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Contract Law and IT

By Bernard Sia (bernardsia@gmail.com)

1. Abstract ................................................................................................................................................. 3

2. Introduction .......................................................................................................................................... 3

3. The Principles of Contract Terms .......................................................................................................... 4

3.1 Express Terms ............................................................................................................................... 4

3.2 Implied Terms ............................................................................................................................... 5

3.3 Sequencing of Representation and Terms .................................................................................... 6

3.4 Breach and Repudiation of Contract ............................................................................................. 6

4. Minimizing Liabilities ............................................................................................................................. 7

4.1 Limitations of Liabilities and Exclusion Clauses ............................................................................ 7

4.2 Entire Agreement Clause .............................................................................................................. 8

4.3 Further Scenarios to Reduce Liabilities ......................................................................................... 8

5. Summary and Closing ............................................................................................................................ 9

6. Appendix – IT Cases Cited (LexisNexis) ............................................................................................... 11

GB GAS HOLDINGS LTD v (1) ACCENTURE (UK) LTD (2) ACCENTURE SCA (3) ACCENTURE

INTERNATIONAL SARL (4) ACCENTURE INC (2009) - [2009] EWHC 2734 (Comm) - QBD (Comm) (Field

J) 6/11/2009 ........................................................................................................................................ 11

PEGLER LTD V WANG (UK) LTD (2000) - QBD (TCC) (Judge Bowsher QC) 25/2/2000 ......................... 11

(1) BSKYB LTD (2) SKY SUBSCRIBERS SERVICES LTD v (1) HP ENTERPRISE SERVICES UK LTD

(FORMERLY ELECTRONIC DATA SYSTEMS LTD) (2) ELECTRONIC DATA SYSTEMS LLC (FORMERLY

ELECTRONIC DATA SYSTEMS CORPORATION) (2010) EWHC 86 (TCC) - QBD (TCC) (Ramsey J)

26/1/2010 ........................................................................................................................................... 12

SAPHENA COMPUTING LTD v ALLIED COLLECTION AGENCIES LTD (1989) CA 3/5/89 ....................... 13

WATFORD ELECTRONICS LTD v SANDERSON CFL LTD (2001) - [2001] EWCA Civ 317, CA (Civ Div)

(Chadwick LJ, Peter Gibson LJ, Buckley J) 23/2/2001 ......................................................................... 13

7. References .......................................................................................................................................... 15

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1. Abstract

This article will run through fundamentals of English Contracting law, especially when applied to

Information Technology and how an IT vendor can be protected by the law, as well as by their own

business practices that can expose them to considerable legal risks. Principles of contract terms will be

highlighted followed by how these terms can be applied in contractual IT engagements, also a quick

walkthrough of Limitation of Liabilities and to end; we seek examples from case law on some quirks

unique to the IT industry which can be beneficial to the vendor if handled accordingly. Fundamentally,

however, the Law should not be used to protect the vendor from unscrupulous behaviour.

2. Introduction

Implications of English law in IT cannot be highlighted without going through an understanding of Offer

and Acceptance. The leading case of Partridge v Crittenden (1968) ‘Bramblefinch cocks and hens 25s

each’ established that advertisements are an ‘Invitation to Treat’, a gesture to start negotiating for a

sale and not an ‘offer for sale’ and thus in appeal, Partridge cannot be convicted under the Protection of

Birds Act 1954.

When applied to e-commerce, offer and acceptance are concluded almost instantaneously, and the

vendor may find himself in a legal conundrum when trying to rescind money losing orders should he

mislabelled the price from £100 to £10. Take into consideration that Section 11 of the Electronic

Commerce (EC Directive) Regulations 2002, states that once the seller acknowledges the receipt of the

order, the acknowledgement of receipt shall be deemed to be received when the buyer is able to access

both the order and the acknowledgement. Section 12 further elaborates that this ‘order’ shall be a

‘contractual offer’. Thus, should Partridge be selling his products online, he will very much be found

guilty.

This report will focus on how an IT entrepreneur can reduce liabilities and strengthen their legal position

within the law. The reader may ask then, how would an Information Technology (IT) business protect

itself legally from the example above? We answer by beginning the journey with an overview of

contracting.

