Harry Small is a partner at Baker & McKenzie. He lectures and writes regularly on most aspects of information technology law. He is a member of the SCL Council. He points out that this article could not have been written without the help of all his colleagues in the Baker & McKenzie ICT department, especially his partner Graham Allan; the views, though, are his.
1. Introduction
The law relating to warranties, express and implied, and how a supplier may exclude or limit liability for their breach, is one of the fundamental pieces of knowledge of any ICT1 lawyer.
The purpose of this article is to offer a brief overview of the law of England2 relating to warranty clauses in IT contracts, and to analyse the law relating to the enforceability of parties’ attempts to limit or exclude the effect of these warranties. Unless otherwise mentioned, the contracts in question are assumed to be between two commercial parties.
These clauses are important to suppliers because they allow the supplier, and its insurers, to predict with accuracy the maximum liability to which they will be liable if the contract goes wrong, and to price the contract accordingly. It is in the nature of information technology, though, that the consequences of its failure often grossly exceed the price paid for it. Hence, there is always considerable debate between supplier and customer over the level of damages to which the supplier lays itself open in the contract. The interference of the law, by means of the Unfair Contract Terms Act 1977 (UCTA), is an added complication.
This article:
- examines what the law would imply into the contract absent UCTA
- addresses the limitations UCTA places on the parties’ freedom to exclude or limit their liability for themselves
- examines certain other words and phrases which we think we know the meaning of but we don’t.
2. Two General Points
ICT lawyers advising on this area should bear in mind, especially when advising suppliers, most of whom will in the nature of things be from the USA, that US lawyers may assume that, England being the home of freedom of contract, commercial parties have the same freedom to exclude and limit liability that they enjoy in most states at home. In fact, it is as well to educate them in the undoubted fact that English law interferes far more in commercial entities’ contractual freedom.
Secondly, the meaning of ordinary contractual terms – such as ‘warranty’ and ‘consequential loss’ – may also differ very substantially indeed.
3. What Happens Without Specific Provisions?
We now know4 that for the purposes of English law software is, in general, to be regarded as ‘goods’ if it is supplied on physical media. The Sale of Goods Act 1979, s 4 provides ‘Where the seller sells goods in the course of a business, there is an implied term that the goods supplied are of satisfactory quality.’ There is a list of items which the Act directs the court to consider, in addition to the goods’ ‘state or condition’, in deciding whether anything is of ‘satisfactory’ quality. Particularly, the goods must be free of ‘minor’ defects. This is a key issue which has yet to be fully explored by the courts. There is ample authority in many jurisdictions for the proposition that minor bugs or defects are to be expected in the context of complex software. But, as we will see, UCTA requires any contractual clause limiting that implied term to satisfy a requirement of reasonableness. Many software licences, especially US originated ones, will exclude all liability for bugs – reminding the reader of the licence of the undoubted truth that all software contains them. In my view, such an exclusion would be likely to be held to be reasonable under UCTA, on the assumption that ‘bugs’ means minor defects not going to the essential functionality of the software supplied, but we need more authority. An alternative view is that the obligation to supply goods free of minor defects in software does not arise having regard to the fact the condition is only implied ‘in appropriate circumstances’6 (1979 Act, s 14(2B)).
There is also an implied term (see 1979 Act, s 12 – and particularly s 12(2)(b)) that a buyer will enjoy quiet possession of the goods; in other words, that third party intellectual property rights will not affect the licensed use of the software. This is important, as many suppliers attempt to limit liability for breach of intellectual property warranties, and there is a strong argument that such an attempt would fail: see below. Further, if the intended purpose of the goods is known at the time of purchase, there will be an implied term of fitness for purpose (s 14(3)).
If the software is not made available in conjunction with something physical then there is an implied term in the contract that the software must be ‘reasonably capable of achieving its intended purpose’.4 Where services additionally are provided, and in particular in the context of a development contract, terms will be implied pursuant to the Supply of Goods and Services Act 1982. Most importantly, these will include an implied term of reasonable skill and care.
4. What Can Be Excluded?
In principle, anything can be excluded by contract. However, contractual provisions containing exclusion clauses are construed against the person relying on them (contra proferentem); in other words, the benefit of any ambiguity is given to the person against whom the clause is aimed. But UCTA makes clauses in contracts which purport to limit or exclude some terms absolutely void; and makes some of them void unless the person relying on them satisfies the court that they are ‘reasonable’.
