Abortive IT Projects – Clearing up the Mess

January 1, 2001

Disputes about IT projects generally fall into one or other oftwo categories. In the first, the customer claims that the system as delivereddoes not work as it should. The second category concerns projects which arecancelled by the customer before completion on the ground that the software islate or over budget, and often both. This article is concerned with the rightsand liabilities of the parties to a dispute which falls into the secondcategory, and reference will be made to the two reported cases which concernedsuch projects, The Salvage Association v CAP Financial Services Ltd andSouth West Water Services Ltd v International Computers Ltd.

The typical facts of a dispute of this kind are as follows. Thecustomer’s requirements are for a system which is not currently available andwhich requires new software to be developed. The supplier agrees to develop thesoftware, or to extend or adapt an existing package developed for othercustomers, and agrees milestone dates for delivery and installation. These datesare sometimes expressed to be contractually binding, but in other cases they arereferred to as targets only. The price may be either a fixed price or may bepayable on a price and materials basis, and is often to be paid partly prior todelivery by instalments or on the achievement of specified milestones.

The customer complains of slow progress, and becomes concernedthat the supplier does not have the resources to deliver a satisfactory packageof programs within any acceptable time-scale. If there is no fixed price, he isalso becoming disturbed that the project looks like going over-budget.Eventually he writes to the supplier cancelling the project.

The supplier’s typical response is that the fault lies with thecustomer for failing to identify his requirements clearly enough before theproject began and for repeatedly adding new requirements after the supplier hadstarted to develop the software.

Other factors may be present which complicate the dispute. Thesupplier may have already delivered hardware and some of the modules before thecustomer cancelled the project, and the hardware may have been ordered from aseparate hardware supplier. Sometimes the purchase of the system is made via afinancing company, so that there is no direct contractual relationship or noclear contractual relationship between the customer and the system supplier. Thesupplier may have indemnity insurance, and the underwriters may be slow toconfirm that they will meet the liability to the customer.

Although many disputes of this kind occur, few have resulted inreported decisions by the courts. The reason for this is likely to be that thesedisputes are nearly always settled, either by direct negotiations or with theassistance of a third-party mediator. The issues are often so complex that itcan be very difficult to predict the outcome of a trial with any degree ofconfidence, and this uncertainty provides an added impetus to the parties toreach a settlement rather than to press on for an outright victory. A case couldoccur in which there are six or more parties, namely the customer, the softwaresupplier, the software sub-contractor, the hardware supplier, the financecompany and the indemnity underwriter. This would make it all the more importantto reach a negotiated settlement, but at the same time would make it moredifficult to negotiate a settlement. Mediation is particularly well-suited tocases of this kind.

In this article we will examine some of the legal principleswhich may need to be applied to disputes of this kind:

  • In what circumstances can the customer terminate the contract on the ground of delay or excessive cost?

  • Can the customer recover sums paid under the contract before termination?

  • What damages are recoverable?

  • Enforceability of exclusion and limitation clauses.

  • Liability of finance companies.

The customer’s right to terminate the contract on the groundof delay

Contracts usually contain terms dealing with the time forcompletion. As stated above, the supplier may argue that these are targetsrather than contractually binding dates which must be met. Where the dates aretargets, or where the contract is silent as to the date for completion, theremay be an implied term that the system should be supplied within a reasonabletime under s.14 of the Supply of Goods and Services Act 1982. There will oftenbe scope for dispute as to how long is a reasonable time.

Even where there are contractually binding delivery dates, thecustomer will not be entitled to terminate on the ground of failure to meetthose dates unless the delivery dates are of the essence of the contract. Timeis of the essence (1) where it has been expressly agreed to be of the essence,(2) where the circumstances of the contract indicate that it is essential thatthe agreed date for completion is complied with, or (3) where time was notoriginally of the essence of the contract but after undue delay by the supplierthe customer has given notice requiring the contract to be completed within areasonable time.