3. The Principles of Contract Terms

The terms of contract describe the duties and obligations that each party

(Elliot & Quinn, 2007) and there are two

expressly or implied.

Figure 1 – Source: Summaris

The figure above summarises and breaks down how express and implied terms can affect the balance of

legal power between the buyer and seller.

3.1 Express Terms

Oral statements are representations made

you will be deemed as someone with special knowledge

v Harold Smith (1965) and Oscar Chess v. Williams (1957)

Harold Smith Motors and Oscar Chess

age of the car due to their expert knowledge.

against the IT service provider should the claims fall short

With agreements in writing, the ‘Parol

the parties cannot adduce extrinsic evidence, and especially oral evidence, to add,

deed or contract writing as per Jacobs v Batavia and General Plantations Trust (1924)

highly applicable in IT when juxtaposed with

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Contract Terms

The terms of contract describe the duties and obligations that each party assumes under the agreement

here are two ways in which a term can be included into the contract,

Summarised from Contract Law, Terms of Contract (Elliot & Quinn, 2007)

es and breaks down how express and implied terms can affect the balance of

legal power between the buyer and seller.

are representations made prior to the contract and coming from an IT service provider

you will be deemed as someone with special knowledge and the judgement of Dick Bentley Productions

v Harold Smith (1965) and Oscar Chess v. Williams (1957) applies. Within the two cases the

Oscar Chess were held accountable for their statement on the mileage and

due to their expert knowledge. Hence, all verbal claims of software efficacy

should the claims fall short of the promised outcome.

Parol’ evidence rule states that the writing is the whole contract and

the parties cannot adduce extrinsic evidence, and especially oral evidence, to add, contradict

Jacobs v Batavia and General Plantations Trust (1924)

highly applicable in IT when juxtaposed with ‘Collateral Contracts’ where oral statement can be deemed

assumes under the agreement

ways in which a term can be included into the contract, either

(Elliot & Quinn, 2007)

es and breaks down how express and implied terms can affect the balance of

and coming from an IT service provider

Dick Bentley Productions

Within the two cases the dealers

were held accountable for their statement on the mileage and

efficacy can be held

rule states that the writing is the whole contract and

contradict and vary a

Jacobs v Batavia and General Plantations Trust (1924). This scenario is

where oral statement can be deemed

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binding, even if it conflicts with written contract (Elliot & Quinn, 2007). The reason is IT engagements

typically commence with sales presentations and brochures with benefit statements issued. What if the

buyer makes the decision based on the assurances in the presentation and the brochure?

3.2 Implied Terms

The answer lies in statutory implied terms set out in the following acts. The Sale of Goods Act 1979 as

amended in Sale and Supply of Goods Act 1994 states that the goods must also be fit for their purpose

and as described by the seller and obligates the seller to meet the standards that a reasonable person

would regard as satisfactory, taking into account any description, price and other circumstances which

affects appearance and finish, freedom from minor defect, safety and durability. The Supply of Goods

and Services Act 1982 further requires services be carried out with reasonable skill and care and the Sale

and Supply of Goods to Consumers Regulations 2002 protects the consumer by obligating the seller to

reimburse the price paid or to replace, repair or handle consumer goods in any way if they do not meet

the specifications set out in the guarantee statement or in the relevant advertising. Hence, the IT vendor

needs to be extra cautious in qualifying the representations made in brochures and sales presentations.

Based on the importance given to the representations made; these assurances could even be included

as collateral contracts as exemplified in City and Westminster Properties Ltd v Mudd (1959) where the

landlord had verbally promised not to enforce a contractual rule in the lease preventing the tenant from

living in the premise. The landlord however, chose to enforce it anyway in order to evict the tenant later

on. The court found for the defendant and that the initial promise was sufficiently important to exist as

a collateral contract or otherwise the tenant will not have entered into the agreement even though that

oral statement conflicts with the written contract.

Through case law we see various examples of implied terms by fact where both parties intended to

include those terms in order to give the contract business efficacy. In the leading case of The Moorcock

(1889) where the ship was damaged during low tide and the owner of the ship claimed damages even

though there were no provisions in the contract to keep the ship safe from such incidents, Bowen LJ

ruled that an implied warranty should be read into the contract to give it business efficacy and the dock

operators owed a ‘duty of care’ to the ship owners. In IT, implied warranties could come in the form of

the vendor guaranteeing a solution that does not harbinger viruses or trojans which allows the buyer’s

IT systems to be compromised.

