The law in this area is heavily influenced by the Unfair Contract Terms Act 1977, and its requirement of ‘reasonableness’ for many forms of limitation terms and clauses. It would be fair to say that in recent years we have seen considerable variances in approach by the English courts in interpreting the 1977 Act and the circumstances in which it can be involved to strike down ‘unreasonable’ limitation clauses, with the perception being that ‘customer friendly’ decisions in cases such as St Albans City and District Council v International Computers Ltd [1996] 4 All ER 481, British Sugar Plc v NEI Power Projects Ltd [1998] ITCCR 125 and Pegler Ltd v Wang Ltd (UK) (No.1) [2000] BLR 218 have been tempered by more recent rulings in Watford Electronics Ltd v Sanderson CFL Ltd [2001] EWCA Civ 317.
Another significant ruling has received relatively little coverage, however. The case of Horace Holman Group Ltd v Sherwood Ltd International Group Ltd (Lawtel) was heard initially by way of preliminary issues, with judgment being delivered in April 2000. However, it was not until 7 November 2001 that judgment in damages was finally given in favour of the claimant, in the sum of £2,622,259.69, and this has in turn given rise to a greater degree of prominence for the original findings of Mr Havery QC in the trial of the preliminary issues which, if followed elsewhere, would have worrying implications for the IT industry.
The Unfair Contract Terms Act 1977
The underlying principle of the 1977 Act, as the name suggests, is to strike down contractual limitations or exclusions which are deemed ‘unreasonable’. This constitutes an important derogation from two general principles in English law, namely freedom of contract (ie the ability of two parties to conclude whatever deal they see fit) and the old Latin doctrine of ‘caveat emptor’, or ‘buyer beware’ (ie the principle that a buyer knows, or should know, what he is getting for its money and should satisfy itself that this is satisfactory).
Section 3(1) of the 1977 Act applies when one party is a consumer, or the parties contract on the other’s written standard terms of business (a point I return to below). In short, s 3(1) requires limitation or exclusion clauses in such circumstances to be ‘reasonable’. Section 11(1) defines ‘reasonableness’ as being that the term in question is ‘a fair and 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 1977 Act contains (non-exhaustive) guidance as to the factors to be taken into account in this regard, which include:
- the resources of the relevant party to meet a liability, should it arise
- availability of insurance cover
- the relative strength of bargaining positions and alternative means for the customer to meet its requirements
- whether the customer received any inducement to accept the limitation/exclusion in question
- whether the customer knew or ought reasonably to have known about the existence and extent of the term.
Background to the Holman case
Holman needed to implement a new integrated insurance broking system. Sherwood were a leading provider of such systems, but it was accepted that they were not the sole provider and that Holman had the option of proceeding with an alternative provider.
Sherwood’s standard written terms were tendered as the basis for Sherwood’s licence of its software and associated services. Holman accepted that they were ‘aware’ of the limitation terms contained in them, which:
- excluded absolutely any liability for indirect, special, consequential or special losses or losses of contracts, goodwill, revenue, profits, anticipated savings or other benefits, and
- limited liability for all damages to the value of the licence fee paid by Holman.
Although certain of Sherwood’s contract terms were amended following negotiation, the exclusion/limitation clauses remained in the form originally drawn by Sherwood. However, it appears that this may have been at least partially due to Holman itself; during the trial of the preliminary issues, it was accepted that Holman had ‘assumed’ that such terms were non-negotiable, without ever specifically raising them with Sherwood. Indeed, Mr Havery QC noted that Holman went into the contract ‘with his eyes open’.
Application of the 1977 Act
Given Holman’s awareness of the limitation terms, the fact that they were acknowledged to be in line with what might have been obtainable from comparable suppliers, and the accepted parity of the bargaining position of each party, Sherwood might have been confident that their limitation clauses would be upheld. Unfortunately for them, they were mistaken.
