Facts
The decision of Judge Havery of the Technology and Construction
Court, in relation to certain preliminary issues of interpretation
was reported in a previous edition of MCLR ([2001] Masons CLR
72).
The Claimant, Horace Holman Group Limited (“Horace Holman”), was
a group of insurance brokers. Essentially Horace Holman was
sub-divided into the following groups:
- Horace Holman International;
- Adam Brothers Contingency;
- Horace Holman UK;
- Holman Wade; and
- Hamiliton Barr.
Each sub-division dealt with a specific area of insurance.
For example, Holman Wade provided insurance for Lloyds’ names,
which was principally personal stop loss insurance (“PSL”).
The Defendant, Sherwood International Group Limited (“Sherwood”),
was a computer software and system company specialising in systems
for the insurance industry.
In 1992, Horace Holman decided that its computer systems were
outdated and a radical overhaul was necessary. At this time
Lloyds was insisting on strict accounting requirements from Lloyds
brokers. The Lloyds requirements included, amongst others, a
requirement that client and underwriter accounts would be kept
separate from other accounts – this basic accounting system was
known as “Insurance Broking Accounts” (“IBA”). Horace Holman
required Sherwood to supply and install a uniform computerised
system that would comply with these requirements and update its
existing system.
Horace Holman and Sherwood entered into a chain of contracts in
1992 whereby Sherwood was to supply and install a new computerised
accounting system known as SYMBAL throughout the entire insurance
business for the purpose of complying with the Lloyds
requirements. Furthermore, Sherwood was to supply, install
and commission other software packages and to service and maintain
the same. As part of this package, Sherwood agreed to develop
the interface between FLOATS (an existing piece of Horace Holman
developed software installed to deal with personal stop loss
insurance claims) and SYMBAL.
Under the contract SYMBAL was to be delivered in two
phases. First, the accounts module, of which IBA was the
core, was to go live by April 1994 and secondly, the contracts and
claims modules, was to go live by November 1994.
By November 1995, Sherwood had
failed to get any part of the SYMBAL system up and running.
The judge described the supplied software as “useless”.
Resulting from the failure to implement SYMBAL successfully,
Sherwood also failed to implement the interface between FLOATS and
SYMBAL. Horace Holman justifiably terminated the contract and
sued for damages. Sherwood sought to rely on the various limitation
and exclusions of liability in the contract. However, as was
determined by Judge Havery as a preliminary issue, these clauses
failed to exclude or limit liability by application of the Unfair
Contract Terms Act 1977.
Horace Holman claimed damages for approximately £3,384,271.
Damages were assessed in this judgment.
It was agreed that the action was to be regarded as an action by
Horace Holman as a group rather than as an action by one
company.
Judgment
The judge awarded Horace Holman damages for a total sum of
£2,622,259.69, together with interest and costs. The details
as to how these damages were apportioned is detailed
below.
Part of the damages claimed were agreed between the parties. For
the purposes of this judgment, Horace Holman submitted an amended
Schedule of Damages outlining the respective heads of loss.
These were divided into the following heads:
Third Party Costs
- Computer maintenance - liability was agreed at £63,585.25
- Disaster recovery - liability was agreed at £38,166.00
- PC Upgrades – the claimant claimed £27,000 yet damages were
assessed at NIL. Whilst it was agreed that £1,000 per
personal computer was a reasonable sum to spend, as personal
computers used for business purposes must be regularly upgraded,
Horace Holman failed to provide any documentary evidence as to when
the upgrade had occurred and the cost. Furthermore, it was
not established that the cost was incurred as a result of any fault
of Sherwood.
- Replacement for SYMBAL (the GPM system) - liability was agreed
at £157,383.00
- Temporary Staff – the claimant claimed £15,168. The judge
awarded £15,489.08 by following the evidence provided by the
defendant’s expert.
- FLOATS – liability was agreed at £6,208.00
- EPSILON - liability was agreed at £8,407.00
- SYMBAL/GPM – the claimant claimed £169,597.87 for consultant’s
fees. The judge awarded £99,304.69.
- Policy in-house savings – the claimant claimed £66,561.72. The
judge awarded £66,561.72. A company, ITF, had a three year
contract to deal with policy preparation for Horace Holman.
The judge agreed that had SYMBAL worked, policy preparation could
have been brought in-house a year after SYMBAL was due to be
operative (i.e. April 1995) and the ITF contract could have
been terminated early. As a result, Horace Holman would
have made savings.
- Audit Savings not made – the claimant claimed £66,346.00.