Where it has been expressly agreed that time is of the essenceor the circumstances indicate that the delivery date must be strictly compliedwith, the customer will, assuming he has not contributed to the delay, beentitled to terminate the contract. Because of the serious consequences of evena minor delay, it is rare for time to be of the essence in IT contracts, butthere are some cases where it may be obvious that the delivery date must bestrictly complied with, e.g. where the customer himself has a deadline to meetsuch as the commencement date of a business relationship with a third party orin recent instances involving the year 2000 deadline. Alternatively there may becases where it is clear that the delivery date is not a critical date, such aswhere there have been protracted negotiations before the order was placedwithout the customer giving any indication of an urgent need for the new system.There may be difficult borderline cases in between these extremes.

If the agreed delivery date is not of the essence of thecontract or there is no agreed delivery date, then strictly speaking the givingof notice by the customer will not automatically make the new delivery date anessential term of the contract which must be strictly complied with. The testfor deciding whether delay in fulfilling obligations is so serious as to entitlethe aggrieved party to bring the contract to an end is whether the delay wassuch as to frustrate the commercial purpose of the venture. Failure to meet anew deadline which is reasonable in the circumstances will as a practical matterusually be a sufficiently serious breach of contract, and notifying a newdeadline which is reasonable in the circumstances will generally make it easierfor the customer to establish that he was entitled to terminate the contract.However the giving of notice requiring the contract to be completed within areasonable time is not a step which the customer is required to take before hecan ever establish a right to terminate on the ground of delay: he may be ableto establish that the delay was such as to frustrate the commercial purpose ofthe venture even if he has not taken that step.

Cases involving IT projects in which the customer was heldentitled to terminate the contract on the ground of delay are The SalvageAssociation v CAP Financial Services Ltd and South West Water Services Ltd vInternational Computers Ltd.10

The supplier’s typical response to the customer’s notice oftermination is to assert that the customer was responsible for the delay. If thesupplier is correct in this assertion, the customer will often not be entitledto terminate the contract on the ground of delay by the supplier. In buildingcontracts, an elaborate system of express terms has evolved for the extension ofthe contractor’s deadline for completing the contract, involving certificationof extensions of time by a third party, usually an architect or engineer. Thissystem would be unnecessarily heavy-handed for many IT contracts, and theparties’ respective rights and obligations will usually be determined byapplying general legal principles.

The simplest case is where the customer has actually agreed arevised completion date. But the customer may also be disentitled from relyingon the contractual completion date where he has waived breach of an obligationto complete by a certain date, or where he has himself caused part of the delay,for example by asking for additional functions to be included in thespecification or as a result of delay in providing necessary information to thesupplier.11 In the Court of Appeal in Trollope & Colls Ltd v NW MetropolitanHospital Board Lord Denning MR summarised the effect of the 19th-century caseDodd v Churton as follows:12

‘It is well settled that in building contracts – and in othercontracts too – when there is a stipulation for work to be done in a limitedtime, if one party by his conduct – it may be quite legitimate conduct, such asordering extra work – renders it impossible or impracticable for the other partyto do his work within the stipulated time, then the one whose conduct caused thetrouble can no longer insist upon strict adherence to the time stated. He cannotclaim any penalties or liquidated damages for non-completion in that time.’

Issues of responsibility for delay have not yet arisen in areported case concerning an IT project

Many IT contracts contain an express term requiring the customerto co-operate with the supplier and promptly to provide necessary information tothe supplier. Even where there is no such express term, a term will usually beimplied to the effect that the customer will do all that is necessary on itspart to bring about completion of the contract, and will provide suchco-operation to the supplier as may be required.

Judge Toulmin QC recently elaborated on this implied term inAnglo Group plc v Winther Browne & Co Ltd, holding that in the contractbetween the customer and the supplier of a standard computer system there wereimplied terms as follows:

  1. the purchaser communicates clearly any special needs to the supplier;

  2. the purchaser takes reasonable steps to ensure that the supplier understands those needs;

  3. 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 precisely the appropriate options should be set out by the supplier;

  4. the supplier takes reasonable steps to ensure that the purchaser is trained in how to use the system;

  5. the purchaser devotes reasonable time and patience to understanding how to operate the system;

  6. 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 the purchaser will not achieve the desired results from the system.

Several of these implied terms would also clearly apply to anagreement to supply bespoke software, and could be relevant to assessingresponsibility for delays. However, the implication of terms is heavilydependent on the circumstances of the case and these suggested implied terms arelikely to be subject to refinement in future cases depending on their facts andthe nature of the system provided.

