Aggregating Fundamentals

A dispute between Centrica and Accenture over a gas billing system highlights the fact that even the most carefully drafted of contracts have their ambiguities.

Accenture, the IT consultancy group, suffered a defeat on all of the preliminary issues in a judgment handed down on 6 November in GB Gas Holdings Limited v (1) Accenture (UK) Limited, (2) Accenture SCA, (3) Accenture International SARL, (4) Accenture Inc [2009] EWHC 2734 (Comm).

Centrica is claiming nearly £200m in relation to the alleged failure of the IT customer billing system which was to be created and installed by Accenture. 

In a complex series of preliminary judgments by Mr Justice Field, one element stands out. The contract stated that once Centrica had provided notice to Accenture of any ‘fundamental’ defect in the system, Accenture was obliged to take reasonable steps to fix the problem.  Centrica claimed that it had notified Accenture of a fundamental defect but Accenture had refused to take any steps in response.  Accenture argued that no single ‘fundamental’ breach had occurred and they were therefore not liable.  Centrica claimed that a series of lesser breaches could be aggregated to form a ‘fundamental’ breach.  Mr Justice Field agreed with Centrica. 

Commenting on the judgment, Peter Clough, head of disputes at Osborne Clarke, said:

‘One of the important points to note about this case is that IT suppliers can be liable for claims for fundamental breach arising from the cumulative effect of a series of faults, each of which could look relatively minor in isolation.  The majority of systems will of course be inter-linked so that a defect in part of the process could affect another part, snowballing into a more serious issue.

Accenture were partly caught out by the use of the words “and/or” in the definition of “fundamental breach”.  This judgment reinforces the careful considerations that need to be given when negotiating IT contracts. It will be interesting to see what other issues arise on this matter at the full trial.’

Published: 2009-11-13T12:28:20


    • I disagree with Ann's comment: "The ease with which the judge found that £8m paid by Centrica to its customers by way of ex gratia compensation constituted a direct loss was what surprised me most about this judgment." I have to admit to some insider knowledge here, as I worked at British Gas when these negotiations were going on (I left in 2002), but the whole point of the Jupiter project was to bring all of British Gas' customer-facing systems together as it had different systems for different products, none of which talked to each other and meant that if a customer had queries about 3 products, they had to talk to 3 different people. Accenture were well aware of the importance of the project and what its purpose was. If Centrica then had disgruntled customers as a result of the failure of the system, it seems clear that compensating those disgruntled customers would be a direct loss and falls squarely within the first limb of Hadley v Baxendale.
      anonymous, 16:58:17 26/11/2009
    • I agree with Paul. The ease with which the judge found that £8m paid by Centrica to its customers by way of ex gratia compensation constituted a direct loss was what surprised me most about this judgment. It's time I would suggest for suppliers to accept liability for indirect loss as long as there is an acceptable financial cap. If you are a supplier though, don't amend your template contracts to take this approach before checking your insurance cover - it is common for TMT insurance policies to state that insurers will not pay out if the insured supplier is liable for indirect loss when it would have been reasonasble for the supplier to limit its liaiblity for these in the contract with the customer. If you do have this kind of policy term, you'd need to have the exclusion of indirect loss in your template contract but I presume the insurers would be happy for you to accept the deletion of that provision if that were necesssary to close the deal. I am not suprised the judge ruled that Centrica were allowed to aggregate breaches to constitute a fundamental breach. I imagine this same approach would be applied to any ERP-type implementation because, as the judge said: (i) systems of this nature involve a lot of inter-related processes and sub-processes; (ii) an error in one process can affect a related process; (iii) it is quite common to have defects in a system which in combination create an aggregated defect; (iv) design errors in different processes can cumulatively impact on other processes. I was interested in the weight that the judge put on the recitals in the contract as part of the factual matrix against which he interpreted the relevant contract clauses. Don't speed read Recitals they can be important!
      Ann Lewin, 17:01:34 25/11/2009
    • Frankly, I am surprised that the focus should be on this element of the judgment which seem to me to be almost unique to the drafting. Of much greater import was the view taken by the judge as to the categorisation of particular types of loss as not being consequential or loss of profit and the fact that the judge took, in my view, a fairly practical view on the effectiveness of the notice served by Centrica. The overall result seems to be that suppliers of financial systems probably have to take an entirely different contractual approach if they are not to accept (whether consciously or not) an excessive degree of risk once the system goes into live use.It will be interesting to see how they react. Paul Golding TRG law
      Paul Golding, 17:46:05 19/11/2009
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