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The final implied term; through customs or trade usage may seem rather disadvantageous to the

consumer in IT, where it is an acceptable practice for a software product to be supplied with minor bugs.

In Saphena Computing Ltd v Allied Collection Agencies Ltd (1995) Steyn J noted that ‘the expert evidence

convincingly showed that it is regarded as acceptable practice to supply computer programmes

(including system software) that contain errors and bugs’ and later Staughton J held in St Albans City and

District Council v International Computers Limited (1994) ‘software is not necessarily a commodity

which is handed over or delivered once and for all at one time. It may well have to be tested and

modified as necessary’ (White, 1997). But before IT vendors jump for joy, the ongoing litigation between

GB Gas and Accenture1 centres on the argument of whether an aggregation of minor breaches amounts

to a fundamental breach, thus enabling GB Gas to claim damages. Needless to say, IT practitioners are

waiting with bated breaths as the case unfolds.

3.3 Sequencing of Representation and Terms

It is not uncommon that a number of commitments are provided to the client to win IT engagements;

but at this stage although details of the required works are at a high level, the contract is formed

anyway with whatever information that can be gleaned. Post contracting, elaborations of the

requirements are then completed in a specifications phase and unfortunately, this is the stage where

constraints and risks are uncovered and usually go against the initial assurances. This exercise exposes

the IT vendor; where by law, exclusion of liabilities on the potential risks can no longer be introduced

after the contract has been made. In Olley v Marlborough Court Ltd (1949), the hotel wanted to exclude

liabilities for lost of valuables by referring to the exclusion clauses pasted behind the hotel bedroom

door. The court ruled that the notice is ineffective and too late as the contract was already concluded at

the reception desk.

3.4 Breach and Repudiation of Contract

There are 3 ways in which a contract can be breached, either through it’s conditions, which are

mandatory and crucial to the contract that can lead to both damages and repudiation of the contract,

breach of warranties which requires remedy of damages but not repudiation and finally, breach of

innominate terms; contract terms that can either lead to repudiation or claims of damages or even both

depending on the intent, importance and interpretation of the contract (Poole, 2008).

1 GB GAS HOLDINGS LTD v (1) ACCENTURE (UK) LTD (2) ACCENTURE SCA (3) ACCENTURE INTERNATIONAL SARL (4)

ACCENTURE INC (2009)

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A severe example of IT contract breach can be cited from BSkyB Ltd and another v HP Enterprise

Services UK Ltd (formerly Electronic Data Systems Ltd) and others (2010), the judge ruled that EDS was

in breach of the prime contract in failing to exercise reasonable skill and care, conform to industry

practice due to ineffective programme management, lack of proper design and development as well as

insufficient technical or managerial resources. Secondly, the judgement was also influenced by EDS

making claims prior to the prime contract which led to them being chosen as the preferred bidder and

subsequently awarded the contract. The damage was set at almost £700 million! HP (previously EDS)

appeals this decision and insists that there were no misrepresentations and the failed project was

caused by BSkyB’s ill defined specifications (Collins, 2010).

Having covered the many examples of breaches and contracting principles, the next section will explain

contract clauses and scenarios which can be adopted by the IT vendor to reduce liabilities and avoid

breaches.

4. Minimizing Liabilities

Limitation of Liabilities clauses, Entire Agreement Clause as well as Exclusion and Exemption clauses are

the major clauses to be included to protect the seller and to a certain extent the buyer in business

engagements. However; they are not without intricacies, legal and situational circumstances. The IT

vendor should also take into account the statutes of Unfair Contract Terms Act of 1977 - UCTA

henceforth, Unfair Contract Terms in Consumer Contracts Regulation 1999 which covers more scenarios

not specified in the 1977 act and The Consumer Protection from Unfair Trading Regulations 2008 that

prohibits misleading actions, omissions and aggressive business practices.