Delay amounting to a breach of contract may give the customer aright to recover damages for losses caused by the delay, even where the delay isnot sufficient to give the customer a right to terminate the contract.15 Thefact that the customer has been responsible for some of the delay does notnecessarily prevent the customer from recovering damages for that part of thedelay which was caused by the supplier.

The customer’s right to terminate the contract on the groundof excessive cost

In some cases the supplier works on a time and materials basis.It is matter of construction of the contract whether the customer is committedto paying whatever it costs for the project to be completed.

In such cases it is not unknown for the supplier to provide anover-optimistic budget figure for the total cost of completing the project, inorder to obtain the contract. The customer may be able to show that the supplierprovided this budget figure without reasonable grounds for believing it to be areliable figure, or without taking appropriate account of the risks of theproject. The customer may therefore be entitled to rescind the contract formisrepresentation and to recover the sums paid under the contract and otherwasted expenditure. Usually the customer will not discover the true positionuntil some way into the contract. Rescission may be possible even where thesupplier has partly performed services under the contract, but in that case thecustomer will have to give credit for the value of the goods and servicesreceived.

The supplier’s response may include the following points:

The initial budget was a reasonable budget on the basis of theinformation provided by the customer at the outset, but the customer changed oradded to his requirements later, so that more work was required than couldreasonably have been foreseen at the outset.

The customer failed to provide necessary information on a timelybasis during the development phase, causing disruption to schedules andinefficient working.

The budget over-run was caused by circumstances beyond thesupplier’s control which could not reasonably have been foreseen.

The contract contained an express disclaimer of liability orresponsibility for budget estimates or other pre-contractual representations.

The customer’s claims

Where an IT contract has been terminated, the customer will belooking to recover some or all of the following:

  1. part-payments of the contract price

  2. increased cost of obtaining a suitable system from elsewhere

  3. wasted expenditure, including management time

  4. loss of anticipated profits.

Recovery of part-payments of the contract price

In many cases the price is to be in instalments, partly inadvance of delivery. If the customer terminates the contract prior to deliveryhe will be seeking to recover these payments. There are two routes to recovery:either he can claim contractual damages for wasted expenditure, or, where he hasreceived no part of what he bargained for and the advance payment was not paidas a non-refundable deposit, he can claim in restitution on the ground of totalfailure of consideration.

The advantage of the restitutionary claim over a claim incontract is that it does not necessarily require the customer to embark on theoften difficult exercise of proving that the supplier was in breach of contractand that the breach was sufficiently serious to justify termination. However,whilst the right to recover pre-payments is clear enough where the customer hasreceived nothing at all, the position is more difficult where the supplier hastaken some steps on the way to performing the contract, such as partiallydeveloping the software or preparing specifications which could be used by analternative supplier. In The Salvage Association v CAP Financial Services LtdJudge Thayne Forbes QC held as follows:

‘… in a case such as this, where the contract is one forservices intended to provide a particular product, it is well nigh impossible toprove a total failure of consideration unless no part of the services contractedfor is provided. I also agree that it is not sufficient to show that CAP has notprovided the ‘final product’ or that the final product is defective. What isrelevant is the bargained-for performance. In contracts for work and materialsthe purchaser is paying for the work as well as the final product, in contrastwith contracts of sale where he is only paying for the final product …. CAP’sobligations under the second contract were not confined to selling the system toSA but included designing and building it. Therefore, CAP’s obligations underthe second contract required CAP to carry out work and incur expense from thevery beginning of the contract and such work was done and expense incurred. inmy judgment, the work carried out and expenses incurred by CAP under the secondcontract were part of CAP’s ‘bargained-for’ performance under the secondcontract and that is reflected in the provision for payment of instalments ofthe price at specified stages. Accordingly, I am satisfied that there was not atotal failure of consideration under the second contract and, for that reason,SA’s claim in restitution under paragraph 14 of the Re-Re-Re-Amended Statementof Claim fails.’

The judge held therefore that the plaintiff’s right to financialrecovery had to be founded on its claims for damages.