In summary:
- The implied term as to quiet possession cannot be excluded or limited. This means that if, as is highly arguable but not certain, the implied term as to quiet possession would be breached by a claim by a third party that, for example, software supplied under a contract was an infringement of its intellectual property rights, then any limitation of liability under the contract’s intellectual property warranty would be void. Advisers to suppliers should watch this point more than many in practice do.
- Any obligation to compensate anyone for death or personal injury caused by ‘negligence’ (defined as any obligation to take reasonable care or exercise reasonable skill, not just the tort of negligence) may not be excluded.
- The implied obligation to supply goods of a satisfactory quality can be limited or excluded only to the extent that the provision in question satisfies the ‘requirement of reasonableness’.
- The same applies to any limitation or exclusion clause on a supplier’s written standard terms (whether or not the clause purports to exclude liability under the Sale of Goods Act implied terms mentioned above); or any clause restricting or limiting liability for ‘negligence’.
5. Drafting Limitation Clauses
The issue of the reasonableness of a limitation or exclusion clause must be viewed in the context of the contract at the time it is made, and not with the hindsight of the breaches of it which may actually have occurred. The drafter must therefore ensure that events which may never happen in practice and were wholly outside the contemplation of the parties at contract are nevertheless properly excluded.
A good illustration of the consequences of not doing this is the curious case of Witter v TBP [1996] 2All ER 573. An exclusion clause which does not exclude the consequences of the fraud of the person relying on it is likely to be struck down under UCTA even if in fact there has been no fraud.
The facts of the Witter case could not be further removed from the ‘classic’ IT dispute. The dispute concerned alleged breaches of warranties in contracts for the sale of a business. The majority of the judgment is equally of limited relevance to the IT industry. What is important are the obiter comments of Jacob J regarding the ‘entire agreements’ clause in the contract. The clause stated:
This Agreement sets forth the entire agreement and understanding between the parties or any of them in connection with the business and sale and purchase described herein. In particular, but without prejudice to the generality of the foregoing, the Purchaser acknowledges that it has not been induced to enter into this Agreement by any representation or warranty other than the statements contained or referred to in Schedule 6.
Jacob J construed the clause narrowly (contra proferentem). In his view, the clause was not sufficient to ensure that the purchaser’s only remedy would be for breach of warranty. It did not expressly exclude the purchaser’s right to sue for loss or damage resulting from misrepresentations before the contract was entered into. The judge felt that, if that was the intention behind the clause, it should have said so expressly.
More generally, Jacob J took the view that the clause was too broad. In other words, if the clause had been effective to exclude liability for pre-contractual misrepresentations, it would have excluded all misrepresentations, whether fraudulent, negligent or innocent. In his view, it could not be considered reasonable, under UCTA, to exclude liability for fraudulent misrepresentations. As the clause was not severable, the only conclusion the judge could reach was that the entire agreement clause, as a whole, was void.
Jacob J’s comments are strictly obiter. However, in the absence of any higher authority (or any authority which distinguishes Witter), it would be prudent to take account of the comments in connection with both an entire agreement clause and, in addition, the more general liability clause. Witter would apply to a clause seeking to exclude or limit liability for breach of contract in just the same way as it applies to a clause seeking to exclude any misrepresentations before the contract was entered into.
. What Is Reasonable?
For many happy years in the late 1970s and early 1980s, the British IT establishment wallowed in the blissful illusion that the standard exclusion and limitation clause in most IT contracts,5 whether for software, hardware, for both or for bespoke systems, was enforceable. In all probability it was not.
Traditionally, and probably because that was the approach adopted by IBM, the average IT contract would:
- exclude all liability for ‘consequential’ loss; and
- limit all other liability to, at the best, the sum paid or payable under the contract, or, at the worst, to a lesser and arbitrary sum.
In the course of the 1980s, two cases rang warning bells. In the unreported British Olivetti case, for the first time a clause of the ‘standard’ type was struck down by reference to UCTA.
