Judgment has recently been given in J Murphy & Sons Limited v Johnston Precast Limited [2008] EWHC 3024 (TCC) at the Technology and Construction Court. It may have a major impact on many IT contracts. Although the case concerns construction rather than technology, it is important for two reasons. First, the judge introduced a new contract implied term: suppliers must warn customers of ancillary matters that they discover even after the contract has been entered into. That implied term is likely to be non-excludable. Secondly, the case demonstrates the current thinking of judges in dealing with liability clauses, including affirming the approach in Regus (UK) Limited v Epcot Solutions Limited [2008] EWCA Civ 361, but taking a more interventionist line.
The Facts
The facts and scenario were somewhat complex but they can be summarised as follows. Thames Water contracted Murphy to design and construct a tunnel. As often applies in IT contracts, the main contractor (Murphy) engaged sub-contractors to do various bits and then looked to the sub-contractors when things subsequently went wrong. In this case, Murphy asked Johnston to supply glass reinforced plastic pipes, and the tunnel was later backfilled by Murphy with foam concrete supplied by another sub-contractor, Pro-Pump Limited. Some time after installation, the pipe burst open causing flooding and considerable damage. Thames Water sued Murphy and the claim was settled for about £4m. In turn, Murphy sought to recover its losses in separate actions against Pro-Pump and Johnston. This case concerned the action against Johnston. On the facts, Murphy lost in its claim against Johnston, because Mr Justice Coulson ruled that the effective causes of the failure were not down to Johnston. It is the legal analysis which the judge applied to the facts that will be of particular interest to IT lawyers.
That said, the decision on the facts of the case arguably makes the legal analysis obiter, although its status is unclear because of the way the judgment is structured. This article considers two legal issues in turn and how they are affected by the judgment. The first issue is implied terms in contracts; the second is interpreting liability clauses.
Issue 1: Implied Terms in Contracts
There are essentially three types of implied terms that affect IT contracts.
(1) Terms implied by custom. An example of this is where a supplier delivered a new PC to a customer every Friday morning at 11am for 20 weeks and then failed to do so on the twenty-first week. It could be argued that a term had been implied into their contractual relationship by custom that the supplier would deliver again at 11am because of the course of dealing in the previous 20 weeks and he had breached that implied term.
(2) Terms implied by fact. This is where something is so obvious that if the parties would have been asked whether the implied term applied, the parties would have responded, ‘Of course.’ It is a term usually needed to give business efficacy to the contract.
(3) Terms implied by law. There are terms implied by statute, such as for title, satisfactory quality or fitness for purpose under the Sale of Goods Act 1979. There have also been other terms implied by law which have been developed by case law. The third category was expanded in the Technology and Construction Court nearly 10 years ago in the case of Anglo Group Plc v Winther Browne & Co Limited [2000] 72 Con LR 118. In that case, Judge Toulmin QC came up with the following six principles that are implied into contracts for the supply of a standard computer system.
- The purchaser communicates clearly any special needs to the supplier
- The purchaser takes reasonable steps to ensure that the supplier understands those needs.
- The supplier communicates to the purchaser whether or not those precise needs can be met and if so how they can be met. If they cannot be met precisely, the appropriate options should be set out by the supplier.
- The supplier takes reasonable steps to ensure that the purchaser is trained in how to use the system.
- The purchaser devotes reasonable time and patience to understanding how to operate the system.
- The purchaser and supplier work together to resolve the problems which will almost certainly occur.
