Facts
The Claimant software supplier, SAM, and the Defendant, Hedley,
entered into a Licence Agreement and a Maintenance Agreement in
respect of computer software supplied to Hedley for use in its
stockbroking business. Hedley was a small firm and had been using a
dated, DOS-based system which Hedley believed was not millennium
compliant. Hedley had contracted for SAM’s InterSet system, which
was to be used to automate the settling of trades, to interface to
CREST, to maintain customer portfolio records, and so on.
InterSet was a standard system which was configured to the
customer’s requirements.
The Licence Agreement and the Maintenance Agreement were signed
on 18 October 1999 and both agreements incorporated SAM’s standard
terms and conditions. The Licence Agreement contained what the
Judge described as a “‘belt and braces’ collection of overlapping
exclusions and limitations of liability”. Clause 3.2 contained a
broad exclusion of warranties, including statutory implied
terms:
“[T]here are no warranties, either
expressed or implied, by this agreement. These include, but are not
limited to, implied warranties of merchantability or fitness for a
particular purpose, and all such warranties are expressly
disclaimed to the extent permissible by law.”
Clause 3.3 sought to exclude responsibility on the part of SAM
for all significant heads of damage and to cap liability for any
remaining damage to the amount of the licence fee:
“… SAM will not be responsible for any
direct, incidental or consequential damages such as, but not
limited to, loss of profits resulting from the use of the software,
even if SAM have been advised of the possibility of such damage …
[A]ny liability to which SAM might otherwise become subject shall,
in aggregate, be limited to the licence fee paid.”
The Licence Agreement also contained an entire agreement clause
which stated that the agreement constituted the entire agreement
between the parties and that it superseded all prior
representations.
Notwithstanding these very broad exclusions and limitations,
clauses 2.10 and 2.11 contained a “money back guarantee”. If, after
a defined period, the software still did not meet its acceptance
criteria, Hedley was entitled to reject it and get its money
back:
“2.10 30 days from delivery
of the application software by SAM, acceptance tests will be
completed by the client in order to test the application software …
Client will advise SAM of any instances where the application
software fails to achieve the stated acceptance criteria. Such
advice shall be in writing … Any individual software component
reissued by SAM … may be subjected to retesting by client for a
further 30 days … If, having followed these procedures, and within
90 days from the original date of delivery, there remain acceptance
criteria correctly notified by client according to the procedures
outlined above but not achieved by the application software, client
shall be entitled to initiate procedures for rejecting the
application software … In the absence of a valid written advice
from client … the application software will be deemed
accepted.
2.11 In the event of the application software not being accepted
according to the obligations and procedures outlined in sections
2.9 and 2.10, client shall have the right at its entire discretion
to rescind this agreement and to be repaid all sums which have
previously been paid to SAM in respect of the licence under this
agreement. This shall be the sole and exclusive remedy available to
the client in the event of the application software not being
accepted.”
The parties managed to achieve go-live before the millennium.
However, after installation, the software was beset with technical
problems. These led to, among other things, increased costs of
working due to the need to operate workarounds. Hedley also said
that these problems caused it to get into difficulties with the
regulator. About a year after go-live Hedley decided to stop using
the software and to outsource the relevant back office functions to
another company, Pershings. It went live with Pershings in about
June 2001. Plainly, then, Hedley did not reject the software
within the timescales required by clause 2.10.
SAM brought proceedings for £310,000 said to be due in respect
of the licence fee, post-installation maintenance and other
services. Hedley defended the claim on the basis that it was
entitled to rescind the Agreements for misrepresentation and had
done so, alternatively that SAM was in repudiatory breach of
contract. Hedley sought to recover damages amounting to
£790,000, a sum which included the cost of the system and loss of
profit.
Judgment
The Judge found that the software was defective and that SAM’s
statements about InterSet being highly automated had proved untrue.
Both parties accepted that, subject to the contractual limitations
and exclusions, the Licence Agreement was subject to a number of
implied terms, including a term that InterSet would be reasonably
fit for its intended purpose, and a term that InterSet would be of
satisfactory quality. These terms were along the same lines as
those implied in St Albans City & District Council v
ICL [1996] 4 All ER 481. These implied terms had been
breached. The question, then, was whether the limitations and
exclusions were effective in protecting SAM from liability for
these failings.