7. The Cap Case
In 1992, the decision of Salvage Association v CAP went some way to removing some of the uncertainties surrounding computer litigation and allowed both suppliers and users to evaluate with some precision the merits of their contractual position before attempting to resolve any dispute by recourse to the court. Moreover, the case raises many of the ‘classic’ features of any IT dispute:
this action is principally concerned with the contractual terms as to the competence of CAP’s staff, the quality of their performance, the quality of the subject matter of each contract, the time for completion of the System and the construction and application of terms which exclude or limit CAP’s liability for breach of contract or negligence ([1995] FSR 654 at p 663).
7.1 Facts
The Salvage Association (SA) appointed CAP Financial Services Limited (CA’) to design, develop and implement an accounting system for use at SA’s head office. The system was to be based on existing relational database software, which CAP would develop (‘customise’) to meet SA’s specific requirements. The hardware in question was provided by a services bureau.
Two separate contracts were entered into. The first governed the design stages. For a fixed fee of £30,000, CAP agreed to analyse SA’s requirements and to specify how those requirements could be met. The second contract, again for a fixed fee (£291,654) governed the development, customisation and implementation of the computer software, which should have provided SA with the accounting system it required. The second contract obliged CAP to deliver a computer system which met the specifications produced by CAP under the first contract and agreed by SA.
CAP was first appointed in March 1987. In July 1989, SA terminated the second contract, rejecting what work had, by that stage, been carried out by CAP and commenced proceedings for recovery of all sums which had been paid to CAP, together with various other wasted expenses. The total claim was for a sum in excess of £800,000.
SA alleged that CAP was in breach of both contracts. At the time of rejection, the evidence demonstrated that there was no realistic prospect that SA would have the accounting system it was expecting in operation within the next 12 months. The parties had contemplated that this system would have been in operation in the summer of 1988. The evidence showed that CAP had missed its target by a considerable margin.
The judgement of HH Judge Thayne Forbes clearly recounts the history of the project. He found CAP’s lack of familiarity with the particular relational database software they were developing to be the reason for failure to produce the system that the parties had bargained for. In short, CAP had taken on a project it was ill-equipped to perform and, by any computer expert’s standards, the system was not fit for its intended purpose.
7.2 The Impact of CAP’s Contractual Documentation
CAP’s contracts were typical of those commonly used in the information technology industry. A limited warranty was given as to the skill and care which would be used in the project; all others were expressed to be excluded. In the event that there was a breach of the limited warranty, the second contract (the development and implementation contract) offered a ‘repair or replace’ remedy and, if repair or replacement was not achieved, CAP’s liability was limited to a maximum of £25,000. As usual, the contracts purported to exclude all consequential losses.
7.3 The Analysis of the Contract
Both contracts were construed contra proferentem, that is to say against CAP. In the case of both contracts, this narrow interpretation proved fatal to the exclusions of all implied terms. In the first contract, the exclusion was found not to extend to the implied term that reasonable skill and care would be exercised by those carrying out the contract. The clause had referred only to the exclusion of merchantability (now the satisfactory quality obligation) and fitness for purpose. In the second, the ‘repair or replace’ obligation and, (in default of repair or replace) CAP’s limited liability, was held to bite only after the accounting system had been ‘accepted’. As the system had never reached a state where acceptance testing could begin, it followed that a precondition of the liability limitation had not arisen. Accordingly, CAP’s liability was restricted by the contract only insofar as it excluded consequential loss. This is a first-class illustration of a contract having the legal system’s meaning, not the parties’.
The judgment could have been restricted to the construction of the two contracts, with respect to both contracts he was able to conclude that the facts in question fell outside the ambit of CAP’s attempts to limit its exposure under the project. However, and of greater significance, the judge went on to analyse the impact of UCTA on the limitation of liability (under either contract) to £25,000. Although strictly speaking obiter, Judge Thayne Forbes’ reasoning is, granted the paucity of reported decisions, of the highest persuasive authority, especially in the light of its being quoted without disapproval by the Court of Appeal in St Alban’s v ICL.
7.4 The Unfair Contract Terms Act
The first issue was whether the agreement was on CAP’s ‘standard terms’ for the purpose of s 3 of UCTA. The first contract was held to be on such terms; the second not.
The court laid down a series of factors to apply in deciding whether, as a question of fact, changes made to contractual documentation issued by a supplier are sufficient to take the contract outside the scope of ‘written standard terms’. These included the relative bargaining power of the parties, the extent and nature of any changes made to the contracts, and the extent and duration of any negotiation.