This requires active co-operation from both parties. If such co-operation is not present, it is likely that the purchaser will not achieve the desired results from the system. The Anglo v Winther Browne judgment did not explain where those implied terms came from or on what basis they were suddenly introduced by the case. However, I understand that the origins of the principles were derived from the French civil code. It is interesting that the case implied those terms even though, as I understand it, the contract itself had an express provision excluding implied terms (although the judgment itself did not mention this point). Mr Justice Coulson has now taken on the spirit of Anglo v Winther Browne. Hidden away at [128]-[130] of his lengthy judgment, he has developed a principle that could also have major implications for suppliers in IT projects. The judge found on the facts of the case that there was no implied term that the pipe was fit for the particular purpose of an environment of foam concrete – not least because Murphy had not made that purpose known to Johnston before the contract had been entered into. However, after the contract was made and before the pipes were installed, Johnston became aware that the tunnel was going to be backfilled with foam concrete. The judge concluded that a supplier in Johnston’s position should owe a duty to warn the contractor buying its product of design defects which it believe existed or whose existence it ought to suspect. He said it would be absurd if Johnston knew or should have known that foam concrete was an inappropriate environment for its pipe but had no obligation to pass that information onto Murphy, simply because the contract had been made before Johnston found out about the use of foam concrete. Accordingly, it was an implied term of the contract that if Johnston knew or ought reasonably to have known that use of foam concrete would or might create problems for its pipe, it had a duty to warn Murphy of its concerns. Mr Justice Coulson went on to emphasise that the duty arose simply because of Johnston’s role as a specialist supplier of the pipe and not because of any role Johnston may have had as a designer of any aspect of the overall project. So there you have it: a new obligation faced by suppliers. No implied term of fitness for purpose was relevant here, because no purpose had been made known at the relevant time. However, that implied term was effectively extended in time beyond the point of entering into the contract as it turned into an ongoing duty to warn according to knowledge that the supplier subsequently discovered. This has echoes of the ongoing duties on the parties to work together and co-operate as set out in Anglo v Winther Browne. The parties must not simply wash their hands of providing further co-operation because the contract did not require it. And as with Anglo v Winther Browne, where the judge ruled that the implied term applied despite apparent conflicting wording in the underlying contract, so it appears something similar has happened again. Clause 15(i) of the Murphy contract said:
‘The Customer must rely on its own skill and judgment and recognise good civil engineering practice in relation to the goods and shall satisfy himself that goods specified are suitable for the Customer’s intended purpose.’
Despite the apparent express words disclaiming the supplier’s responsibility and putting the onus on the customer, Mr Justice Coulson said that that wording did not relieve Johnston of its obligation to warn Murphy if it knew or ought reasonably to have known that the foam concrete would or might cause problems for its pipe. It should be noted that this is a first instance ruling and the legal issues are all arguably obiter because the judge found on the facts that Johnston was not to blame. It therefore remains to be seen whether the implied term introduced here is followed in subsequent cases, but it would certainly be worth a customer pleading it in the future, particularly as the Technology and Construction Court has shown its willingness to imply the term.
Issue 2: Approach to Interpreting Liability
Clauses One of the most hotly contested clauses in any IT dispute is the liability clause. It will almost certainly be attacked by the customer who seeks to justify non-payment by allegations of the supplier’s breach of duty. The supplier will argue that even if it has any liability for its breach of duty, its liability is excluded or limited in some way by the wording within the liability clause. There then follow questions as to the interpretation of particular provisions within the liability clause, and whether they are reasonable and therefore enforceable under the Unfair Contract Terms Act 1977. The trends in cases on liability clauses have ebbed and flowed. Most recently, in Regus v Epcot, the Court of Appeal took a pro-supplier, non-interventionist line, although it may have been swayed on the facts of the particular case by its apparent disdain for the position taken by the customer, especially the customer’s inflated claims for damages. By the time the matter had reached the Court of Appeal, the customer had largely thrown in the towel on many points, so they were not fully argued. For those reasons, any follow-up case to Regus v Epcot was going to be important in assessing the current judicial mood. The Murphy case has affirmed the Regus v Epcot approach to the severability of individual parts within liability clauses, although the case was less pro-supplier in a couple of other areas. Severability As with Regus v Epcot, the judge inserted sub-paragraph numbers into the relevant clauses that had not been put there by the parties themselves, so as to give the opportunity to sever any offending wording. The difference in this case was that the customer cited precedents to argue that severability was not possible. The judge sought to reconcile the conflicting previous cases by saying that severability did not occur in Stewart Gill Limited v Horatio Myer and Co Ltd [1992] 1 QB 600 because of the particular wording used in that instance which made severability impossible for all practical purposes. Mr Justice Coulson’s conclusion was that severability should take place where possible. A lengthy contractual term can be broken down and considered in its constituent parts if those different parts perform different functions. This part of the judgment is very much pro-supplier. Contra Proferentem In inserting sub-clause numbers, the judge also appears – as in the Regus case – to have ignored the strict interpretation rules of contra proferentem (ie if there is even the slightest ambiguity in a liability clause, the courts should interpret that ambiguity against the party wishing to rely on the exclusion or limitation). As with the Regus case, the rationale for this was not explained. Again, the position here was to the supplier’s advantage.
