepresentation, breach of implied warranties, breach of contract and negligence.
In its defence, Sanderson relied on two clauses from its standard terms: the ‘entire agreement' clause and the ‘warranty and limit of liability' clause. The entire agreement clause provided that no statement or representation made by either party had been relied on by the other. The warranty and limit of liability clause provided that neither party was to be liable for the other's consequential loss and that Sanderson's liability was not to exceed the price paid by Watford under the contract.
On a trail of preliminary issues the judge held that the entire agreement clauses did not prevent Watford putting forward its misrepresentation claims, that the limit of liability clauses were apt to exclude liability in excess of the total price paid by Watford, but that the limit of liability was unreasonable under the Misrepresentation Act 1967 and the Unfair Contract Terms Act 1977. Sanderson appealed against the finding that the clauses were unreasonable.
Decision
The Court of Appeal allowed the appeal and, in finding that the limitation clause was fair and reasonable, held that the judge had fallen into error in three respects:
The first error was that the judge failed properly to identify the scope and effect of the limit of liability clause. The clause did two things: (i) it excluded contractual claims for indirect and consequential losses, and (ii) it restricted liability for loss directly and naturally resulting from breach of warranty to the price paid for the equipment/software. The clause does not seek to exclude or restrict liability for pre-contract misrepresentation, whether under common law or statute.
The second error was that the judge treated the obligation added in the addendum as "virtually meaningless". The effect of the addendum combined with the limit of liability clause is that Sanderson would not be liable for indirect or consequential losses suffered by Watford provided that Sanderson had done what it could to allocate appropriate resources to making the equipment and the software perform. Therefore if, despite Sanderson's best endeavours, indirect or consequential losses were suffered, those losses would fall on Watford. But if Sanderson had not used its best endeavours, then Watford could recover such losses.
The third error lied in the fact that the judge treated Watford's standard terms as "irrelevant" when deciding whether the limitation clause was reasonable. Watford's standard terms contained a very similar limitation clause and other restrictions on liability. This was relevant when deciding whether the inclusion of the limit of liability clause in Sanderson's standard terms and conditions was reasonable having regard to the circumstances which were or ought reasonably to have been in the contemplation of the parties when the contract was made.
The court held that where an experienced buyer and seller between whom there was no inequality of bargaining power agreed on the allocation of risk and the price reflected that allocation, the court would be very cautious before reaching the conclusion that the agreement was unreasonable.
Comment
This decision will be much welcomed by IT suppliers and has been regarded as a welcome return to freedom of contract. However, this decision should not be taken as the final conclusion on limitation and exclusion clauses and could well subsequently be found to have turned on its specific facts. An important consideration here was that the parties were considered to have equal bargaining power and the customer was considered to have understood the nature and effect of the clauses in question.
Nevertheless, the decision does emphasise the need to clarify issues in the contractual documentation as much as possible, both from the customers' and suppliers' perspectives. Any customer who has decided not to negotiate a standard form contract on the basis that it will fall foul of UCTA will be at serious risk.
Anglo Group plc – v – Winther Brown & Co Ltd & ANR
Technology and Construction Court
HHJ Toulmin QC 01.03.00
Facts
Winther Brown ("WB") was a distributor and reseller of wooden mouldings. In 1995 it contacted a computer company called CML with a view to purchasing its software package that was designed for distribution companies. The software package was called Charisma. WB agreed to purchase the Charisma software package from BML to be financed with a lease agreement from Anglo Group plc ("Anglo"). The system went ‘live' in July 1996. Once the system was up and running WB complained about the way the software package operated and in April 1997 it stopped paying instalments under the lease agreement. Anglo sued for damages and WB defended the claim arguing that Anglo were in breach of the leasing agreement because the software package was defective. WB also claimed against BML and sought damages for loss of profits and wasted expenditure. BML argued that the software package was sound, albeit that there were problems that were being dealt with, in converting WB's system to work with the package. There was therefore no justification for WB to repudiate. BML's conditions of sale contained terms that made the purchaser responsible for selecting an appropriate system and supervising its use. The lease agreement contained terms that made WB responsible for any failure of the system to function properly.
Decision
The Court gave judgment for Anglo against WB. The issues were decided as follows:
Active cooperation is required from both parties when designing and installing a computer system. Since WB were buying a package system off-the-shelf and not using an IT consultant it was inevitable that some procedures of WB would have to be adapted to Charisma. Unfortunately not all of WB's requirements had been spelled out in advance. The Court suggested that it would have been prudent to make clear in writing the needs that WB had communicated to BML and how they were to be actioned. The customer must accept where possible reasonable solutions to problems when they arise. In relation to contracts for the supply of a standard computer system, it is an implied term that.
- the purchaser communicates clearly any special needs to the supplier;
- the purchaser takes reasonable steps to ensure that the supplier understands those needs;
- the supplier communicates to the purchaser whether or not those precise needs can be met and if so how they can be met. If they cannot be met the supplier should set out precisely the appropriate options;
- the supplier takes reasonable steps to ensure that the purchaser is trained how to use the system and the purchaser devotes reasonable time and patience to understanding how to operate the system;
- the purchaser and supplier work together to resolve the problems which will almost certainly occur. This requires active co-operation from both parties. If such co-operation is not present it is likely that desired results would not be achieved.
BML had performed substantially what it contracted to do under the contract, and BML's conduct was not such as to deprive WB of substantially the whole benefit which it was intended that WB should obtain from the contract. Further, WB continued to use the system for nearly a year after the purported repudiation and if the system had not met WB's requirements then WB would have proceeded to acquire a new system much sooner than it did. WB's complaints that were not rejected by the Court could have been remedied by reasonable co-operation.
The provision in the lease making WB responsible for any failures in the software package was not unreasonable under the Unfair Contract Terms Act 1977. Anglo was entitled to damages based on the unpaid instalments.
Comment
This decision is important for both IT suppliers and users, particularly of standard systems. This decision is a salutary reminder that IT problems can be as much the fault of the customer as the supplier. IT users would therefore be ill advised to rely solely on skill and knowledge of the supplier involved and should, particularly on sizeable projects, consider whether external IT consultants should be appointed to help define requirements and ensuring these are accurately reflected in the contractual documentation. The decision has, in particular, important practical implications for disputes involving standard package software systems. In the absence of a clear misrepresentation by the IT supplier, or a major defect in the system, any early termination is likely to constitute a breach of contract entitling the supplier to success in a claim for damages.
For further information, please contact Susan Barty at susan.barty@cms-cmck.com or on +44 (0)20 7367 2542.