By contrast, in South West Water Services Ltd v InternationalComputers Ltd,20 the supplier argued that the claim in restitution wasunsustainable because the customer had received software and hardware and alsomanagement services, which involved a very considerable cost to the supplier intime and expense over one and a half years, and the customer argued that thiswas irrelevant as it was unable to use the hardware and the partially deliveredsoftware. Judge Toulmin QC held as follows:

‘I adopt the description of a computer system by Scott-BakerJ in St. Albans City Council v International Computers Ltd (cited with approvalby Sir Iain Glidewell in the Court of Appeal): ‘By itself hardware can donothing. The really important part of the system is the software….’ I amsatisfied that the fact that ICL delivered hardware which could not be usedwithout the software (even if there was nothing wrong with the hardware) was ofno significant value to SWW. The same consideration also applies to such baseCustima and other packaged software as was delivered to SWW. I accept that SWWdid not receive any of the benefit for which it contracted until the turnkeyagreement. … In my view the hardware did not have significant value to SWW initself (except for a minimal second-hand value). Equally, I am satisfied thatthe customer contact and work flow SRS did not have any intrinsic value to SWWwhich would prevent SWW claiming in restitution. In my view SWW did not get anypart of that for which they paid the purchase money. They paid the purchasemoney for ICL to devise and install a computer system to conform to SWW’s URS.They did not receive any part of the computer system. SWW did not contract in avacuum to receive management know-how. They contracted to receive managementservices to enable the computer system to be delivered not as an end in itself.The project management and training agreement was expressed to be subordinate tothe turnkey agreement. The buyer did not get any part of that for which theypaid the purchase money.’

Note that the judge relied on the description of a computersystem by Scott-Baker J in St. Albans City Council v International ComputersLtd. It seems likely that the judge regarded it as significant that theagreement was described as a ‘turnkey’ agreement.

The differing decisions in Salvage Association and South WestWater leave scope for argument in future cases as to what, exactly, is the’bargained-for’ performance under the contract under dispute. Where the supplieris in breach the question is of little importance in practice because thecustomer can claim recovery of pre-payments as damages; this, in fact, was theremedy awarded in the Salvage Association case.

Cases can occur in which the customer may be entitled to recoveradvance payments (though not a deposit) even when he is himself in breach ofcontract, subject to the seller’s right to damages for breach of contract. InDies v British and International Mining and Finance Corpn Ltd the buyerrepudiated his contract to purchase goods, but was nevertheless held to beentitled to recover a substantial pre-payment (not in the nature of a deposit)made by him, subject to a deduction in respect of the actual damage suffered bythe seller through the breach of contract: Staple J held that, if the courtpermitted the whole pre-payment to be retained by the seller, it would bepermitting the retention of a penalty, not damages. However, it should be notedthat Staple J stated that the foundation of the right was not total failure ofconsideration but rather ‘the right of the purchaser derived from the terms ofthe contract and the principle of law applicable’. In Hyundai Heavy IndustriesCo Ltd v Papadopoulos, the case of Dies was distinguished. Lord Fraser ofTullybelton drew a distinction between the sale of existing goods where theseller performs no work and incurs no expense on the one hand, and contractssuch as building contracts on the other hand, where the contractor is requiredto undertake work and to incur expense from the outset. However Dies could stillbe followed in an appropriate case.


The customer will often base his claim on both breach ofcontract and misrepresentation. The method of assessing damages differs in eachcase.

Damages for breach of contract are intended to put the innocentparty, so far as money can do it, in the same position as he would have been inif the contract had been performed. Those damages include compensation for anyprofit (or saving) which the claimant would have received as a result of thecontract, or the increased cost of obtaining a similar system from anothersupplier. Alternatively, the claimant can claim damages for all sums spent andwasted in reliance on the contract. It has for a long time been a subject foracademic debate whether the innocent party can in an appropriate case recoverboth wasted expenditure and loss of net profits, or whether he must choosebetween these remedies. The point has arisen in context of an IT contract inAnglo Group plc v Winther Browne & Co Ltd, where Judge Toulmin QC followedAnglia Television Ltd v Reed,30 and held that the claimant must elect between aclaim for wasted expenditure and a claim for loss of profits. At any rate, theclaimant can never be put in a better position by receiving damages than hewould have been if the defendant had not breached the contract. If it can beshown that the contract would have been loss-making in any event then this willgive rise to a cap on the recovery of expenditure.