The judge awarded £10,000. The judge took into account that
whilst the replacement of the various different accounting systems
in each of the divisions of Horace Holman with one integrated
accounting system “SYMBAL” would greatly simplify the tasks of
accountants and auditors, auditors’ fee may actually slightly
increase in the first year of use of the new system as adjustments
were made. The effect of market forces in lowering the audit
fees was considered, as was the fact that the additional work was
carried out on the accounts in order to organise them into a
suitable state. The judge indicated that with all the
uncertainties surrounding this head of claim it was difficult to
assess the damages.
- Paid to Sherwood (FLOATS) – the claimant claimed
£29,351.00. The judge awarded £29,351.00. The FLOATS
interface was rendered useless as a direct consequence of the
SYMBAL system not working. The judge awarded damages on the
basis that Horace Holman paid for a useless product and had to pay
for temporary staff to carry out this work. The judge
rejected Sherwood’s argument that the correct approach was to value
the benefit that would have been derived from FLOATS had it worked
in conjunction with the SYMBAL system.
Staff Not Made Redundant Earlier
This was the largest part of the claim with Horace Holman
claiming totals in excess of £2.2 million. The judge
awarded £1,736,135.00.
Horace Holman argued that had SYMBAL worked, it would have been
able to make staff redundancies years earlier than was the case and
in the process would have made financial savings. The judge
emphasised that damages would be awarded on the basis of the
“evidence actually presented” as to whether the computers were the
cause for the staff losses. It was unnecessary to make an enquiry
into staff losses in the Group company as a whole. The
arguments put forward by Sherwood that Horace Holman had failed to
take reasonable steps to mitigate its losses under this head were
unfounded, it was understandable that Horace Holman should wish to
concentrate on getting SYMBAL, the initial and most important part
of the system up and running first. Four heads of claim
existed within this section:
- Named individuals – The judge awarded £1,736,135.00. This
was the figure agreed upon by the experts. Horace Holman
satisfied its claim covering a five year period of loss for all
broking and claims staff other than those in policy
production. This five year period was appropriate because
there was (at least) a five year gap between the contractual
delivery dates for SYMBAL and the actual delivery date for GPM, the
eventual replacement system. The judge accepted the phased
redundancy programme that was to take place after implementation of
SYMBAL but noted that a certain amount of delay would be expected
between implementation of the system and the actual
redundancies.
- Accounts Department – The judge awarded £82,132.00.
Horace Holman claimed that as a result of Sherwood’s failings, it
was not possible to make redundancies in April 1994 and the
accounts department was forced to wait until the following year
before reducing its size. Furthermore, the PLS run-off
element would have been dealt with more speedily, thus producing
savings in the accounts department, had SYMBAL been installed
successfully. Once again, the judge accepted the concept of a
“delay” period before the redundancies became effective and
therefore the damages would not run from 1 April 1994. The
paperwork produced on this head of claim was lacking for the
judge. The defendant’s expert agreed that if causation of
redundancies was proved as from 1 April 1994 then the appropriate
figure was £164,263.13; the judge awarded, on the balance of
probabilities, half of that amount.
- Accounts Department (Individual Employees) – The claimant
claimed £196,254 but damages were assessed at NIL. While the
defendant agreed the figure, the claim was unsubstantiated by the
evidence and failed on causation. The time periods referred
to in the supporting documentation were inconsistent, considerable
doubt arose as to the pleaded annual average salary cost and no
written evidence was produced in support of the
claim.
- Adam Brothers Contingency Limited – the judge awarded
£96,961.00. This claim was awarded in relation to a single
employee. He was moved to this department to carry out menial
tasks that could have been carried out by a computer had the system
been working. This employee was a skilled broker and should
have been spending his time carrying out such activities.
From the evidence, it was deduced that 10% - 20% of his time was
spent on broking and to that extent the judge deducted 10% from the
figure accordingly.
Time Wasted by Directors and Staff
A total figure of £135,567.95 was awarded by the judge out of
£142,724.49 claimed. The judge relied on the principles that
a claimant may be able to claim for the expense of time lost by
directors and staff and that there should be compensation for the
cost of managerial time wasted (Tate & Lyle v GLC
[1982] 1 WLR 149). In the Tate & Lyle case, in
the absence of detailed evidence of the wasted time Forbes J. was
not prepared to speculate as to damages. However, in this
case whilst no documentary evidence existed in the form of records
of time etc., the judge was prepared to evaluate oral evidence in
the form of a reconstruction from memory of events from the
past. The key point was that Horace Holman was paying for
employees' time which was intended to be of benefit to it and this
benefit was lost. The distinction between short and long
periods of wasted time, senior and less senior posts and profit and
non-profit makers was not accepted by the judge.
Lost Revenue Opportunities
- Adam Brothers Engineering – the claim for the lost broking
opportunities was rejected by the judge.