In this regard, Mr Havery QC made a number of statements which, unfortunately, he did not elaborate upon but which were obviously key to his thought processes, as follows:
- although there had been negotiations on Sherwood’s standard terms, the extent of the changes made meant that they were ‘not relevant’ to the question as to whether or not the parties were dealing on Sherwood’s standard written terms of business, as the changes made were of a ‘minor’ nature;
- if Holman had tried to amend the limitation clauses, Mr Harvery QC concluded that the attempt would have been ‘resisted’ (although he did not appear to go so far as to conclude that proposed amendments would have been refused in any event).
- the types of losses which would be suffered by Holman in the event of Sherwood’s breach of contract or negligence were not of the type which would usually be covered by Holman’s insurance portfolio (although it is unclear what, if any, specific enquiries Holman had made in this regard), and, of course, Holman, as an insurance broker itself, should have been well aware of the insurance position;
- Holman could not readily have obtained better terms from any alternative supplier (based on the evidence received from Sherwood that their contract terms were consistent with those used).
On the basis of the above (and, it appears, with particular emphasis on the point concerning availability of insurance cover), Mr Havery QC concluded that Sherwood’s limitation clauses were unreasonable within the meaning of the 1977 Act, and so would not be enforceable. In this regard, he was especially critical of the clause which excluded all liability for indirect losses, loss of profit or benefits or failings to make savings, etc (see above). He concluded that failings to make savings were ‘likely’ to arise in the event of a breach, and said that ‘in my judgment, a good reason has to be shown to support such an apparently unreasonable term’; the fact that the contract was freely negotiated was not, in his view, sufficient.
Insofar as the overall limitation on liability was concerned, Mr Havery QC noted that the potential loss of Holman far exceeded the amount of the licence fee (although this is, of course, the case in most, if not all, IT projects). No consideration appears to have been given by him to the balance of ‘risk and reward’ from the contract from Sherwood’s perspective, ie the comparison of their likely profit against the degree of risk and liability which they were being expected to undertake.
Software as ‘Goods’?
There is an ongoing dispute as to whether software can be classed as a form of ‘goods’ as opposed to the output from the provision of services. The potential implications of this finding go beyond simply determining which implied terms will apply to the supply in question (ie fitness for purpose/satisfactory quality for goods, on the exercise of reasonable skill and care for the provision of services). Issues relevant to the availability of insurance cover may for example be raised (by reason of the fact that property-related insurance policies will be more likely to respond to software-related losses if software is classed as ‘goods’ and hence, by implication, a form of tangible property).
Sir Iain Glidewell, in an obiter passage in his judgment in St Albans City and District Council v International Computers Limited [1996] 4 All ER 481 at 492-494, suggested that a contract for the supply of software would be a contract for ‘goods’ as opposed to services if the relevant programs were provided in conjunction with some form of tangible medium (eg a disk or CD).
However, Mr Havery QC concentrated not so much on the medium on which the software was supplied, but instead upon what the contract described as being at the heart of the deal, and quoted the relevant delivery clause as follows:
“The Supplier shall deliver and install one copy of the software in respect of each permitted person on the equipment at the location on the delivery date . the software so delivered shall consist of the object code of the software in machine readable form only“.
On that basis, Mr Havery QC said ‘I am not satisfied that the contract is a contract for the supply of goods insofar as it is a contract for the supply of software. It seems probable that it is not.’
It is unfortunate that Mr Havery QC did not provide further details as to how he felt his reasoning had differed from that of Sir Iain Glidewell as, on the face of it, the circumstances of the supply of the relevant software would appear materially the same.
Conclusion
The Horace Holman case was said by many to have represented the ‘high water mark’ of judicial interventionism under UCTA 1977, shortly before the reinstatement of the underlying principles of freedom of contract between parties of equal bargaining power in the Court of Appeal decision in Watford v Sanderson. However, whilst it may well be the case that the final decision on the reasonableness of the overall limit on liability might well have been different, had Holman come to the court after the Watford v Sanderson decision, it is submitted that the statements made as to the ‘inherent unreasonableness’ of blatant exclusions of loss of profit (regardless of whether they constitute direct or indirect heads of loss) and the status of a software supply contract as one for the provision of goods or services remain unaffected by the Watford v Sanderson decision, and thus add to the body of IT-related case law now available to the English courts.
Kit Burden is a Partner at Barlow Lyde & Gilbert.