Damages for negligent or fraudulent misrepresentation areintended to put the innocent party into the position he would have been in if hehad never entered into the contract, and not to put him in the position he wouldhave been in if the representation had been true.

A customer making a claim in relation to failure to supply an ITsystem may seek to recover loss of profits or contribution to overheads, failureto achieve anticipated savings, increased costs, wasted expenditure, the cost ofobtaining and installing a replacement computer system, and the cost of wastedmanagement time.

A claim for wasted management time may be rejected if it is notsupported by sufficient records. However in the Salvage Association case, anestimate of wasted management time was accepted by the court as beingreasonable. The judge stated as follows:

‘Although SA is not a trading corporation in the widest senseof that expression, that is only because it is non-profit making. In all otherrespects, it is a very sophisticated commercial enterprise whose efficiency andproductivity depends to a significant extent on the effective use of the time ofits management. I am therefore satisfied that the management time that waswasted on the CAP project could and would have been put to productive use inSA’s activities in other areas, had it not be necessary to deal with the CAPproject. I am therefore satisfied that there is no reason in principle why thesesums should not be recovered by SA as expenditure which was wasted as a resultof CAP’s breaches and that they are recoverable in full.’

On the other hand, in Anglo Group plc v Winther Browne & CoLtd, a claim for the time spent in relation to obtaining an alternative systemby the individual in charge of computers for the customer was rejected as he wasnot employed on a fee-earning basis.

The customer must act reasonably to mitigate its loss, andcannot recover the full cost of a more sophisticated replacement system if anequivalent system could have been obtained at less expense. The supplier may beable to argue that credit must be given for the benefit to the customer of workcarried out identifying the customer’s detailed requirements and in preparingdetailed software specifications which can be used in the process of obtainingan alternative system.

Exclusion and limitation clauses

The supplier’s response to a claim will usually includereference to the exclusion and limitation clauses in the contract. These clausesoften result in disputes as to their applicability in the circumstances whichhave occurred, and it may be held that they are worded too narrowly to excludethe liability alleged.

Exclusion and limitation clauses are also subject to thestatutory controls contained in Unfair Contract Terms Act 1977, the Unfair Termsin Consumer Contracts Regulations 1994 (where the customer deals as consumer)and s3 of the Misrepresentation Act 1967. Paragraph 1(c) of Sch 1 to the UnfairContract Terms Act 1977 provides that ss 2 to 4 of the Act do not apply to anycontract insofar as it relates to (inter alia) the creation or transfer of aninterest in any copyright, technical or commercial information, or otherintellectual property. It was confirmed in Salvage Association that thisparagraph did not extend to all the terms of the contract, but only to thosewhich dealt with the creation or transfer of rights of those kinds.

In both St. Albans DC v International Computers Ltd andSouth West Water the court rejected the argument that the contract had not beenmade on one party’s written standard terms of business because some changes tothat party’s standard terms of business had been negotiated and agreed.

The onus is on the party relying on the exclusion or limitationclause to prove that the clause was a fair and reasonable one to be includedhaving regard to the circumstances which were, or ought reasonably to have been,known to or in the contemplation of the parties when the contract was made(s11(5) of Unfair Contract Terms Act 1977). Issues of reasonableness have arisenin a number of IT cases.

  • In St. Albans and City District Council v International Computers Ltd, where limitation to £100,000 was held to be too low when compared with the potential risk and the actual loss.

  • In Salvage Association, where limitation to £25,000 was held to be too low when the supplier had already concluded that it was too low and was contemplating increasing its standard limitation of liability to £1,000,000.

  • In South West Water, where the clauses did not explicitly cover the situation of failure to deliver a system capable of being tested; it was manifestly unreasonable that the supplier should be required to refund the price if the system failed the acceptance test, but that if the system never reached an acceptance test the supplier could keep all except possibly £25,000 of the price.

  • In Mackenzie Patten v British Olivetti Ltd, where there was an attempt to exclude virtually all liability.

  • In Anglo Group plc v Winther Browne, where it was held that exclusion clauses in a finance agreement were reasonable (see below).

  • In Pegler Ltd v Wang (UK) Ltd, where it was held to be unreasonable for the supplier to rely on exclusion clauses in circumstances, inter alia, where the supplier knew, or had the means of knowing, before contract, that the risks to a successful implementation were much higher than they had led the customer to believe and breaches of contract were not unlikely.