4.1 Limitations of Liabilities and Exclusion Clauses

Limitation clauses are only subject to the operation of UCTA for standard written contracts compared to

bespoke contracts where the parties will be bound by the limitations specified in the contract (Warchus,

2008) and Limitation of Liabilities as a risk management instrument are highly recommended for

scenarios of direct and indirect losses resulting from a failed endeavour. In the same article by Warchus;

he noted that prior to 2001, the courts have taken a stern stance on contractors that have performed

badly and depended on the limits of liabilities. For example; in the case of Pegler Ltd v Wang (UK) Ltd

(2000), Wang’s attempt to depend on the Limitation of Liabilities for indirect losses and anticipated

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losses failed as the court held that it did not meet the reasonableness test of UCTA (Section 11);

fundamentally because Wang had abandoned the project prior to completion and there were elements

of misrepresentation in the contract formation. The situation changed with Watford Electronics v

Saunderson (2001), where the Court of Appeals found that the limits were acceptable because both of

them were IT organizations. The court held that where the parties were experienced businesses and of

equal bargaining power, the courts should not interfere unless one party has taken unfair advantage of

the other, or the term is so unreasonable that it cannot properly have been understood or considered.

This distinction is important as IT vendors do not operate alone and form consortiums to undertake

major projects. Hence the underpinning contracts between the vendors will highly likely fall outside of

UCTA on the basis of business experience. Hence, IT vendors in a consortium are advised to closely

scrutinise their relevant limit of liability clauses in the event of dispute and to quantify the risk

exposures.

Exemption clauses are also highly regulated by UCTA which states that the clauses need to be agreed

through signature, reasonable notice by the seller and through implied terms from previous course of

dealings should for some reason or another the exemption was left out.

4.2 Entire Agreement Clause

Save for fraudulent misrepresentation, entire agreement clauses are extremely useful for IT vendors to

cap liabilities to terms within the contract. In Watford Electronics v Saunderson (2001), Chadwick LJ

identified two reasons why entire agreement clauses are effective - to attain commercial certainty and

to reduce the risk of litigation arising from pre-contractual negotiations. Secondly, it reflects the

commercial risks that both party are willing to accept and thus commercially desirable since accurate

pricing can be determined to quantify the risk. However, Entire Agreement clauses may be rendered

ineffective due to the peculiarity in software contracts that allows changes to be made to the product

upon written request by the customer via change orders, where the written instructions can potentially

supersede the agreement (MacDonald, 2005).

4.3 Further Scenarios to Reduce Liabilities

Since the business cannot introduce exclusion clauses after the contract, it is best for the vendor to split

the IT engagements into two phases. The first being the requirements and design phase where the exact

blueprint of the requirements are fleshed out and potentially risky business scenarios that can

jeopardise the success of the project elaborated. The resulting specification can be turned into to the

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conditions and warranties of the contract for the actual implementation. The contract itself can also

include ‘fair usage terms’, where specific conditions should be met or availed by the purchases in order

for the solution to work, for example; the servers need to be kept in an operating environment of no

more than 27°C.

For scenarios of negligence2 arising out of an IT engagement, the IT vendor is highly recommended to

acquire a Professional Indemnity Insurance to cover claims arising out of defects which then result in

financial losses (Wright, 2009). Although previously a domain of medicine and construction, this

insurance is gaining a foothold in information technology engagements.

In the UK, Value Added Tax (VAT) applies for various services as per Value Added Tax Act 1994 and Sixth

Council Directive (EEC) 77/388. Although a number of exemptions are provided, to safe guard against

misinterpretation it would be best to include a clause that the customer shall bear all VAT charges

where applied and that the overall costs of the implementation do not include VAT chargers. The

following IT cases are examples where the court held against claims of exemption from the plaintiff in

RM Education Plc v Revenue & Customs Commissioners (2009) and the defendant in Customs and Excise

Comrs v Electronic Data Systems Ltd (2003), both IT vendors.