- Cash Flow Improvements – the claimant claimed £77,008.00 for
interest lost as a result of the absence of SYMBAL. The judge
awarded the full £77,008.00. It was agreed that a large part
of a broker’s income is from interest on money not belonging to the
broker but simply passing through his bank account. Through
Sherwood’s failure to implement the SYMBAL system, the claimant had
suffered a loss. The judge preferred a conservative
assessment and applied the following approach: had Sherwood
fulfilled its contractual obligations then 5% more interest may
have been earned by Horace Holman, however a 25% discount should be
applied for uncertainty making a net addition of 3.75%. The
months November and December 1994 were excluded from the
calculation to take account of the time it would have taken for the
management to adjust and benefit from the SYMBAL system.
Application for leave to appeal to the Court of Appeal
Sherwood applied for leave to appeal to the Court of Appeal at a
hearing held on 7 February 2002. The application was
made on five specific grounds under the main head of claim above,
namely Staff Not Made Redundant Earlier. The specific grounds
raised by Sherwood were the following:
- There was no causal link between the implementation of the
SYMBAL system and four of the named employees being made redundant
as these certain individuals did not undertake clerical tasks or
work that could have been undertaken by a computer;
- Damages had been awarded on the basis of a 60 month period,
when they should have been calculated on a 48 month period taking
into account a “delay” from implementation of the computer system
to the point when redundancies could have been made;
- Certain of those individuals for whom damages were awarded,
were not employed for the whole 60 month period and there was no
evidence that there were predecessors to their employment;
- The redundancies for which damages were awarded were a direct
result of the “downturn in business” for Horace Holman thus causing
the need for Horace Holman to make savings, and not a result of
Sherwood failing to perform its contractual obligations; and
- There were problems of over-staffing at Horace Holman and this
was the reason for the redundancies, again they were not a result
of Sherwood failing to perform its contractual obligations.
Dyson LJ heard the application and concluded that the challenges
raised by Sherwood were all based on findings of pure fact.
The specific grounds raised by Counsel had all been concluded by
Judge Bowsher at the previous hearing on 7 November 2001.
Accordingly, the application by Sherwood for leave to appeal was
dismissed
Commentary
The most significant point to remember when considering the
award of damages in this case is that the preliminary issues
relating to the enforceability of the exclusion and limitation
clauses contained within the contract were considered by Havery J.
in the Technology and Construction Court before the Court of Appeal
judgment in Watford Electronics Limited v Sanderson CFL
Limited ([2000] Masons CLR 57). Following the Court of
Appeal judgment in that case it is unclear whether the exclusion
and limitation clauses contained within the contract would, today,
be found to be similarly unreasonable and unenforceable. As a
consequence, the assessment of damages awarded by Judge Bowsher
must be treated with care both in terms of the value and the heads
of loss recovered. It is worth revisiting the issue of the
exclusion and limitation clauses.
In the contract the relevant exclusion and limitation clauses
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 or for
death of any person resulting from negligence for which no limit
applies…"
Although there had been some negotiation and amendment of the
terms and conditions by the parties, any changes were minor and the
above clauses remained as per Sherwood's standard written terms of
business.
Judge Havery at the preliminary issues stage found that the
agreement was on Sherwood's written standard terms of business and
that the limitation and exclusion clauses were unreasonable.
In his deliberations Judge Harvery held that the fact the contract
was negotiated between two substantial enterprises with knowledge
of its terms was only a factor pointing in favour of the
reasonableness of the term, and nothing more than that.
In Watford Electronics, Chadwick LJ (giving the
judgment of the Court) took a more robust attitude towards
negotiations, stating that where experienced businessmen
representing substantial companies of equal bargaining power
negotiate an agreement, they may be taken to have had regard to the
matters known to them. They should be taken to be the best
judges of the commercial fairness of the agreement which they have
made, including the fairness of each of the terms in that agreement
and whether the terms are reasonable. The Court should not
assume that either is likely to commit his company to an agreement
which he thinks is unfair, or which he thinks includes unreasonable
terms. Unless satisfied that one party has, in effect, taken
unfair advantage of the other - so that a term is so unreasonable
that it cannot properly have been understood or considered - the
court should not interfere.
In Watford Electronics the user had attempted to
negotiate changes to the exclusion and limitation of liability
clauses but without success. Chadwick LJ found that the terms
excluding indirect loss were fair and reasonable. The main
factors influencing his decision were (a) the equal bargaining
power of the parties, (b) the fact the key terms of the contract
were subject to negotiation; including price and who would bear the
risk of remedying loss of profits and other consequential losses,
and (c) the fact Watford’s own written standard terms contained
similar exclusion clauses. These factors may be used to test
the enforceability of other exclusion and limitation clauses,
however, the Watford Electronics case was substantially
fact based with the result that this Court of Appeal judgment may
well be distinguished.