Entire agreement clauses often appear in IT contracts. In SouthWest Water41 Judge Toulmin QC held, following Thomas Witter Ltd v TBP IndustriesLtd, that the entire agreement clause was unreasonable and could not be reliedon as it purported to exclude liability for fraudulent misrepresentation.However the decision of the Court of Appeal in E. A. Grimstead Ltd v McGarrigan,where an entire agreement clause in a share sale agreement was held to beeffective to exclude liability for misrepresentation, casts doubt on this lineof reasoning, and in Government of Zanzibar v British Aerospace (LancasterHouse) Ltd Judge Jack QC decided not to follow Witter on the ground that clausesexcluding liability for misrepresentation should generally be construed as notexcluding claims based on fraud.

The supplier’s claims

The supplier may be owed sums which have already been invoicedbut remain unpaid at the time of a justified termination by the customer. Suchsums must be paid by the customer unless he would be entitled to recover thosesums from the supplier on the ground of total failure of consideration.

There may be other sums which would have become due to thesupplier shortly thereafter if the customer had not terminated the contract.Where the customer’s termination was justified the supplier has no right topayment for work done unless the payment had already accrued due under thecontract at the date of termination.

Where the customer’s termination was unjustified and a breach ofcontract, the supplier will be entitled to damages (including payment for workdone which has not yet been paid for and the profit which he would have made onthe contract had he been allowed to complete it), and/or to payment for workdone on a quantum meruit basis. In a fixed price contract the customer may tryto reduce the damages by arguing that the supplier had so underestimated thework necessary for completion that the supplier would have lost money in anyevent.

It can be seen that a great deal will turn on the determinationby the court of whether the supplier’s delay was or was not sufficient tojustify termination. This is heavily fact dependent and represents a seriousrisk in any IT litigation over contracts cancelled for delay.

The finance company

Often the cost of the system is financed through a financecompany, in order to convert the capital cost of the system into tax-deductiblerental payments. The legal relationships between the customer, the supplier andthe finance company will depend on the contractual documentation, which willneed to be carefully analysed. Usually there will be a written contract betweenthe customer and the supplier. In some cases a collateral contract between thecustomer and the supplier can be established, or a tortious liability based onnegligent mis-statement by the supplier to the customer. The customer mayhowever want to pursue its claims against the finance company, who can beexpected to rely on its exclusion clauses, arguing that as its role was simplyto provide finance its exclusion clauses are reasonable and should be enforcedaccording to their terms.

In Lease Management Services Ltd v Purnell Secretarial ServicesLtd the customer leased a photocopier which did not have a particular featurewhich the customer had made it clear she required. After unsuccessful efforts tosort the matter out, the leasing company took the machine away, and eventuallybrought proceedings claiming five years’ rent, less a discount for acceleratedpayment and a deduction for the second-hand value of the repossessed machine.The customer counterclaimed for the value of an old machine which had beenhanded over in part-exchange. At first instance the leasing company succeeded,the judge holding that as it had played no part in the matter other than asfinance company it could rely on its very wide exclusion clauses, following theobiter dictum of Dillon LJ in R & B Customs Brokers Ltd v United DominionTrust Ltd. The judge went on to hold that Purnell was entitled to an indemnityfrom the vendor of the photocopier, and that the vendor was liable for the valueof the old machine as damages.

This decision was reversed on appeal. The first ground ofdecision was that as the vendor was Canon (South West) Limited, and as theleasing company traded under the name ‘Canon (South West) Finance’, the leasingcompany had used a deliberately misleading trading style and was stopped fromasserting that it was not bound by the salesman’s representations. Secondly, itwas held that the exclusion clauses were unreasonable:

‘I have to differ from the judge. I am unable to accept, as ageneral proposition, that an exclusion clause which would be unreasonable in acontract for sale by a supplier will be reasonable as between a hirer and afinance company because of the latter’s non-inspection of the goods and itsnon-participation in negotiations proceeding the transaction. If there were sucha general proposition, acquisition by hire from a finance company rather than bypurchase from a supplier would became a trap. A customer would not expect hisrights regarding defects to differ according to which of these two acquisitionroutes he chooses to follow.