5. Summary and Closing

We conclude this report by answering the query on how our online finch seller can legally protect his

business. Firstly, a ‘Terms of Usage’ page where the disclaimers, terms, conditions and process of buying

finches online should be displayed to the customer in legible language and any major exclusion to be

identified clearly, as per UCTA. The transaction can be strengthened further with terms that the finch

seller reserves the right to reject the transaction. Lastly, a term which gives the seller the right to vary

the prices prior to order confirmation by the consumer can also be included and this is still in

compliance with Section 11 (b) of the Electronic Commerce (EC Directive) Regulations 2002 which states

that an effective and accessible technical means allowing the consumer to identify and correct input

errors prior to the placing of the order should be made available. By clicking ‘I AGREE’, the consumer

2 Negligence in IT and Professional Indemnity Insurance is a large topic by itself, with due respect this should be

addressed outside this assignment.

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would have showed understanding and consented to the terms specified. A final note to all IT vendors

are that there’s just no room for misrepresentation or even ‘puffery’; the protracted BSykB case and

summary £700 million judgement should serve as reminder to all.

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6. Appendix – IT Cases Cited (LexisNexis)

GB GAS HOLDINGS LTD v (1) ACCENTURE (UK) LTD (2) ACCENTURE SCA (3) ACCENTURE

INTERNATIONAL SARL (4) ACCENTURE INC (2009) - [2009] EWHC 2734 (Comm) - QBD

(Comm) (Field J) 6/11/2009

In a claim for breach of contract the court determined preliminary issues concerning the true construction of the relevant agreement, the correct basis for calculating damages and whether certain claims were excluded as consequential loss.

The court was required to determine preliminary issues in a claim for breach of an agreement under which the defendants (D) contracted to design, supply, install and maintain a new IT system including an automated billing system for the claimant (C). Under the agreement the system was to be delivered in five software releases, the third of which was to be the billing system. Clause 15 of the agreement contained warranty provisions which provided what was to happen in the case of a breach of warranty depending on whether the breach involved a fundamental or a material defect, as defined. The agreement was amended to reflect the fact that disputes as to the implementation of the agreement had broken out between the parties and it had been agreed that releases 4 and 5 were to be cancelled; D should move off site with C taking over operational responsibility for the system, including its implementation, day-to-day operation and maintenance; employees of D were to be transferred to C; and, with certain exceptions, including any right accruing to C to pursue the warranty provisions in clauses 15.2 to 15.4, D was to be released from all other claims in connection with the agreement. Problems emerged with the new billing system and C by letter notified D of certain fundamental defects pursuant to clause 15.4.3 of the amended agreement. D took the view that there were no fundamental defects and refused to take any corrective steps under clause 15.4.3. C then issued proceedings alleging that the relevant software release contained two basic and critical design errors each of which was a fundamental breach of warranty within the meaning of the amended agreement and which individually or in combination constituted a fundamental defect or defects. C also asserted that there were other material errors which in combination constituted fundamental breaches of warranty and fundamental defects. A trial was ordered of preliminary issues relating to the true construction of clause 15.4.3, the correct basis for calculating the damages which could be claimed by C for a fundamental defect and whether certain classes of loss claimed by C were excluded by clause 16.2 as consequential loss. D contended that individual breaches of warranty asserted by C could not be combined whether for the purpose of establishing a fundamental breach or for the purpose of establishing a fundamental defect pursuant to clause 15.4.3 of the amended agreement. HELD: (1) The meaning which clause 15.4.3 would convey to a reasonable person having the relevant background knowledge was that a fundamental breach of warranty could be constituted by individual breaches of warranty all falling within the same subparagraph under clause 15.2.1 or clause 15.2.2, and the consequences of such individual fundamental breaches of warranty could be aggregated for the purposes of determining whether there was a severe adverse effect on C's business. The categories of material defects and fundamental defects were not mutually exclusive. There was no obligation under the agreement on C to classify an apparent breach of warranty as either a material defect or a fundamental defect and nothing that prevented C from asserting that a breach was a fundamental defect when to begin with it had thought that the effects of the breach did not justify such an assertion. (2) In order for a fundamental breach of warranty to constitute a fundamental defect it did not have to have caused an actual severe adverse effect on the business before it was notified to D under clause 15.4.3. It was sufficient if, at the time of notification, the breach had started to or would cause a severe adverse effect if left unremedied. (3) Clause 15.4.3 had to be construed contra proferentem, since it was an exclusion clause excluding or limiting what otherwise would be D's liability at common law for breach of the release warranties. Clause 15.4.3 did not require specification of any particular breach of warranty or the severe adverse effect but referred only to a written notification of a fundamental defect and the provision by C of such analysis and detail as was reasonably practicable as to its reasons for believing there was a fundamental defect. The provision of such information was not an additional condition precedent to the notification. (4) D's warranty obligations were free-standing so that they could found a claim for damages at large at common law if D failed promptly to take the prescribed steps. Such a failure by D did not only entitle C to recover damages measured by D's prescribed steps obligation. (5) None of the classes of loss claimed by C were excluded as consequential loss under clause 16.2 of the amended agreement.

