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Kingsway Hotel - limitation of liability clause thwarted Print

Summary

Kingsway Hall Hotel Ltd, based in busy central London, procured a premises management system from Red Sky IT (Hounslow) Ltd. Needless to say problems arose with the new system, which the Hotel eventually rejected claiming around £330k in damages.

Red Sky sought to limit its liability as per the contract, which was set at four times the total price or some £70k.
The crux of the case was whether or not the contractual warranties fell foul of the reasonableness test under s11 of the Unfair Contract Terms Act.

Nature of the dispute

The judgement goes into some considerable detail about the cause of the inherent stability of the system and the failure of the system to deliver expected functionality.

It is important to note that this was not a bespoke software development project, rather the Hotel was acquiring a standard product. Red Sky tried to argue that it was for the Hotel to determine if the functionality met its needs, but this was ultimately rejected. The judge found that the Hotel had relied upon Red Sky’s positive recommendation as to the suitability for its purpose in making its decision to acquire the software.

Unreasonableness and UCTA

It is quite common for software contracts to provide limited warranties, which under clause 10.2 of the contract stated that the “programmes will in all material respects provide the facilities and functions set out in the Operating Documents” (as defined, being the manuals and accompanying documentation). Clause 10.1 said that, apart from the warranty in clause 10.2, all terms as to performance and fitness for purposes were to be excluded. Again, this is a fairly common provision. What was perhaps more unusual was that clause 10.4 went on to say that the sole remedy for a breach of the warranty was to deal with an issues under the contractual maintenance and support cover, though nothing in the case ultimately turned on this point.

The limitation of liability clause excluded liability for indirect or consequential loss and loss of profits, again a fairly standard provision. Red Sky argued that, applying Watford Electronics v Sanderson CFL [2001] All ER (Comm) 696, the parties were experienced business people representing companies of equal bargaining power and therefore should be regarded as being the best judges of the commercial fairness and reasonable of the agreement entered into between them and also the fairness of each of the terms of the agreement.

Applying the Watford approach a court would not seek to rewrite a contract, leaving the parties to live by their choices. This approach was rejected here, with the court finding that the parties had unequal bargaining power and that only parts of the contract which were negotiated (the price and payment terms).

Section 11 of the Unfair Contracts Terms Act 1977 requires that the terms of a contract have to be reasonable having regard to the circumstances known to the parties or in their contemplation at the time. If a clause is unreasonable then a court may find that it is unenforceable.

The judge found that the reasonableness test under s11 was not excluded and that when applied clause 10.2 failed to satisfy that test. This was because the warranties were to be referenced against the Operating Documents. These were not supplied prior to contracting therefore the Hotel had no opportunity to review the functional specifications and to decide if the software met its needs; relying instead on the representations of Red Sky. Had the Operating Documents been provided prior to the execution of the contracts then it would appear that the court would have accepted clause 10 as being reasonable, which is of some comfort to legal draftsmen using similar contractual wording.

As clause 10 of the contract was unenforceable the court was at liberty to apply: (1) s14 of the Sale of Goods Act 1979, which implies a contractual term that the software should be fit for the purpose for which it was bought, and (2) s4 of the Supply of Goods and Services Act 1982, which implies a term that the goods must be of satisfactory quality.

This is where the judgement becomes slightly confused. At point 3 of paragraph 258 of the judgement there is perhaps a transcription error as the meaning is not entirely clear. It would seem that the court held that not only was clause 10.2 unenforceable but that every exclusion or limitation following it would be unenforceable as well; which included all of clause 10 and clause 18 (the actual limitation of liability clause). The judgement goes onto award damages for heads of loss that would otherwise have been excluded under clause 18 (e.g. loss of profits).

It is arguable that the court could have struck out clause 10.2 but retained clause 18, excluding any claims for indirect and consequential loss and loss of profits and applying a cap to the damages; which would have reduced the award considerably.

Lessons to be learnt

This case appears to be yet another instance where a judge will actively look for a reason to find one party liable (using the lack of Operating Documents as the hook here). There were clearly issues not only with the software but also the preparation of the defence by Red Sky’s solicitors.

Licensors would be well advised to pay heed to the following:

  • if warranties are qualified by reference to supporting documentation (which is a common practice), then those documents must be provided in full prior to the conclusion of the contract;
  • encourage your customers to negotiate the contractual terms, particularly any exclusions and limitations of liability and the content of any limited warranties; and
  • prepare your evidence properly, preserve and disclose all relevant evidence and ensure that your witnesses can withstand sustained scrutiny under cross-examination.

 

 
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