Unfortunately, the judgment does not make clear which terms were specifically changed by agreement between the parties. However, it is submitted that one or two changes to key clauses (such as the warranty and limited liability clauses) should carry more weight than, for example, changes to any amount of boilerplate clauses such as addresses for service, force majeure or the like.
On the facts, the court decided that there was sufficient negotiation and amendment of the main development contract to ensure that the contract was not on CAP’s standard terms.
7.5 Reasonableness and the Computer Contract
The remaining question was whether CAP could exclude liability for its ‘negligence’ under s 2 of UCTA.
Judge Thayne Forbes followed the approach of Judge Potter in Flamar Interocean Ltd v Denmac Ltd (The Flamar Pride) [1996] 1 Lloyds Rep 434 (at pp 438-439) in accepting that it is ‘sensible’ to look at Sch 2 to UCTA in testing for reasonableness under s 2, notwithstanding that, on the strict interpretation of UCTA, s 2 is to be used to test for reasonableness under ss 6 and 7 (exclusion/limitation of implied terms) only. He therefore considered the relative bargaining power of the parties, alternative sources of supply available to the customer, any difficulty involved in carrying out the project and the ability of the parties to bear any loss – notably through insurance. It was the last factor which was central to the case. CAP had £5,000,000 of indemnity insurance, which the court compared unfavourably with the contractual limit of its liability of £25,000.
In particular, CAP was unable to adduce any evidence as to why the figure of £25,000 was used. Indeed, at the time that the SA contract was entered into, CAP had already decided, internally and unilaterally, that the figure should be increased and that future contracts should fix CAP’s liability at £1,000,000 – a 4000% increase on the existing level, as the judge was keen to point out. CAP was unable to explain why the old and arbitrary figure of £25,000 had been used in the SA contract.
The court was also influenced by the fact that SA did take steps to obtain insurance cover for the project and found that suitable cover was not available to it at a realistic premium. CAP could insure (and indeed had insured) against failure of the project; SA could not.
It is possible to interpret this case narrowly and to isolate as the key factor in the decision the fact that CAP had already taken the decision to increase its liability to £1,000,000. However, to do so would be to ignore the importance attached to the question of insurance generally and to other considerations, which would not necessarily be unique to the facts of CAP.
In particular, if the limitation of liability is a truly arbitrary figure, the clause must be more likely to be struck down. CAP may have been more successful in defending the limit of its liability if:
- the figure had been linked to the contract price;
- the figure represented a fair and reasonable proportion of the insurance cover available to it
- they had put forward some other objective means of justifying the provision.
Further, it is clear that the court would have had more sympathy for the impugned clause if the project had been one where there was, as a matter of expert evidence, a realistic risk of the project not succeeding or encountering substantial delays, rather than one which appeared on expert evidence to be routine.
7.6 Time and Software Development Contracts
As is to be expected in contracts generated by a supplier, no fixed timetable was set out for performance of the contract and there was certainly no express confirmation that time was of the essence. However, Judge Thayne Forbes implied a term that time was of the essence, pointing out that this was a commercial contract pursuant to which timetabling was reviewed and dealt with at project meetings throughout the duration of the contract. On the facts, the parties were also aware that SA intended to carry out further projects once the contract involving CAP had been completed. Absent something specific in the contract (the whole agreement is not quoted in the judgment), this is a surprising conclusion: is the supply of a computer system fundamentally different to the supply of other goods and services for business in which time is almost never of the essence?6
The clear warning from the case is that, if delays may arise (particularly if the project is a complex one), a contractual mechanism for dealing with slippage should be built into the contract. This should ensure that rights to rescind the contract do not arise through failure to meet a particular deadline unless the parties so wish.
8. St Albans DC v ICL
8.1 Facts
St Alban’s District Council needed a new computer system to enable it to calculate and dispatch bills for the community charge (poll tax). It accepted a tender from ICL for the provision of a complete system to run the register of community charge payers and details of their bills.
One of the new system’s first jobs was to calculate the number of community charge payers in the city for the purposes of making a return to the Secretary of State for the Environment and enabling the Council to set the level of community charge. This was done by calculating the number of people liable to pay community charge within the area, making an allowance for bad debts etc and dividing the amount which had to be raised by that number. Owing to a fault in one release of the relevant software, the system over-estimated the number of eligible community charge payers in St Alban’s. Accordingly, the Council set a level of community charge too low to yield the necessary revenue. This had to be made up the following year.