Preliminary issues determined

PEGLER LTD V WANG (UK) LTD (2000) - QBD (TCC) (Judge Bowsher QC) 25/2/2000

Standard form exclusion of liability clauses introduced into a contract by a supplier of computer hardware and software could not be relied upon since, on their true construction, they only applied to loss arising after supply, and not arising out of late supply or non-supply, and because they failed the test of reasonableness under the Unfair Contract Terms Act 1977.

Assessment of damages payable by the defendant ('Wang') to the claimant ('Pegler') for admitted breaches of a contract to supply computer hardware and software and associated services of project management, consultancy and business process management. In addition to putting the quantum of Pegler's claim for damages in issue, Wang claimed to be entitled to rely upon clauses

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excluding and/or limiting its liability. The contract between the parties was made in December 1991, and related to the provision of a bespoke computer system which would enable Pegler, a manufacturer of engineers' and plumbers' brassware, to move to a demand driven manufacturing system. The judge concluded that Wang had misrepresented the system which it was selling; had failed to deliver modules on time or at all; had closed its business management process department (which was essential to the success of the project), part way through the project; had ceased to sell, and had become unable to support, the software package; and had finally abandoned the project, when it was far from complete, at the end of 1995. In February 1996 Pegler began proceedings, which were subsequently consolidated with this action, which was begun in April 1997 after Pegler formally accepted Wang's repudiation of the contract. Pegler claimed to have sustained losses of over £22.8 million, of which by far the largest element was a claim for ‘lost UK sales’ in the sum of £12.5 million. Wang claimed to be entitled to rely upon, inter alia, two of its standard form clauses which had been inserted into the contract with the intention of limiting and/or excluding its liability. By the first, Pegler agreed that Wang would not be liable ‘for any indirect, special or consequential loss, howsoever arising including... loss of anticipated profits...) in connection with or arising out of the supply, functioning or use of (the goods and services supplied)’ ('the exclusion clause'); and by the second Pegler agreed that, save in respect of liability for death or personal injury, ‘no action... arising out of the transactions in relation to this contract may be brought by either party more than two years after the cause of action has occurred’ ('the limitation clause'). Pegler contended that the clauses were not applicable on the facts of the case and, in the alternative, that both failed the test of reasonableness contained in s.11 Unfair Contract Terms Act 1977.

HELD: (1) On its true construction, the exclusion clause only applied after the product had been supplied. The clause did not refer to non-supply or late supply, and if Wang had wished it to exclude liability for those eventualities, then it should have said so. In any event, the clause did not apply to the associated services which Wang had contracted to supply. Moreover, the loss for which liability was excluded was loss under the second limb of Hadley v Baxendale (1854) 9 Ex 341, whereas the loss claimed by Pegler was under the first limb. (2) A delay in delivery was a continuing breach, in respect of which a fresh cause of action accrued every day until the duty to perform ceased by acceptance of repudiation or in some other way. Similarly with a total failure to perform. The parties could not have intended that the limitation clause should be read as if the words were ‘more than two years after the cause of action or any similar cause of action first occurred’. Since it was agreed that performance ceased to be offered in December 1995, and the first writ in the now consolidated action had been issued in February 1996, the limitation clause was ineffective to bar Pegler's action. (3) The submission as to reasonableness raised an antecedent issue as to whether Pegler had dealt with Wang on the latter's written standard terms of business, within s.3 of the Act, given that it was not the contract as a whole, but the exclusion and limitation clauses in it, which had been in Wang's standard form. The evidence showed that these clauses were, from Wang's perspective, non-negotiable. The court was therefore satisfied that, in relation to the material clauses, Pegler had contracted on Wang's ‘written standard terms of business’, which was sufficient for the Act to apply. (4) It would have been one thing for Wang to include in the contract standard terms intended to limit or exclude liability in the event of some not readily foreseeable lapse on its part, but quite another to do so when it had so misrepresented what it was selling that the breaches of contract were not unlikely. (5) Compensatory damages under various heads of claim was assessed at £9 million odd. Judgment for Pegler accordingly.

