IT systems provider unable to rely on exclusions of liability in standard terms of business

02 November 2010

Laura Holt, Francesca Liebling

A recent decision of the Technology and Construction Court provides another example of exclusions of liability in an IT system provider’s standard terms being held unenforceable.  The court said that the exclusions were irrelevant in the context of the way in which the IT system had been supplied and that they were unreasonable under the Unfair Contract Terms Act.

Background

Red Sky, an IT systems provider, supplied Kingsway Hall Hotel Ltd, operator of the Kingsway Hotel in London, with a system for managing reservations and billing. After numerous problems with the software, which Red Sky failed to rectify, Kingsway rejected the system and alleged that it breached implied terms of contract as to fitness for purpose and satisfactory quality under section 14(2) Sale of Goods Act 1979 and section 4 Supply of Goods and Services Act 1982 respectively.  Kingsway sued for damages for the cost of replacement software, financial loss due to fewer rooms being reported available than actually were and costs associated with the hire of extra staff to manage reservations in light of the failing system.

In defending the claim Red Sky sought to rely on its standard terms.  The standard terms clearly excluded all terms as to performance, quality and fitness for purpose except for an express warranty that the system provided would “in all material respects provide the facilities and functions set out in the Operating Documents”, for which the sole remedy for breach of this express warranty was maintenance and support. Indirect and consequential loss, including loss of profit was also excluded, and there was a liability cap of c. £70,000.

Decision

The Technology and Construction Court held that Kingsway was entitled to and did reject the system on the basis that it was not fit for purpose. 

The express warranty in the standard terms was predicated on the basis that a prospective customer would be provided with the necessary information to investigate the system and decide on its own judgment whether or not the system was suitable for its needs.  In this case, the operating documents referred to had not been supplied and, therefore, the customer had had to rely on Red Sky’s advice in purchasing the system.  On this basis, the standard terms and conditions, including the exclusions and limitations, did not apply.

The court also held that the terms restricting liability were unreasonable for the purposes of section 11 UCTA.  Firstly, the parties were not of equal bargaining power since Kingsway had no real option but to replace its IT system once Red Sky withdrew support for the previous system it had used. Secondly, although the parties had negotiated the price, this was not by reference to or as an inducement for Kingsway to accept the standard terms. Thirdly, there had been no long course of dealings between the parties such that Kingsway should have been aware of Red Sky’s standard terms.

Discussion

This is a useful reminder of the confines of standard limitations on liability.

The decision highlights that suppliers should review standard terms to check that they reflect the relationship with customers and should ensure that personnel are trained to understand the link between standard terms and sales practices (some of the problems in this case could probably have been avoided had staff been clear about the scope and purpose of documentation provided to customers).  Suppliers should also be clear about whether there has been any inducement to accept standard terms, as a reduction in price without reference to what the inducement is for will not be a factor considered for the purposes of assessing reasonableness under UCTA.

Case reference: Kingsway Hall Hotel Ltd v Red Sky IT (Hounslow) Ltd [2010] EWHC 965 (TCC)