The interpretation of exclusions of indirect and consequential losses
ACCENTURE V CENTRICA
This case involved a contract for Accenture (A) to design, supply, install and maintain a new IT system for BG, a subsidiary of Centrica (C), which included an automated billing system (the System). The agreement under which the System was to be developed and installed contained a number of warranties and specifically set out A’s obligations in the event of a breach in some detail. These essentially amounted to an obligation to take steps to endeavour to fix or alternatively to fund the necessary remedial work (up to a specified cap).
facts:
C experienced very significant problems with the System after many millions of customers had been transferred to the System. It notified A of what it claimed were breaches of warranty and required them to be remedied. A claimed that there were no ‘Fundamental Defects’ (as defined) in the System and that the notice given was ineffective to trigger any obligation to take remedial action. As a result C brought a claim for damages.
The contract required that C had to serve notice giving “such analysis and detail as reasonably practicable” in relation to the alleged defects constituting the breach of warranty. C maintained that it had given such detail as it reasonably could in the circumstances at the point of serving the notice.
ruling:
- The judge held that the detailed requirements of the notice clause should be construed ‘contra proferentem’ i.e. strictly against A because compliance with the conditions effectively imposed restrictions on C’s ability to bring a damages claim and was therefore a form of limitation of liability. The judge also said that in deciding whether the notice served was sufficiently detailed, account should be taken of the extent of A’s actual knowledge of the defects in question at the time the notice was received.
- A argued that C’s ability to recover damages was limited and that it could not recover any damages in respect of costs or losses incurred prior to it being notified of the defects in issue. A further argued that C could not recover any damages in respect of the period prior to the expiry of the (reasonable) time which A had under the contract to fix the alleged breaches. In other words, if A failed to take reasonable steps, this was the breach which was actionable and not the original breach of warranty. The judge rejected both of these contentions.
- We suspect that for many the most interesting aspect of the case will be the judge’s analysis and findings in relation to ‘consequential’ loss. There was an exclusion of liability in the contract for “loss of profits or contracts arising directly or indirectly; loss of business or revenues arising directly or indirectly; any losses, damages, costs or expenses whatsoever to the extent that these are indirect or consequential…”.
- C claimed damages in respect of:
- excess charges that it had to pay to its gas suppliers. C was obliged to pay its gas suppliers on an estimated basis since because of the problems with the System, it did not have precise information about the amount of gas used by all of its customers. As a result C argued that it was obliged to pay more than it should have. A argued that this was effectively ‘lost profit or revenue’. The judge held that it was nothing of the sort but instead were additional charges which would not have had to have been paid but for the errors with the System;
- compensation paid to customers for the inconvenience and disruption caused by the problems with the System. This loss was again regarded as being neither indirect nor consequential but direct damage and therefore recoverable given the context;
- additional borrowing charges to deal with cashflow shortages caused by the problems with the System. Such charges were said to be a very likely consequence of the problems and were therefore recoverable;
- the costs of wrongly chasing customer debts which were not actually due. These were said to be losses flowing naturally and in the ordinary course of events as a result of the breach;
- additional stationery costs related to correspondence with customers. Again these were not thought to be indirect or consequential.
points to note:
- These claims alone amount to almost £30m and whilst it must be remembered that this was only a preliminary hearing to determine whether these losses can be claimed in principle (they still have to be established as a matter of fact), the judge at this hearing was not even asked to express a view as to the recoverability of damages for the:
- employment of additional staff to try to deal with the rising volumes of complaining and dissatisfied customers;
- writing-off of millions of pounds in respect of unbilled or late-billed gas and/or electricity; and
- cost of investigating and rectifying the problems with the System including the cost of purchasing significantly more powerful hardware and third party software.
- This case is a timely reminder that the judges do not look particularly kindly upon exclusions of liability for broad categories of loss and especially ‘indirect and consequential’ loss. The approach taken by the judge, to interpret such exclusions very narrowly, is entirely consistent with a number of other previous cases. Suppliers of financial IT systems are therefore exposed to very significant risk unless they are extremely careful and clear as to the degree of risk/liability that they are prepared to accept. As a result the financial cap on liability assumes much greater importance and it remains to be seen whether suppliers try to address the exclusion of specific types of losses more directly and specifically in future and/or whether they seek to place greater emphasis on acceptance of the system as the defining watershed in terms of the customer assuming risk for losses suffered. This case suggests that if they are not prepared to underwrite such customer losses, they will be well advised to do so.
Whilst there may be an element of overlap between some of the claims, given the judge’s findings it has to be likely that these latter categories of loss will be regarded as being direct and therefore recoverable.