In my view each case must depend on its own facts. All thecircumstances must be taken into account. In the R & B Brothers case thebuyer was aware of the leak when he signed the contract and the conditions ofsale were sufficiently drawn to his attention. In the instant case Purnell hadno opportunity to inspect or test the machine supplied before deciding whetherto accept it. As soon as Mrs Berry had tried it, she rejected it fornon-compliance with the disputed term. LMS did not see or test the machine, butneither did Purnell.

I have in mind that by imposing a reasonableness testParliament envisaged that a condition such as condition 5 is not necessarilyunreasonable. There may be circumstances where it is reasonable. But where thecondition excludes all liability for breach of any representation or warranty,express or implied, the burden of proving reasonableness will not be lightlydischarged. In the ordinary way the buyer would need to have brought home to himclearly that, for instance, although the seller had expressly given him an oralassurance about the goods, the assurance was of no legal effect and was whollynegatived by the conditions of sale. In other words, that what had been given bythe one hand had been taken back by the other. In the ordinary run of things,the mere presence of an exclusion clause among a series of small-print standardterms will not be adequate for this purpose. It will not be adequate because itis not reasonable to suppose that a buyer will appreciate that such termsoverride statements expressly made by the seller with the intention the buyershall rely on them.’

It was held that the customer was entitled to reject themachine, was not liable to make any payment to the leasing company, and wasentitled to damages for the value of the machine taken in part-exchange.

Purnell was followed in Sovereign Finance Ltd v Silver CrestFurniture, a case concerning a lease of a shrink-wrap machine and associatedmachinery for manufacturing kitchen equipment. However in Anglo Group plc vWinther Browne & Co Ltd Judge Toulmin QC held the finance company’sexclusion clauses to be reasonable, as it would have been unreasonable for thecustomer to rely on the skill and judgment of the finance company in relation tothe supply of the computer system, and the customer had a direct claim againstthe supplier.


This article has focussed on the legal issues which arise whenan IT project is cancelled. In addition to the legal issues, most cases alsoinvolve disputed issues of fact (such as who caused delay) and disputedtechnical issues (such as whether there was any prospect of satisfactorysoftware being developed by the contractual delivery date). In thecircumstances, the outcome of litigation is particularly difficult to predict,and it is understandable that there should be a very strong desire to settle bydirect negotiation or mediation.

Clive Freedman and David Quest are Barristers. Their chambersare at 3 Verulam Buildings, London.


  1. See “Computer Contract Disputes”, Michael Turner, in Computers & Law, vol 8, issue 3 (August/September 1997), p.12.

  2. [1995] FSR 654, 679-680, Judge Thayne Forbes QC (as he then was).

  3. [1999] Masons CLR 400, Judge John Toulmin QC.

  4. For example South West Water v ICL [1999] Masons CLR 400 at pages 443-444.

  5. Chitty on Contracts 28th Edn (1999), vol. 1, paras. 22-011 – 22-015.

  6. See Chitty on Contracts, para. 22-017.

  7. Universal Cargo Carriers v Citati [1957] 2 QB 401, 430-431 and 449, applied in South West Water Services Ltd v International Computers Ltd [1999] Masons CLR 400 at 442.

  8. Carr v J.A. Berriman Ltd (1953) AJLR 273 (High Court of Australia), Hudson’s Building and Engineering Contracts 11th Edn (1995) vol. 2, paras. 9-007 – 9-031, vol. 1, paras 4-210 – 4.212.

  9. [1995] FSR 654, 679-680.

  10. [1999] Masons CLR 400.

  11. See Rickards v Oppenheim [1950] 1 KB 616 (CA), Dodd v Churton [1897] 1 QB 562, Trollope & Colls Ltd v NW_Metropolitan Hospital Board [1973] 1 WLR 601; see also Hudson’s Building and Engineering Contracts 11th Edn (1995) vol. 2, paras 9-007 – 9-031).

  12. This part of Lord Denning’s summary of the effect of Dodd v Churton was quoted and approved by in the House of Lords in Trollope & Colls [1973] 1 WLR 601 at 607.