(1) BSKYB LTD (2) SKY SUBSCRIBERS SERVICES LTD v (1) HP ENTERPRISE SERVICES UK LTD

(FORMERLY ELECTRONIC DATA SYSTEMS LTD) (2) ELECTRONIC DATA SYSTEMS LLC

(FORMERLY ELECTRONIC DATA SYSTEMS CORPORATION) (2010) EWHC 86 (TCC) - QBD

(TCC) (Ramsey J) 26/1/2010

An information technology company was liable in deceit where it had falsely represented that it had carried out a proper analysis of the amount of time needed to complete the initial delivery and go-live of a customer contact centre and that it held the opinion that, and had reasonable grounds for holding the opinion that, it could and would deliver the project within the timescales put forward.

The claimants claimed damages against the defendants for breach of contract and misrepresentation in relation to the provision by E to B of a new customer relationship management system. The claimants were a satellite broadcaster (B) and its subscriber services subsidiary (S). The defendants were a provider of information technology services (E) and its United States parent (U). Following a tender process, B selected E to design, build, manage, implement and integrate the process and technology for a new customer relationship management system. After an initial letter of intent to appoint E as prime contractor, E entered into the prime contract with S to provide the new system. Clause 20.2 of the prime contract limited E's liability for certain kinds of loss and clause 20.5 imposed a liability cap of £30 million. The project was not delivered on time or on budget. There was a renegotiation which led to a letter of agreement, which varied the prime contract and effected a settlement of existing contractual liabilities. Later B took over the performance of E's role of systems integrator and a memorandum of understanding was signed. B alleged that E made fraudulent misrepresentations which led to the letter of intent and to the prime contract. B also alleged that E made negligent representations prior to the letter of agreement. B claimed damages for fraudulent misrepresentation prior to the prime contract, consisting of the increased costs incurred in delivering the actual system and the lost benefits of the earlier delivery of an alternative system. Alternatively B claimed damages for negligent misrepresentation prior to the letter of agreement. In addition B claimed damages for breach of the prime contract before and after variation by the letter of agreement.

HELD: (1) The entire agreement clause in the prime contract did not preclude S from advancing a claim for negligent misrepresentation or misstatement against E. Clause 20.2 of the prime contract had the effect of excluding E's liability for any loss of

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anticipated savings, except in respect of claims in deceit. (2) The letter of agreement contained an exclusion of claims for breach of the prime contract but that provision did not exclude claims for negligent or fraudulent misrepresentation. (3) The memorandum of understanding was not a legally binding agreement. It was ‘subject to contract’ and envisaged a further contract, although none was ever signed. (4) No duty of care should be imposed on U in favour of B or S or on E in favour of B which circumvented the contractual exclusion or limitation of liability which the parties had put in place. That contractual structure negatived such duties of care. (5) B had not established that, before the letter of intent and the prime contract, E made any misrepresentation in relation to the resources available for the project or in relation to the estimated cost of completing the project. However, before the letter of intent and the prime contract, E represented that it had carried out a proper analysis of the amount of time needed to complete the initial delivery and go-live of the contact centre and that it held the opinion that, and had reasonable grounds for holding the opinion that, it could and would deliver the project within the timescales put forward. Those representations were false as there was no proper analysis nor were there reasonable grounds. They were made dishonestly by the relevant employee of E who knew them to be false. In making the misrepresentations, E intended B to rely on them in entering into the letter of intent and then the prime contract and B did so. Accordingly, E was liable to B in deceit for those misrepresentations. The misrepresentations which were made prior to the letter of intent and the prime contract were only made on behalf of E and not on behalf of U but were made to both B and S. Other allegations of misrepresentation before the prime contract were not made out. (6) E was liable to S for negligent misstatement and under the Misrepresentation Act 1967 s.2(1) in respect of a misrepresentation prior to the letter of agreement that E had developed an achievable plan, which had been the product of proper analysis and re-planning. (7) Given the finding on the existence of a duty of care owed by E to B, E had no liability to B for negligent misrepresentations made prior to the letter of intent, the prime contract or the letter of agreement. (8) E was in breach of the prime contract in failing to exercise reasonable skill and care or conform to good industry practice because there was no effective programme management, the design and development of the solution was not properly documented and E did not provide sufficient technical or managerial resources. However, there was no repudiatory breach and no acceptance of any repudiation. (9) B was entitled to recover losses caused by entering into the prime contract on the basis of either the misrepresentations made prior to the letter of intent or prior to the prime contract. B was entitled to damages for breach of the prime contract before the letter of agreement and to damages for breach of the prime contract as varied thereafter, the sum recoverable being subject to the cap in clause 20.5. (10) B did not fail to mitigate its loss.

