Loss Causes: Centrica v Accenture

November 26, 2009

This case, familiarly referred to as Centrica v Accenture, involved a contract to design, supply, install and maintain a new IT system (‘the Jupiter System’) for BG, a subsidiary of Centrica, which included an automated billing system. The Agreement under which the billing system was to be developed and installed contained a number of warranties and specifically set out in some detail the obligations of the supplier (Accenture) in the event of a breach. These essentially amounted to an obligation to take steps to endeavour to fix or alternatively to fund the necessary remedial work (up to a specified cap).

Centrica experienced very significant problems with the billing system after many millions of customers had been transferred to the new billing system. It wrote to Accenture notifying it of what it claimed were breaches of warranty and requiring them to be remedied. Accenture claimed that there were no ‘Fundamental Defects’ (as defined) in the billing system and that the notice given was ineffective to trigger any obligation to take remedial action. As a result Centrica brought a claim for damages.

The Contract required that Centrica had to serve notice giving ‘such analysis and detail as reasonably practicable’ in relation to the alleged defects constituting the breach of warranty. Centrica maintained that it had given such detail as it reasonably could in the circumstances at the point of serving the notice.

The judge held that the detailed requirements of the notice clause should be construed ‘contra proferentem’, ie strictly against Accenture because compliance with the conditions effectively imposed restrictions on Centrica’s ability to bring a damages claim and was therefore a form of limitation of liability. The judge also said that, in deciding whether the notice served was sufficiently detailed, account should be taken of the extent of Accenture’s actual knowledge of the defects in question at the time the notice was received.

Accenture argued that Centrica’s ability to recover damages was limited and that it could not recover any damages in respect of costs or losses incurred prior to it being notified of the defects in issue. Accenture further argued that Centrica could not recover any damages in respect of the period prior to the expiry of the (reasonable) time which Accenture had under the contract to fix the alleged breaches. In other words, if Accenture failed to take reasonable steps, this was the breach which was actionable and not the original breach of warranty. The judge rejected both of these contentions.

I suspect that for many the most interesting aspect of the case will be the judge’s analysis and findings in relation to ‘consequential’ loss. There was an exclusion of liability in the contract for ‘loss of profits or contracts arising directly or indirectly; loss of business or revenues arising directly or indirectly; any losses, damages, costs or expenses whatsoever to the extent that these are indirect or consequential…’.

Centrica claimed damages under a number of heads.

• Centrica claimed in respect of excess charges that it had to pay to its gas suppliers. Centrica was obliged to pay its gas suppliers on an estimated basis since, because of the problems with the billing system, it did not have precise information about the amount of gas used by all of its customers. As a result Centrica argued that it was obliged to pay more than it should have. Accenture argued that this was effectively ‘lost profit or revenue’. The judge held that it was nothing of the sort but instead additional charges which would not have had to have been paid but for the errors with the billing system.
• Centrica claimed in respect of compensation paid to customers for the inconvenience and disruption caused by the problems with the billing system. This loss was again regarded as being neither indirect nor consequential but direct damage and therefore recoverable given the context.
• Centrica claimed in respect of additional borrowing charges to deal with cash flow shortages caused by the problems with the billing system. Such charges were said to be a very likely consequence of the problems and were therefore recoverable.
• Centrica claimed in respect of the costs of wrongly chasing customer debts which were not actually due. These were said to be losses flowing naturally and in the ordinary course of events as a result of the breach.
• Centrica claimed in respect of additional stationery costs related to correspondence with customers. Again these were not thought to be indirect or consequential.

These claims alone amount to almost £30 million and whilst it must be remembered that this was only a preliminary hearing to determine whether these losses can be claimed in principle (they still have to be established as a matter of fact), the judge at this preliminary hearing was not asked to express a view as to the recoverability of damages for (a) the employment of additional staff to try to deal with the rising volumes of complaining and dissatisfied customers; (b) the writing-off of millions of pounds in respect of unbilled or late-billed gas and/or electricity; and (c) the cost of investigating and rectifying the problems with the billing system, including the cost of purchasing significantly more powerful hardware and third-party software. Whilst there may be an element of overlap between some of the claims, given the judge’s findings it has to be likely that these latter categories of loss will be regarded as being direct and therefore recoverable.

This case is a timely reminder that judges do not look particularly kindly upon exclusions of liability for broad categories of loss and especially ‘indirect and consequential’ loss. The approach taken by the judge, to interpret such exclusions very narrowly, is entirely consistent with a number of other previous cases. Suppliers of financial IT systems are therefore exposed to very significant risk unless they are extremely careful and clear as to the degree of risk/liability that they are prepared to accept. As a result, the financial cap on liability assumes much greater importance and it remains to be seen whether suppliers try to address the exclusion of specific types of losses more directly and specifically in future and/or whether they seek to place greater emphasis on acceptance of the system as the defining watershed in terms of the customer assuming risk for losses suffered. This case suggests that if they are not prepared to underwrite such customer losses, they will be well advised to do so.

Paul Golding is a partner in TRG law: www.TRGlaw.com