English High Court adopts broad interpretation of warranties favouring aggrieved customer in IT project dispute

11 January 2010

Stuart McGinn

In a dispute over the implementation of a gas and electricity billing system, the English High Court, in GB Gas v Accenture, has held that a fundamental breach of warranty can be constituted by a series of individual breaches, and the consequences of each individual breach aggregated, to determine whether there is a serious adverse effect on the claimant’s business.

GB Gas Holdings (a holding company for British Gas, a major gas and electricity supplier to residential customers in England and Wales) was in dispute with Accenture (the global management, consulting, technology services and outsourcing company) over an agreement for Accenture to design, supply, install and maintain a new IT system, including an automated billing system based on pre-packaged SAP IS-U software.

The court was asked to try a number of preliminary issues, including the proper interpretation of warranties given by Accenture as to compliance in all material respects with British Gas’s requirements and freedom from material design, programming and implementation errors.

Under the agreement, the consequences of a breach of warranty depended on whether the breach was caused by a Material Defect or a Fundamental Defect, as defined in the agreement. Accenture was required to take remedial action in the case of a Fundamental Defect but merely to reimburse British Gas for the necessary works in the case of a Material Defect.

“Fundamental Defect” was defined to mean:


a fundamental breach of Clauses 15.2.1 and/or 15.2.2 and/or 15.1.1(i) [the warranties] … which causes a severe adverse effect on the British Gas Business;


Various problems emerged during migration to the new IT system and British Gas notified Accenture of alleged Fundamental Defects. Accenture refused to take any steps to remedy the alleged defects. 

Two preliminary issues arose as to the construction of the warranties: (1) could a fundamental breach be constituted by a series of individual breaches and the effects aggregated for the purpose of determining the second issue? and (2) if a fundamental breach was established, must it have caused an actual severe adverse effect?

Aggregation of the breaches of warranty

One of the warranties provided that it was Accenture’s contractual responsibility to install an IT system that was free of material errors and to do so without adversely affecting the standard of service of British Gas’s business. British Gas claimed that various breaches of this warranty had occurred which amounted to a fundamental breach and, thus, a Fundamental Defect which required remedial action.

Field J held that the effect of the words “and/or” in the definition of Fundamental Defect was that a fundamental breach of warranty could be constituted by individual breaches of warranty falling within the same sub-clause and that 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 the British Gas business.

Construction of “…causes a severe adverse effect…”

The definition of Fundamental Defect, however, differed from that of Material Defect in respect of the resulting effect of the breach. The Material Defect definition used the words “…which has or is likely to have an adverse effect on the British Gas Business…”, whereas the Fundamental Defect definition used the words “…causes a severe adverse effect on the British Gas Business.”

Accenture submitted that the difference in language was deliberate and, accordingly, the breach of warranty and resulting severe adverse effect on British Gas’s business must actually have occurred before there was a Fundamental Defect which required remedial action. Field J, however, preferred British Gas’s submissions that the word “causes” encompasses “could cause” and “will cause” – drawing an analogy with anticipatory breach cases – and declined to accept that the contractual intention was that Accenture came under no obligation to take remedial action where a severe adverse effect had not yet actually been suffered but was inevitably going to occur.

The court also determined further construction issues in relation to the validity of notices of breach given under the agreement, the recoverability of certain damages incurred prior to notification or within a reasonable period thereafter, and whether British Gas could recover damages at large. 

Although the decision concerns the interpretation of the particular agreement before the court, drafters of commercial IT contracts will take heed of the issues that arose and required determination by the court.

The court went on to determine whether certain heads of damage were contractually excluded as consequential loss or loss of profits.  This aspect of the decision is reported separately.

 

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