The Judge held that although the software was defective and had
never worked properly, Hedley’s failure to reject it in accordance
with the timescales and procedures laid down by clauses 2.10 and
2.11 deprived it of any remedy. SAM was entitled to the balance of
the licence fee (£7,467 excluding VAT), but its claim for
additional charges (including a claim for the costs of putting
right defects in the software) failed.
The exclusions and limitations on liability in clauses 3.2 and
3.3 of the Licence Agreement satisfied the test of reasonableness
under sections 3 and 11 of the Unfair Contract Terms Act 1977. The
Judge found that the parties were of equal bargaining power in
terms of their relative size and resources. Although Hedley
had a millennium compliance issue, this was of Hedley’s own making
and therefore not a point that should be weighed when assessing
bargaining power. Further, although there was some evidence that
the limitation clauses were similar to those included in the
standard terms of SAM’s competitors, limiting Hedley’s ability to
contract on different terms, the fact that Hedley had not even
tried to negotiate more favourable conditions with SAM limited the
amount of weight which the Judge attached to this
consideration. The Judge did say, however, that if SAM had
not offered the “money back guarantee” in clauses 2.10 and 2.11,
the exclusions of liability in clause 3.2 and the entire agreement
clause (clause 3.6) would have been unreasonable (although the
limitation of liability to the sum paid under the Licence Agreement
(clause 3.3) would have been reasonable).
Commentary
The Court of Appeal’s decision in Watford v Sanderson
appeared to signal a hardening of judicial attitudes towards
attempts by commercial parties to escape the consequences of
exclusion and limitation clauses by relying on UCTA. The essence of
the Court of Appeal’s reasoning was contained in the following
passage from the Judgment of Chadwick LJ:
“Where experienced businessmen
representing substantial companies of equal bargaining power
negotiate an agreement they may be taken to have had regard to the
matters known to them. They should, in my view, be taken to be the
best judge of the commercial fairness of the agreement which they
have made; including the fairness of each of the terms in that
agreement. They should be taken to be the best judge on the
question whether the terms of the agreement are reasonable. The
Court should not assume either is likely to commit his company to
an agreement which he thinks is unfair, or which he thinks includes
unreasonable terms. Unless satisfied that one party has, in effect,
taken unfair advantage of the other – or that a term is so
unreasonable that it cannot properly have been understood or
considered – the Court should not interfere.”
In SAM v Hedley the Judge did not question the
authority of Watford v Sanderson, but his consideration of
the reasonableness of the exclusion and limitation clauses
reflected the traditional approach of weighing up the
“reasonableness” factors set out in UCTA together with all the
circumstances of the case.
The Judge’s approach, which involved identifying the business
realities which underlay the contract, was epitomised in the
following passage in his judgment:
“Before contract, SAM says, ‘We think our
system is marvellous and will do everything you need, but if you
are not satisfied you can ask for your money back’. The contract,
signed by Hedley’s after they have had a few days to think about it
but without any attempt to negotiate on their part, says, ‘So far
as possible we exclude any liability for our system, but if you are
not satisfied and go through the right machinery, you can have your
money back’. Having regard to the enormous potential liabilities,
that seems to me to be a reasonable arrangement in the
circumstances existing between the two parties”.
What is most noteworthy about this case is that the judge stated
that, but for the “money back guarantee” he “would have
regarded the exclusion of liability and entire agreement clauses as
quite unreasonable”, notwithstanding that the parties were
commercial organisations of equal bargaining power. To the extent
that commentators had speculated that Watford v Sanderson
removed the scope for a Judge at first instance to strike down a
clause in a commercial IT contract as unreasonable, the Judge’s
reasoning in SAM v Hedley suggests that such speculation
was wide of the mark.
If the Judge had felt the need to justify his observations as to
the enforceability of the limitation and exclusion clauses, he
could have done so by invoking one of the exceptions (ie. that one
party has, in effect, taken unfair advantage of the other, or that
a term is so unreasonable that it cannot properly have been
understood or considered) referred to in Chadwick LJ's judgment in
Watford v. Sanderson (quoted above). He could have
reasoned, for example, that the fact that clause 3.3 purported to
exclude liability for direct loss, as well as indirect loss,
suggested that it had not been properly understood or considered.
In fact, the Judge did not even refer to that passage from
Watford v. Sanderson, instead basing his findings on
reasonableness on a traditional weighing up of the all the relevant
circumstances.
