The supply of booking software to a hotel that proved to be a nightmare to operate, and that led to an award of damages totalling over £110,000, is the context for the latest judgment from the Technology and Construction Court on limitations of liability and the Unfair Contract Terms Act 1977.
In Kingsway Hall Hotel Ltd v Red Sky IT (Hounslow) Ltd [2010] EWHC 965 (TCC), His Honour Judge Toulmin CMG QC ruled that the attempt to limit damages by the seller (Red Sky) was ineffective and that failures to provide information undermined any claim that the limitation clauses were reasonable. In a long judgment that focuses primarily on the facts, the following extract (at [231]-[258]) summarises the main points of interest on the law, although practitioners may also be interested in the arguments concerning the allowable damages.
a) Under clause 2 Red Sky was required to sell the equipment and licence the computer system, provide (if any) the operating documents (paragraph 2.1.5) and provide the services set out in Schedule C (including training) and provide maintenance and support cover.
b) Clause 10.1 excluded all terms as to performance, quality, fitness for purpose etc except as provided in clause 10.2.
c) Clause 10.2 contained an express warranty that “the programmes will in all material respects provide the facilities and functions set out in the Operating Documents.
d) Operating Documents were defined in clause 1.1.6 to include “any operating documents supplied by the defendant to the claimant.”
e) Clause 10.4 provided that the sole remedy for breach of the warranty in clause 10.2 was the Maintenance and Support Cover. The Maintenance and Support Cover was defined by clauses 1.1.4 by the Schedules in the four page signed document, by clause 13 and by clause 28 which set out the hours during which support would be provided and also the response times which could be expected from Red Sky.
f) Clause 10.7 provided that clause 10, together with clause 18 stated the entire liability of the defendant in respect of any fault or error in the IT system.
g) Clause 18 contained limitations and exclusions of liability as follows:
i) Clause 18.3.2 excluded liability for any indirect or consequential loss. The term expressly excluded loss of profits and similar losses
ii) Clause 18.3.3 limited liability for direct loss to four times “Total Price”. By clause 1.1.26 the “Total Price” was £18,250 before discount. A net discount of £1,800 was applied to the contract price for the package. Applying the discount pro-rata to the services gives a figure of £17,615.82. The cap on recovery of damages in this case would therefore be £70,463. These figures are agreed by the parties solely as figures.
h) Clause 23 was an entire agreement clause and clause 26 provided for English law and jurisdiction.
- Red Sky claims that clause 10.4 provides the sole remedy for breach of warranty. The support cover to be provided was defined by clauses 1.14, by the schedules contained in the four page signed documents, by clause 13 and by clause 28. This provides a very high level of support from 7 am to 11 pm each day of the year with an estimated response time of four hours.
a. Clause 18.3.2 excluded liability for any indirect consequential loss which expressly excluded loss of profits and similar losses.
b. Clause 18.3.3 limited liability for direct losses to the sum of £70,463
“The term shall have been a reasonable one to be included having 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.” The Guidelines in Schedule 2 are helpful guidelines.
a) That the parties were of equal bargaining power relative to each other. There were over thirty property management systems competing in this highly competitive market.
b) The customer received a significant inducement to agree to the terms in that a significant discount was given and concessions were made on payment terms despite the fact that the contract price was very modest.
c) There was a long course of dealing between the parties so that Kingsway ought to have become aware of the existence of and extent of the terms. Clause 18.3 contained a prominent warning.
d) This was not bespoke software but it was adapted to the special order of the customer in that it would be configured for the particular customer. Entirety was used by a wide range of customers and the consequences of a breach would differ widely depending on which customers were using the software.
a. “the resources which he could expect to be available to him for the purpose of meeting liability, should it arise.
b. how far it was open to him to cover himself by insurance.”
1. It would purport to exclude these criteria without substituting any other and would allow a seller to provide unsatisfactory software without any benefit to the purchaser.
2. The terms, other than price were not discussed and conferred no benefit on Kingsway.
3. The bargaining power of the parties was all one way-save for the question of price and payment terms. The contract was entirely under the control of Red Sky – it was a take it or leave it arrangement especially where Kingsway had no real option but to replace the Innsite software as Red Sky had said that they were not going to continue to support it or maintain it.
4. There is no evidence that Kingsway even knew of the existence of the terms of exclusion. Red Sky did not draw it to Kingsways’ notice clearly or at all.
5. Red Sky continued to protest that the goods were off the shelf and were not made specifically for or specifically adapted for Kingsway.
6. Red Sky were specialists in the supply of hotel PMS software.
7. By the date of the agreement, Red Sky had the knowledge of supplying Entirety software to other hotels and were therefore in the best position to assess the likelihood of the existence of any defects and their likely consequences.
8. There is no evidence that one party was in a better position to insure against the risk of the consequences of defects in the software although, given the factors set out in 6 and 7 above, it was a reasonable inference that Red Sky would have been in a better position. Further Mr Edwards seemed to indicate that in fact Red Sky was insured.
1) The parties were not of equal bargaining power.
2) Kingsway and Red Sky bargained on price. Kingsway did not receive any inducement to agree Red Sky’s’ standard terms.
3) On the facts, it is not correct that there was a long course of dealing between the parties such that Kingsway ought to have known the existence of and the extent of the terms.
4) This was not bespoke software.
- In Kingsway’s case this did not happen. Kingsway, as I have found, relied on Red Sky’s advice that Entirety would be fit for the purpose of use in a busy central London hotel. Red Sky’s employees knew that group bookings formed an essential part of the system which it was supplying. I conclude therefore that Red Sky’s standard terms excluding liability or limiting damages do not apply.
258. To summarise on the Contractual issues:
1. Red Sky’s’ standard terms were predicated on the fact that a prospective customer would investigate Entirety and make up its own mind whether or not to purchase based on demonstrations and the Operating Documents which Red Sky had previously supplied. It did not apply to circumstances in which the customer relied on Red Sky’s’ advice in deciding to purchase Entirety.
2. The exclusions in clause 10.2 only applied where the Operating Documents as defined in Clause 1.1.6 were supplied to the customer before the contract was signed. In this case such documents were not supplied by Red Sky to Kingsway. Therefore, Clause 10.2 and the exclusions derived there from did not apply.
3. In any event, for the reasons set out above, the UCTA Section 11 applies. The terms following which restricted liability were unreasonable to be included having regard to the circumstances which were or reasonably ought to have been known to Red Sky or Kingsway, or be in the contemplation of the parties when the contract was made.
4. Pursuant to S14 of the Sale of Goods Act 1979, a term is to be implied into the contract that Entirety would be fit for the purpose for which it was bought, namely that the system would increase revenue and occupancy levels and would allow quicker check-in and check-out, including accurately processing groups and making changes to group reservations while preserving the accuracy of the system. I am satisfied that Entirety was not fit for the purpose for which it was sold.
5. Pursuant to Section 4 of the Supply of Goods and Services Act 1982 a term is to be implied into the contract that the goods were of satisfactory quality. Entirety did not meet the standard that a reasonable person would regard as satisfactory, taking into account any description of the goods, the price and all other circumstance so as to satisfy S4(2A )of the 1982 Act.
6. Kingsway was entitled, as they did, to reject Entirety which, as delivered, was not of satisfactory quality or fit for its purpose. They were entitled to do so after giving Red Sky every opportunity to improve Entirety, so that it would become of satisfactory quality and fit for its purpose.