ICL relied upon a limitation clause in the ICL standard contract limiting ICL’s liability to £100,000. The contract price was (approximately) £1.3 million.
8.2 Law
Three points arose. In ascending order of importance they were:
(a) ICL claimed that a few days before the community charge was due to be set a further run of the relevant program showed a variance with results achieved earlier, which should have indicated to the Council that there was something wrong with the program. At first instance, Scott Baker J took the view that although doubt had been cast over the figures, the Council was not absolutely sure that they were wrong and there was no means of obtaining any definitively correct figures. Hence the Council had little practical alternative but to set the community charge rate based on the figures it had.
(b) ICL contended that the implied conditions of reasonable fitness, merchantable quality and conformity with description in either the Sale of Goods Act 1979 or the Supply of Goods and Services Act 1982 did not apply to the software, because the supply of software was neither a supply of goods nor services. Although it was not strictly necessary for the decision, the contract itself having express warranties as to the software’s functionality which clearly covered this particular situation, nevertheless the judge took the clear view that software supplied alone (the fact that hardware was supplied with it was not taken into account in this part of the decision) constituted goods and its supply accordingly fell within the Sale of Goods Act 1979. This view was not upheld in that form in the Court of Appeal (see below).
(c) ICL relied on the limitation clause in the contract limiting its liability for breach to £100,000. The Council submitted that the exclusion clause in the contract was invalidated by UCTA. The judge agreed with this submission and gave judgment for the Council for the whole of its loss. The reasons given were as follows:
- The contract in question was probably one on the vendor’s standard terms within the meaning of UCTA. The standard terms were no less standard terms because they incorporated a specification which would vary between councils to whom ICL supplied the software, especially as there was no evidence that any council had negotiated the terms at all.
- In any event, the impugned clause purported to restrict liability resulting from breach of the implied conditions under the Sale of Goods Act or the Supply of Goods and Services Act and had to satisfy the requirement of reasonableness in the UCTA in any event.
- The onus was on ICL to satisfy the court as to the reasonableness of the term.
- The judge, therefore, considered the various issues to be taken into account in assessing reasonableness in accordance with Sch 2 to UCTA. Also, obeying the guidelines in s 11(4) of UCTA, regard must be had to ICL’s resources to meet potential liability and how far it was open to the Council to obtain insurance cover.
- So far as ICL’s resources were concerned, the judge found, as he was bound to do, that ICL had ample resources to meet liability. ICL also held relevant insurance cover in an aggregate sum of £50m worldwide.
- The bargaining position between ICL and the Council was in ICL’s favour. The Council, possibly through its own fault, had to have a contract in a very short period time after ICL had been selected as preferred supplier. Council officials are not businessmen and allowance had to be made for that. Also, ICL had threatened not to keep the reservation for the hardware, which was essential for the provision of the service on time, if the contract, in its standard form, was not signed almost immediately. On the whole, therefore, the Council’s bargaining position was weaker than ICL’s.
- No other competitors of ICL offered any substantially different exclusion clauses.
- It was true that the Council made representations about the clause and, therefore, knew about it. Indeed, at the beginning of the negotiations, the Council had put forward its own standard terms and those included a limitation on the liability of any supplier providing goods or services to the Council.
Having regard to all the issues, the balance of unreasonableness was against ICL. The judge considered the determining factors to be inequality of bargaining power; the absence of any positive justification put forward by the defendant for the £100,000 limitation clause (mirroring the approach taken in Salvage Association v CAP Financial Services); the fact that ICL were insured; and the practical consequences, namely that to allocate the loss to the Council would mean that the community charge payers of St Alban’s rather than ICL’s insurers would bear the ultimate loss. In all these circumstances, the limitation clause could not be relied upon and a clear breach of contract and damages had been proved. Judgment was given for the Council for £1.3m.
The judge also considered certain issues of law as to whether a council can be said to have suffered loss if it can recoup the loss by increasing taxes in the future. That issue is not relevant to this note, but was decided against ICL by the High Court and slightly mitigated in favour of ICL in the Court of Appeal.
