Computer Contractors Professional Indemnity Insurance

SNW (design consultants) bought a graphic design system (hardware, operating systems, applications software and peripherals) from Barco. Barco had an established system (Aesthedes 1) which they demonstrated to SNW. But by the time SNW were to be supplied, Barco had brought out a new version, Aesthedes 2, which they supplied to SNW. There was no written contract or warranty document. The system was commercially unusable and over a long period of time Barco tried to fix the problems and failed to do so.

SNW rejected the system and claimed for misrepresentation and breach of contract (implied terms of merchantable quality and fitness for purpose). Many of the defects were software related but the judge treated the system as a whole (software and hardware) as one ‘product’. Costs were settled at £450,000 on the grounds of misrepresentation and breaches of statutory implied terms.

St Albans entered into a contract with ICL for the provision of a system to run the poll tax administration. There was an admitted error in the software, which resulted in the number of poll tax payers being overstated. This led St. Albans to set its poll tax rate too low and ended up £3,000,000 out of pocket. St Albans sued for breach of contract, relying on the express terms in the contract as well as on implied terms under the Sale of Goods Act 1979 and for negligent misstatement by one of ICL’s employees that it was safe to take population figures direct from a screen (an on-line output). ICL argued that St Albans should have realised there was something wrong (a report they tried to print had produced a line of zeros), that no loss had been suffered because St Albans could make it up for the following year and that liability under the contract was limited to £100,000.

High court decision:

The error in the software was breach of contract.
ICL’s statement that St Albans could safely take the figures from the screen was negligent, therefore breach of contract.
Although software was considered ‘goods’ in this case, it was not necessary to decide whether or not software was ‘goods’ for the purpose of the Sale of Goods Act 1979, as ICL was in breach of the express terms of the contract.
St Albans had lost money and had a duty to recover it for the benefit of taxpayers. The fact that it had recouped its loss by increasing the poll tax charge the following year was irrelevant.
Negotiations prior to the contract had left ICL’s terms largely untouched so St Albans was treated as having contracted on ICL’s standard terms. ICL’s terms were subject to the requirement of reasonableness. The £100,000 limited clause was unreasonable and unenforceable in view of the facts that: ICL was a substantial company, they were insured for product liability to an aggregate sum of £50,000,000, ICL was one of the few companies that could meet St Albans requirements and they had not justified the figure of £100,000.

Salvage entered into two contracts with CAP for the design and development and supply of software. Two years later, the software was incomplete and contained numerous errors. Salvage terminated the second contract (the first was over), rejected the software and dismissed CAP. Salvage abandoned the software altogether and engaged another party to develop a fresh solution.

Salvage brought proceedings for breach of contract, claiming repayment of the contract price (about £300,000) and damages for wasted expenditure. CAP relied on a clause limiting its liability to £25,000 in respect of each contract. Salvage claimed the terms were unreasonable and therefore unenforceable under the Unfair Contract Terms Act 1977. Total damages settled at just under £663,000 and Salvage could recover for its wasted expenditure on the project, payments for use of computer bureau facilities and testing and wasted management time and stationery. Salvage could not recover for lost profits.

This case is a good example of what happens if a supplier tries to rely on a limitation of liability which is so low as to be out of proportion to the contract price or any potential losses under the contract. It also highlights the fact that in order to rely on a limitation of liability a supplier is likely to have to find an objective justification for the limitation applied.