  13. Mackay v Dick (1881) 6 App. Cas. 251, 263, Chitty on Contracts 28th Edn (1999), vol. 1, para. 13-011.

  14. Unreported, 1 March 2000; see “Blessed are the suppliers …”, Richard Harrison, in Computers & Law vol 11, issue 4 (October.November 2000) page 24. The case also contained observations on the need for independence on the part of expert witnesses.

  15. Chitty on Contracts 28th Edn (1999), vol. 1, para. 13-018.

  16. McAlpine Humberbrook Ltd v McDermott International Inc (1992) 58 BLR 1, 35, CA.

  17. Atlantic Lines &_Navigation Co Inc v Hallam Ltd [1983] 1 Lloyd’s Rep 188 at 202; see the comments on this case in Chitty on Contracts 28th Edn vol 1, para. 6-115 – 6-116.

  18. Rowland v Divall [1923] 2 KB 500.

  19. [1995] FSR_654, 682-683.

  20. [1999] Masons CLR 400.

  21. [1995] FS_R 686, 696.

  22. [1939] 1 KB 724.

  23. [1939] 1 KB 724 at 744.

  24. [1980] 1 WLR 1129.

  25. At pages 1147-1150. See also 1134-1136 and 1142-1143.

  26. See eg Rover International Ltd v Cannon Film Sales Ltd [1989] 1 WLR 912.

  27. Chitty on Contracts 28th Edn (1999), vol. 1, para. 27-001.

  28. Chitty on Contracts, 28th Edn (1999), vol. 1, para. 27-064, Stoljar [1975] 91 LQR 68, T.C. Industrial Plant Pty Ltd v Robert’s (Queensland) Pty Ltd [1964] ALR 1083.

  29. Unreported, 1 March 2000.

  30. [1972] 1 QB 60.

  31. CCC_Films v Impact Quadrant Films [1985] QB 16.

  32. Chitty on Contracts 28th Edn (1999), vol. 1, paras. 6-044 – 6-065; South West Water, at pp. 441-442.

  33. Tate & Lyle Food and Distribution Ltd v GLC [1982] 1 WLR 149.

  34. At pp. 684-5.

  35. See “Warranties, Limitation and Exclusion Clauses revisited”, Harry Small, Computers & Law vol 9, issue 6 (February/March 1999) p. 39.

  36. For example Pegler Ltd v Wang (UK) Ltd [2000] BLR 218, 70 Con LR 68; see Computers & Law vol 11, issue 1 (April/May 2000) p.29.

  37. [1995] FSR 686 at 704-711 (Scott-Baker J), [1996] 4 All ER_481 at 492 (CA).

  38. [1999] Masons CLR 400, 440-441, 444-449.

  39. [1984] 1 CL &_P 92.

  40. See above.

  41. [1999] Masons CLR 400, at 440-441; see Compters & Law vol 10, issue 4 (October/November 1999), p.4.

  42. [1996] 2 All ER 573; See “Warranties, Limitation and Exclusion Clauses revisted”, Harry Small, Computers & Law vol 9, issue 6 (February/March 1999), p.39, at p.40.

  43. Unreported, 27 October 1999. Contrast also Skipskreditt v Emperor Navigation [1998] 1 Lloyd’s Rep 66, at 76-77.

  44. Unreported, 26 January 2000.

  45. For example Mackenzie v Patten v British Olivetti Ltd (1984) 1 CL & P 92, a case concerning the supply of a computer.

  46. For example Professional Reprographic Services v DPS_Typecraft (unreported, 15 February 1993).

  47. [1994] CCLR 127, 13 Trad. L.R. 337, The Times 1 April 1997.

  48. [1988] 1 WLR 321, at 332. Other cases in which exclusion clauses in finance agreements were held to be enforceable are Richards Longstaff &_Partners Ltd v Lombard North Central plc (unreported, 30 July 1985, a computer case), Ormsby v H & H Factors Ltd (unreported, 26 January 1990, where the Court of Appeal upheld the first instance decision but expressed misgivings about it), W Photoprint Ltd v Forward Trust Group Ltd (1993) 12 Tr L 146, and National Trust v Arnall Structures Ltd (unreported, 4 July 1994).

  49. Per Sir Donald Nicholls V-C.

  50. [1997] CCLR 76, 16 Trad. L.R. 370.