8.3 On Appeal
ICL appealed and the appeal was dismissed. On the issue of reasonableness, the Court of Appeal said that it would interfere with the judgment that the clause was unreasonable only if it thought that the judgment was plainly wrong: it did not, and indeed would probably have come to the same conclusion itself.
The interesting part of the judgment of the Court of Appeal is views on the question of whether software is ‘goods’ for the purposes of the Sale of Goods Act. The reason the question is important is that the Sale of Goods Act implies certain obligations into a contract for the sale or supply of goods, in particular the obligation to supply goods of ‘satisfactory quality’. An attempt to limit or exclude such obligations is subject to the requirement of reasonableness. The court took the view that software which is written on a disk or any physical medium is ‘goods’ and subject to the statutory satisfactory quality obligation, but software supplied by simple copying from the supplier’s media to the customer’s, or by transmission down a telephone line, is subject to a common-law obligation to supply software which will be ‘reasonably capable of achieving its intended purpose’. That obligation, when included in a contract which is not on standard terms, is one to which UCTA would not apply, and hence the requirement of reasonableness would probably not apply to any clause which tried to exclude or limit that obligation. That said, anyone seeking to rely on this apparent, albeit small, loophole should tread with extreme caution.
9. Conclusions from the Cases
One of the most notable features of the judgments in Salvage Association v CAP and St Albans DC v ICL is the importance the judge attached to the facts that neither ICL nor CAP had put forward any positive case as to their reasons for drafting their limitation clauses at such a low level compared to the amount paid for the software. This may well mean that a limitation clause for an amount equal to the value of the contract cannot necessarily be said to be unreasonable if the supplier seeking to rely on it puts forward positive evidence as to why such limitation was chosen. For example, many insurance packages insist upon such a limitation, or a similar limitation, before cover can be confirmed. In these circumstances, although there is a substantial risk, suppliers and their advisers should not assume that a standard clause entered into between two true commercial entities should not be valid. Both these cases, although they have provoked a considerable degree of fright amongst practitioners in IT law who normally act for suppliers, are very heavily distinguishable and a properly drafted clause limited to the value of the contract, with properly argued reasons for its inclusion, produced to the court, may stand some chance of being upheld.
10. Contract Drafting following these Cases
Although the above cases have gone some considerable way to clarifying the impact of UCTA, there are still a considerable number of uncertainties that remain unresolved as to the extent to which parties can exclude or limit liability.
10.1 Price Paid Limitation Clauses and Fraud Exclusions
As I have said, neither Salvage Association v CAP nor St Albans DC v ICL rules out the possibility or, indeed, probability that a limitation of liability to the price paid under a contract will be valid as ‘reasonable’. Equally, a limitation by reference to insurance cover (which could be higher or lower than the price paid) may also have a reasonable possibility of being held valid. In particular, in my opinion a limitation may be valid where it is set by reference to a proportion of the relevant insurance limits, to take account of both the excess and the fact that there may be more than one claim and the total payable may therefore need to be shared.
The Witter decision, whilst it remains good law, can easily be accommodated by the inclusion of language within the exclusion clause to ‘except liability for fraud’ or, in alternative words, except liability in the tort of deceit or ‘for any statement made knowing it to be false’. In this sense, Witter needs to be taken into account in the same way that liability for death or personal injury is invariably taken into account in limitation and exclusion clauses.
10.2 Consequential Loss
No case has yet addressed the question of when it would be reasonable to exclude totally consequential loss or damage In this context, it is worth looking at the recent case of British Sugar Plc v Nei Power Projects [1997/98] InfoTLR 353.7 In that case, the Court of Appeal, in construing a clause in a supply agreement for electrical equipment, rejected the submission that ‘consequential’ loss included simple loss of profits which flowed directly from the breach (which most businessmen would regard as a classic definition of the word ‘consequential’): in fact, the Court of Appeal said, it meant loss which did not naturally flow from the breach but which would only be allowable if brought specifically to the attention of the supplier.
An example of what might not be excluded would be the loss of profits or interest a bank might incur if some software misdirected money to the wrong account (many would say that before this case that was a classic example of consequential loss); what might be excluded would be the loss of abnormal and special profit (over and above that which would be lost anyway) which would not be recoverable anyway unless the supplier was specifically aware of it. This is a bad example of the courts’ interpretation of a well-known contractual expression differing from that of most businessmen and from that of many other countries with similar legal systems. This is a pity, but it is important to bear in mind when ‘translating’ contracts developed for the US market for use in the UK and in countries which derive their legal systems from the UK.