Judgment for claimants

SAPHENA COMPUTING LTD v ALLIED COLLECTION AGENCIES LTD (1989) CA 3/5/89

Defective software-supplier's obligations as to delivery and rectification

Appeal by purchasers of allegedly defective software against judgment in favour of plaintiff suppliers who had supplied on-line software & batch software for the defendants' debt collection service. The supply agreement had been terminated by mutual consent before either the batch software or the on -line software was working satisfactorily in the defendants' system. HELD: A The law was the same whether the contract had been for the supply of goods or for the supply of services B It was not a breach of contract if software did not immediately work satisfactorily, it had to be tested & possibly modified. The process of testing & modification had to be completed within a reasonable time but both sides knew there were defects to be remedied when they terminated the agreement by mutual consent. After that the plaintiff/suppliers were no longer under any obligation or entitled to do any more work on the software. That was part of the bargain made. The plaintiffs were therefore entitled to succeed. Appeal dismissed.

WATFORD ELECTRONICS LTD v SANDERSON CFL LTD (2001) - [2001] EWCA Civ 317, CA (Civ

Div) (Chadwick LJ, Peter Gibson LJ, Buckley J) 23/2/2001

Provisions in a contract for the supply of computer software that both excluded the supplier's liability for indirect loss and limited the damages recoverable to the amount paid by the customer under the contract satisfied the requirement of reasonableness under s.11 Unfair Contract Terms Act 1977.

Appeal by the defendant ('Sanderson') from that part of the order of HH Judge Thornton QC by which he determined against Sanderson a preliminary issue as to whether certain of its standard terms and conditions satisfied the requirement of reasonableness under s.11 Unfair Contract Terms Act 1977. The preliminary issue arose in the course of an action by the claimant ('Watford') for damages for breach by Sanderson of a contract for the supply of computer hardware and software ('the goods'). The contract, which incorporated Sanderson's standard terms and conditions, included: (i) an ‘entire agreement’ clause, which contained an acknowledgement of non-reliance on the part of Watford; and (ii) a clause ('the subject clause') under which Sanderson purported: (a) to exclude any liability for indirect or consequential losses; and (b) to limit its liability to the price paid by Watford under the contract. Following the failure of the goods to perform, Watford sought to recover damages for breach of contract totalling £5.5 million in respect of loss of profits/depression of turnover, increased costs of working and mitigation costs. The total paid by Watford under the contract amounted to £104,596. The judge held that the subject clause, which he construed as a whole, was ‘unreasonable in its entirety’, and hence fell foul of s.11 of the 1977 Act.

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HELD: (1) The judge had erred in his approach to the construction of the subject clause, which was plainly comprised of two distinct contract terms, in relation to each of which it was necessary to consider whether the requirement of reasonableness was satisfied. The purpose of each part was to be construed not only by reference to the other, but also by reference to the entire agreement clause and Watford's acknowledgement of non-reliance. (2) It was clear that the contract had been negotiated between experienced businessmen of equal bargaining power and skill. Unless satisfied that one party had effectively taken unfair advantage of the other, or that a term was so unreasonable as plainly not to have been understood or considered, the court should not interfere. (3) In those circumstances, it was impossible to hold that either the term excluding indirect loss or the term limiting direct loss failed the requirement of reasonableness.

Appeal allowed.

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