With this is mind, how could Sherwood have effectively excluded
its loss? Loss of anticipated savings made up the significant
element of the recoverable losses in this case. Of the
£2,622,259.69 awarded £1,894,828.72 related to loss of anticipated
savings, being for policy in-house savings, audit savings and staff
not made redundant earlier. Could these losses have been
excluded by effective drafting? Judge Havery made an
interesting comment at the preliminary issues stage. In his
view, computer systems were sold on the very basis that they would
make savings. As such, a good reason had to be shown to
support an exclusion of loss of anticipated savings or other
benefits. It is therefore submitted that irrespective of the
drafting of clause 15.01, it would have been extremely difficult
for Sherwood to have successfully excluded its loss regarding
anticipated savings given the nature of the system sold and the
purpose for which it was to be used.
Suppliers of systems which are geared more towards making profit
or for purposes other than savings, may, it is submitted,
effectively exclude this loss. This issue naturally overlaps
with the law relating to direct and indirect loss. If the
system is procured for certain purposes, such as savings, then if
these savings do not materialise as a result of the supplier's
breach, they are direct losses which are normally recoverable under
the first limb of Hadley v Baxendale. As such,
greater justification must exist in order to reasonably exclude
liability. If, however, the system is procured for purposes
other than cost savings, any such losses which flow from the breach
are likely to be indirect losses under the second limb of
Hadley v Baxendale. It may be more reasonable to
exclude these losses by an appropriate contractual clause.
Unfortunately, neither the present case nor Watford
Electronics provides a definitive answer to this point.
Clause 15.02 in the current case was an attempt of limiting
liabilities of certain matters to the licence fees paid.
Judge Havery found that although it was common place for suppliers
of software to limit their liability to the sum payable by the
customer under the contract, the clause was objectionable since the
possible damage could easily far exceed the limit imposed by the
court. By comparison, in Watford Electronics
Chadwick LJ found that a clause limiting liability to the price
paid by the customer was in the circumstances reasonable.
Ascertaining the level of financial cap remains a key issue for all
contract drafters.
Could Sherwood have effectively excluded liability for wasted
management and staff time? Horace Holman recovered a
relatively small amount of damages under this head of loss.
Judge Bowsher rejected Sherwood's argument that wasted
directors/senior managers time should not be recoverable as these
individuals would naturally make up this time by working in the
evenings or at weekends. Instead, Judge Bowsher found that
loss of leisure time led to less productivity. Interestingly,
though, instead of calculating the financial impact of this loss of
productivity, Horace Holman was awarded damages for the actual time
spent by the senior staff dealing with the matter. Further,
these damages were based on fairly scant documentary evidence as to
the time actually spent.
It is submitted that it would be reasonable to exclude loss for
wasted management and staff time by agreeing, for example, that all
such loss was a natural overhead of the project. Nonetheless,
the actual savings achievable by doing so are rather small in the
scheme of things.
Could Sherwood have excluded loss of profits? Horace
Holman recovered £77,008.00 under this head of loss. The
Court of Appeal case Deepak Fertilisers v Davy McKee &
ICI ((1999) 1 Lloyds Rep 387) is authority that loss of
anticipated profits may be effectively excluded. In that case
liability was expressly excluded for "loss of anticipated profits…
or for indirect or consequential damages". In relation to
this Smith LJ held, "wasted overheads incurred during the
reconstruction of the plant as well as profits lost during that
period, are no more remote as losses than the cost of
reconstruction. Loss of profits cannot be recovered because
they are excluded in terms, not because they are
too remote" (emphasis added). That said,
whether it is reasonable to exclude loss of profits/revenue must be
assessed on a case by case basis. Again, however, in many
situations the relative value of excluding loss of profits may have
little overall impact on the amount of damages recoverable by a
user. By way of illustration, in Pegler v Wang
([2000] Masons CLR 19) Pegler recovered only £640,000 of a
£12,500,000 loss of profits claim with the judge holding that the
period over which the profits were likely to have been affected was
more likely 18 months rather than 5 years or ‘in perpetuity’, as
claimed.
In conclusion, a supplier’s attempts at excluding certain heads
of loss may be worthwhile, but also may be of little overall impact
to the damages claim. Successful limitation of losses is, on
the other hand of key importance. However, without further
case law subsequent to Watford Electronics little concrete
guidance may be given as to what the court will consider to be a
reasonable limitation clause and consequently
enforceable.
