Facts
Holman carried on business as an insurance broker. By
1992, Holman was looking to replace its computer systems. The
group was large, and the different companies used different and
sometimes incompatible systems, some of which were in any case very
old. Holman determined that it should acquire an integrated
insurance broking system. One of the requirements for that
system would have to be that it could comply with the strict
requirements laid down for brokers by Lloyds, one of which was that
client and underwriter accounts should be kept separate from other
accounts.
At about the same time, a product known as SIMBAL came onto the
market. SIMBAL had been developed for insurance brokers in
Norway, and needed further work for the London market. In
1993, Sherwood acquired the rights to SIMBAL. One further
point about SIMBAL: it was character based, not Windows, which did
have the incidental benefit for Holman that it did not have to
acquire more powerful hardware.
The contract between the parties was in the form of a software
licence executed in August and September 1993, although Holman did
also acquire some Sequent hardware from Sherwood.
Essentially, Sherwood agreed to supply SIMBAL to comply with a
functional specification.
The contract was on Sherwood’s standard terms although there
were some changes set out in Schedule 3, which provided that the
specific changes took precedence over the standard terms. The
judgment related a large part of the contract relating to
warranties and liabilities. While it is not possible to set
out in full all of these clauses, the more important ones for the
purpose of understanding the judgment were as follows:
“15.01 The supplier shall have no
liability in respect of any indirect loss of contracts, goodwill,
revenue, profits, anticipated savings or other benefits whether
arising from negligence, breach of contract or otherwise ….”
15.02 The liability of the supplier in relation to any claim
or series of claims arising out of one occurrence or circumstances
or series of occurrences or circumstances, consequent on or
attributable to one original cause, shall be limited to an amount
equal to the licence fees paid by the customer hereunder, except in
the case of personal injury to or death of any person resulting
from negligence for which no limit applies. ….”
There had been some negotiation and amendment of the terms, but
the amendments were minor, and the additions also had little to do
with liabilities.
However, Holman did read the contract and even commented on it,
except that they did not comment on the question of the limitations
and exclusions. This seemed to be because they thought they
were non-negotiable or perhaps because they were just “small
print”.
The matter came before the court as a preliminary issue on
certain question of interpretation of the contract and precise
facts of the case are not given in the judgment.
Judgment
Judge Havery recited at length from the Unfair Contract Terms
Act 1977 (UCTA), including sections 3(1), 6(2) and (3), 7(1) and
(3), 11(1), (2), (4) and (5) and Schedule 2.
Judge Havery had no hesitation in concluding that the agreement
was on Sherwood’s written standard terms of business, thus bringing
the case within section 3 of UCTA, notwithstanding the existence of
negotiations and the fact that at least some (albeit minor) changes
were made.
The next question was therefore whether the limits and
exclusions were reasonable in the sense required by UCTA.
Looking at the various clauses, the Judge found that the implied
terms of quality and fitness for purpose were excluded by the words
of the contract, which purported to set out the entire warranties
granted to the user. Clause 15.01 on its true construction
excluded liability for loss of expected savings in costs but did
not exclude liability for increased costs of working in attempting
to operate the system (e.g. costs of correcting ledgers) or for
wasted costs or for costs in researching and acquiring a
replacement system. However, it was also effective to exclude
liability for the loss of the value of an expected improvement in
cashflow, on the basis that this was included in “other
benefits”.
The fact that the contract was negotiated between two
substantial enterprises with knowledge of its terms was a factor
pointing in favour of the reasonableness of the term, but it was no
more than that, and certainly did not create any kind of
presumption of reasonableness.
An interesting question related to the applicability of sections
6 and 7 of UCTA. Holman claimed they did, as software was
“goods” in the light of St. Albans v ICL [1966] 4 All ER
481, 492-494. However, Judge Havery believed this was
doubtful in the light of the wording of the contract, which defined
Sherwood’s obligations in terms not of delivering a tangible copy
of the software, but in terms of delivering and installing object
code. Judge Havery was satisfied that in that case a common
law implied term of reasonable fitness for purpose would be
applicable and also that section 7 of UCTA would apply.
Judge Havery looked at the factors for assessing reasonableness
listed in Schedule 2 of UCTA, it being common ground that they
should apply for that purpose, although by the strict wording of
UCTA they are relevant only to a consideration of reasonableness
under sections 6 and 7.
Both parties were substantial – Holman with a turnover of some
£10 million a year, and Sherwood with £20 million. Holman
could have chosen another supplier – Highams – and knew that
Sherwood was keen to break into the insurance market. On the
other hand, Sherwood was the preferred supplier with a product that
Holman had judged suitable for their purposes. Judge Havery
did not regard these factors as particularly significant either
way.
Another factor was that Holman could probably not have obtained
much better terms elsewhere. The evidence in the case was to
the effect that the types of exclusion and limitation in this case
were commonplace in the software industry as a whole.
Together with the factor above, this meant that Holman was not in a
stronger bargaining position.
As to insurance, Sherwood had errors and omissions insurance,
£10 million one claim and £20 million in total. This was
increased to £30 million in mid-1993 as a result of a large
contract involving Lloyds. As against this, Holman had no
insurance against the software failing and none was available at a
reasonable premium. It was more economical for the supplier
in such cases to carry the insurance than the user. A further
factor here was the potential damage could easily exceed the
licence fees (which was the limit of liability in the contract) and
there seemed to be no obvious relation between the licence fee and
the possible loss Holman might suffer.
Looking at the exclusion of loss of anticipated savings or other
benefits, computer systems were sold on the basis that they would
make savings. Judge Havery said that a good reason had to be
shown to support such an apparently unreasonable exclusion of
liability.
Judge Havery commented with regard to clauses 13.01 and 13.02
that it had not been suggested that compliance with the functional
specification would necessarily ensure that the software would be
reasonably fit for its purpose. Judge Havery thought that
these clauses therefore might lessen the effect of clause 13.04,
but did not remove Sherwood’s duty of satisfying the court that it
was reasonable. Clause 13.04 was therefore also held to be
unreasonable.
Commentary
This report is included for completeness – although it was
decided in 2000, it has not been much reported or commented
on. However, given the more recent judgment of the court of
Appeal in Watford Electronics v Sanderson, no further
comment will be made on this case and the reader is referred to
Watford Electronics for a more authoritative statement of
the law.
