Consequential loss exclusion clause fails to shut out damages in IT system dispute

11 January 2010

Graham Smith

The High Court decision in GB Gas v Accenture illustrates once again that under English law an exclusion of liability for indirect or consequential loss often has little practical effect.

This case involved a claim by British Gas against Accenture over an agreement for the design, supply, installation and maintenance of a new IT system, including an automated gas and electricity billing system based on pre-packaged SAP IS-U software.  The aspects of the judgment concerning interpretation of warranties are reported separately.

The judge determined, as a preliminary issue, whether a series of claimed heads of loss were capable of being recovered as damages against Accenture or were prevented by contractual exclusions of liability.  The relevant parts of the exclusions were as follows:

16.2 Consequential Loss


… in no event shall either Party be liable whether in contract, tort (including negligence) or otherwise in respect of any of the following losses or damages:

16.2.1 loss of profits or of contracts arising directly or indirectly;

16.2.2 loss of business or of revenues arising directly or indirectly;

16.2.3 any losses, damages, costs or expenses whatsoever to the extent that these are indirect or consequential or punitive; …”


It was common ground that the words "directly" and "indirectly" in Clause 16.2 referred respectively to the first and second limb of the rule in Hadley v Baxendale (1854) 9 Exch. 341:


"Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of it."


This is consistent with a long line of English case law that has given this interpretation to exclusions of indirect and consequential loss.

The judge went on to consider five items of claimed loss, holding that each one was not prevented from recoverability by the exclusions of indirect and consequential loss.  The judge made no finding as to whether any items of loss were in fact recoverable.  The claimed items and the alleged basis of recovery were:


1. Gas distribution charges in the region of £18,700,000.  These were charges to British Gas by wholesale gas suppliers based on over-estimates of consumption due to lack of meter data for 15% of British Gas’s customers, resulting from an automation error.  The judge held that these losses, if proved, were a direct result of the automation error.  Accenture also argued, unsuccessfully, that these losses were loss of revenue or loss of profits and as such excluded.

2. Compensation paid to customers: £8,000,000.  These were ex-gratia compensation payments to customers as a result of reputational damage, to reflect billing difficulties and poor customer service.  The judge held that having regard to the agreement overall and to the relevant background, he thought it plain that one of the purposes of the new billing system was to improve customer relations and customer services.  It was equally plain that in the context of the agreement, Accenture assumed responsibility for losses in terms of compensation paid to customers if the billing system failed to perform as it was intended it should perform.

3. Additional borrowing charges: £2,000,000.  These were additional borrowing charges caused by a drop in revenue due to late or non-billing of customers.  The judge observed that the billing system was at the heart of British Gas's business. Its revenues depended on it operating efficiently. Breaches of warranty that delayed the issuing of bills or the non-issuance of bills were bound to have an adverse impact on British Gas's revenues with the very likely consequence that there would have to be borrowing to make up for the loss of revenue.

4. Cost of chasing debt not due: £387,287.  These were the costs of chasing debts thought to be due, but not in fact due, due to software errors.  The judge’s view was that if the alleged breaches of warranty were proved, this loss would have flowed naturally and in the ordinary course of events from those breaches.

5. Additional stationery and correspondence costs: £107,120.  These were stationery and correspondence costs in writing to customers to update them on hot topics causing them particular distress and contributing to an increase in customer call volumes.  The judge regarded these as not excluded, for the same reasons as the compensation paid to customers.


British Gas also argued that if the amounts were excluded as indirect or consequential loss, they were nevertheless recoverable as sums expended in mitigation of British Gas’ loss.  The judge observed that if he had found any of the losses to be excluded, then sums spent in mitigating loss that is indirect or consequential must in logic be sums paid in respect of indirect or consequential loss, and for that reason would also have been excluded. 

Those familiar with jurisdictions in which indirect or consequential loss exclusions have a broader scope may find some of these determinations surprising.  However, they are firmly within the bounds of a long line of English authorities. 

 

Case reference: GB Gas Holdings Ltd v Accenture (UK) Ltd and others [2009] EWHC 2734 (Comm)

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