10.3 Ongoing Services
Equally, no case has addressed the question of what might be a reasonable limitation of liability in an ongoing IT services contract. For example, in an outsourcing arrangement, an ongoing maintenance and support contract or a distribution agreement, is it reasonable to limit liability by reference to amounts received over a period of time or should the contract be limited to the total amount received throughout its duration? In the my opinion, a restriction to less than the price paid (for example all amounts received in the 12 months immediately preceding the date liability arose) may well be upheld as a reasonable limitation. A limitation to such an amount may well be enough to ensure that the party suffering the loss or damage can recover for its loss of bargain (by procuring a replacement service) or, alternatively, recover its expenses thrown away by virtue of the breach.
Whether such a limitation might be upheld will have to be looked at in the particular factual circumstances of the case. Pending further clarification in the law, such judgment calls will remain to be made in contracts of this nature where two commercial parties are attempting to allocate risk between themselves.
10.4 Warranty Exclusions
The contra proferentem rule, which I have mentioned above, may be well overdue for reconsideration, now that UCTA has given the courts a more open method of relieving deserving parties from the consequences of a bad bargain. Pending a reconsideration, however, a lawyer making a US-style contract suitable for use here needs to be aware that the US wording, which traditionally excludes all implied warranties, is not effective to exclude the Sale of Goods Act implied terms, which are conditions.7 Be careful and exercise all your pedantic skills!
11. A Final Thought
In my opinion, the assumption is too frequently made that the net effect of Salvage Association v CAP and St Albans DC v ICL is that price paid limitation clauses, or similar, are invalid. At some point in the future, the courts may prove me wrong, but I strongly disagree with the assumption that genuine free bargains between approximate equals in the course of business would be interfered with as a matter of course in this way. Both these cases are very easily distinguishable on their facts – the different amounts in the circulating standard forms in Salvage Association and the interesting behaviour of the sales force in St Albans – and even as a matter of pure academic law the issue of price paid limitation clauses in ICT contracts remains very firmly open.8 I think that absent special circumstances a court would uphold such a clause. The starting point is that it would, as this final, significant and often overlooked passage from Salvage Association v CAP (at p 676) helpfully demonstrates:
Generally speaking, where a party well able to look after itself enters into a commercial contract and, with full knowledge of all relevant circumstances, willingly accepts the terms of the contract which provide for apportionment of the financial risks of the transaction, I think that it is very likely that those terms will be held to be fair and reasonable.
Endnotes
- I use the acronym ICT, for ‘information and communications technology’ in recognition of the ever closer union between telecoms and classic information technology contracts. There is now very little point in distinguishing, for example, the legal principles which apply to a contract for the provision of a voice and data network (a telecoms contract?) and a traditional information technology contract to supply, for example, a standard PC network.
- For this and most other purposes, England includes Wales. The law of which I write is specifically that of England, but the Unfair Contract Terms Act applies to the whole of the United kingdom, with minor terminological distinctions. The law of Scotland as to implied terms in contracts for the sale of goods and the supply of services differs from that of England although the end result, in general terms, does not. The law of Northern Ireland is substantially the same as that of England; and the law of the Republic of Ireland is not blessed with the Unfair Contract Terms Act at all. It is to be hoped that the devolved legislative assemblies of Scotland and Northern Ireland do not cause the commercial law of the different regions of the Kingdom to diverge too markedly.
- See St Albans City and District Council v International Computers Ltd [1996] 4 All ER 481.
- From the strictly obiter judgment of Sir Iain Glidewell in the St Albans’ case: see below.
- I use the term ‘IT contract’ as a generic one for any standard form contract for the supply of hardware and/or software, or ICT services generally.
- See for example, Chitty on Contracts, 26th Edition, p 943.
- Wallis, Son & Wells v Pratt [1911] AC 394 is authority precisely on point.
- There is House of Lords authority (Finney Lock Seeds) for a price paid limitation clause in a contract (for the sale of cabbage seeds which turned out not to be cabbage) being held to be invalid. But hardware and software are not cabbage, there was extreme inequality in the bargaining power, and the issue of reasonableness is one of fact. The case is a good weapon in the armoury of anyone wanting to challenge such a clause, however.
