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.

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3. The Principles of Contract Terms
The terms of contract describe the duties and obligations that each party assumes under the agreement
(Elliot & Quinn, 2007) and there
here are two ways in which a term can be included into the contract, either
expressly or implied.

Figure 1 – Source: Summaris

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

The figure above summarises

es 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 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 dealers
Harold Smith Motors and Oscar Chess were held accountable for their statement on the mileage and
age of the car due to their expert knowledge. Hence, all verbal claims of software efficacy can be held
against the IT service provider should the claims fall short of the promised outcome.

With agreements in writing, the ‘Parol

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 and vary a
deed or contract writing as per Jacobs v Batavia and General Plantations Trust (1924).
(1924) This scenario is
highly applicable in IT when juxtaposed with ‘Collateral Contracts’ 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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