Unreasonable warranty time periods Mr Justice Coulson reviewed the warranty and split that provision into distinct parts, because they were performing entirely separate functions. Clause 14(i) was a warranty of good workmanship, materials and compliance with standards. Clause 14(ii) was different and was described by the judge as being ‘draconian in its effect’. It read as follows: ‘In the event that the goods or any part thereof are found to be defective owing to faulty workmanship or materials and not arising from the Customer’s default, neglect, mishandling or misuse, but not limited to any deviation from catalogues or recommended operating instructions applied by the Company for use with the goods, the Company will, at its option, refund the price paid for or replace or repair any goods forming the whole or any part of the goods supplied provided always that the Company is notified in writing within 7 days of the discovery of such defects and in the event not later than 28 days from the date of delivery.’ The judge objected to the proviso as it meant that 29 days after the date of the pipe being delivered, no claim could be made, no matter how defective the pipe. Even aside from the very limited timeframe, this did not take into account the fact that the pipe would not be installed immediately on delivery and so there would be even less time from the date of installation in which the warranty period operated. Reducing a six-year limitation period to 28 days was ‘plainly and obviously unfair and unreasonable’. It did not comply with UCTA requirements of reasonableness and so would be struck out. That limit did not affect the warranty in Clause 14(i). However, the wording before the proviso in Clause 14(ii) was also struck out. This was very much more of an interventionist line than in Regus v Epcot. Exclusion of liability Mr Justice Coulson also split up the liability clause to allow for any offending bits to be severed. Under the judge’s numbering system, Clause 15(ii) said:
‘Save as otherwise expressly provided in Clause 14 the Company shall not in any circumstances be under any liability whatsoever to the Customer whether in contract, tort or otherwise for any defect in, failure of or unsuitability for any purpose of the goods or for any loss (including but not limited to consequential loss, loss of profit, loss of goodwill or similar financial loss), damage, claim or any other liability howsoever or whensoever caused whether or not due to the negligence or default of the Company or its servants or agents or to faulty design, specification, workmanship or materials.’
This was deemed unreasonably wide and also fell foul of UCTA, although the judge failed to elaborate as to why. One can speculate that the effect of the clause was to limit any liability for anything going wrong in the pipe to the warranty clause, and the warranty remedies had already been held to be unreasonably narrow in scope. Alternatively, the judge may have felt that a limit of money back or repaired/replaced pipe was not enough considering the damage that could be done. Either way, the whole of Clause 15 (ii) was dealt with in one long paragraph and it was all struck out, regardless of whether some of it (such as the exclusion of consequential loss) may otherwise have been rescued if the clause drafting had been separated. The treatment of Clause 15(ii) was also not really consistent with a ‘freedom of contract’ approach.
Lessons to be learned
There are a few lessons to be learned from this case.
- If you are a supplier, do not assume that your duty ends when you supply your product or service. You should continue to inform the customer of anything that you think may be relevant to their project.
- Adopt the waterfall approach to drafting liability clauses, separating out as many points into different sub-clauses within the overall clause, to enhance the likelihood of a court severing any parts of the clause that it finds offensive. For example, have a cap on liability in a separate sub-clause to exclusions of certain heads of loss, and separate the excluded heads of loss into separate sub-sub-clauses. Even though the courts sometimes appear to be happy inserting sub-clause numbering in the event that you do not, do not rely on them always doing so. Provide your own sub-clause numbers to sign-post to the judge where you believe the wording is seeking to achieve different functions.
- Be careful with imposing unreasonable time-limits, as they could turn what was an otherwise reasonable clause into one that is unenforceable. Where they may be held to be unreasonable, the time-limit should be separated into a separate sub-clause, so that any potentially offending words can be isolated, thus maximising the chance of other wording be retained.
- Remember to keep up-to-date with trends in the judicial tide to indicate which way a court is likely to go if your liability clause ever gets challenged. As can be seen from this latest case, although certain principles from Regus v Epcot were followed, the judge took a more interventionist line in respect of two sub-clauses. It could be argued that this case turned on its own facts and the legal analysis was obiter. Alternatively, with the moving economic situation, is this the first sign of a change in the liability tide?
© Matthew Arnold & Baldwin 2009
Paul Gershlick is an Associate in the Commercial, IP and IT department at Matthew Arnold & Baldwin, working in their London, Milton Keynes and Watford offices. He is editor of the IP/IT/e-commerce legal and market news update site, www.upload-it.com.
