Oh dear! Ever since the court ruled in favour of St Albans City and D.C. that ICL’s standard terms were unreasonable, IT lawyers have been agonising over exclusion and limitation of liability clauses.
A few years later, and a few miles further south, in Watford Electronics the Court of Appeal tipped the balance back in favour of suppliers in B2B contracts.
However, somewhere on the journey around London from Watford the court seems to have got lost near Hounslow. In a recent decision from the Technology and Construction Court (Kingsway Hall Hotel v Red Sky IT (Hounslow) Ltd) a set of fairly standard exclusion and limitation clauses have been ruled to be ineffective in protecting the supplier against a claim by a customer.
Admittedly, the software had been found to be fundamentally defective in a number of respects and presumably the judge was determined in the light of his findings to see justice done. However, the decision itself raises more questions than answers.
The regime which applies to clauses excluding and limiting liability is, in essence, that in a standard form B2B contract they must satisfy the test of reasonableness under the Unfair Contract Terms Act 1977. In Watford Electronics, a case with some similarities, the court’s approach was that it should not interfere where experienced businessmen representing companies of equal bargaining power negotiate an agreement. In Red Sky, the judge found that there was not equal bargaining power but did not attempt to explain why. He found the exclusion of implied terms to be unreasonable but failed to comment on why Red Sky could not exclude liability under those terms or limit it to four times the price (a pretty reasonable multiple in my experience). The Judge also based his decision on pre-contractual representations but failed to comment on the effect of the “entire agreement” clause although these have recently been approved by the Court of Appeal in a case called Springwell.
So, what can we learn from this case? Not much, I suspect, apart from the salutary lesson that predicting the outcome of court cases is a risky business. Suppliers should look again at their terms and conditions to ensure that they fit with their sales processes, a factor which was an important part of the judge’s reasoning. And dissatisfied customers will point to this case when claiming compensation to show suppliers that it is dangerous to hide behind such clauses.
Of course, we don’t know yet whether Red Sky will appeal and give the Court of Appeal the chance to turn back to Watford!
Tim Clark
June 2010
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