Supplier’s liability clause held unreasonable
KINGSWAY HALL HOTEL v RED SKY IT [2010]
A software supplier was held not to be able to rely on its limitation of liability clause and other clauses of its contract because of the way in which it had sold its products. Given that what the supplier did is not untypical this decision may be very significant.
facts:
- K bought off-the-shelf hotel management software from R for front and back office reservations and in particular, for advance reservations, check-in/out and billing. The parties contracted on R’s standard terms and conditions, the relevant provisions being:
- Clause 10.1 excluded all terms regarding performance, quality, fitness for purpose etc except as provided in clause 10.2.
- Clause 10.2 contained an express warranty that "the programs will in all material respects provide the facilities and functions set out in the Operating Documents", which were defined to include any ‘operating documents’ supplied by R to K.
- Clause 10.4 provided the sole remedy for breach of the warranty in clause 10.2 was the provision of maintenance and support cover.
- Clause 10.7 provided that clause 10, together with clause 18, stated R’s entire liability for any fault or error in the IT system.
- Clause 18.3.2 excluded liability for any indirect or consequential loss and loss of profits.
- Clause 18.3.3 limited liability for direct loss to four times the price paid for the software.
- The Judge found that the program had been ‘recommended’ to K by the sales person from R as being ‘suitable to the hotel’s needs and an improvement on its existing system’. However, surely all suppliers do exactly that? The Judge said that given this ‘advice’ (and the lack of documentation - see below) it was unreasonable to exclude the statutory implied conditions of satisfactory quality and fitness for purpose.
- K was given a demonstration of the software at the premises of another user but their situations were not directly comparable.
- Crucially R did not supply any operating manuals (the subject of the warranty) to K pre-contract or before installation of the software. Without these the Judge felt that it would have been impossible for a customer to decide whether the software was suitable for its needs even though there had been several demonstrations and the customer does seem to have formed a view that the software was appropriate.
- K soon experienced problems with the software; specifically, it did not accurately manage room occupancy resulting in underselling and overselling of rooms. K requested that R solve the issues but R failed to do so leading K to reject the software and procure a replacement system. K then sought to claim damages from R for loss of business, wasted management time and the employment of additional staff. R tried to rely on clauses 10 and 18 to limit its liability.
decision:
- The High Court held that R could not rely on clauses 10 and 18 as they did not satisfy the reasonableness test in the Unfair Contract Terms Act 1977 (UCTA), which is a requirement where a seller excludes or restricts his liability for breach of contract under his written standard terms of business in a B2B context. This was not because they were inherently unreasonable but rather they were unreasonable given the background to the transaction and the failure to supply documentation.
- R’s purported exclusions were predicated on the basis that K would satisfy itself as to the suitability of the software based on the demonstrations and the operating documents. However, no manuals were supplied before the contract was signed. The demonstrations were given in a context different from that in which K intended to use the software and so were of limited assistance in informing K about the software’s potential problems and limitations.
- Without manuals or adequate demonstrations K was not in a position to understand the strengths and the limitations of the software and thus to decide whether it would be suitable to meet its needs.
- What is very strange is that the Judge prevented reliance upon the exclusion and limitation clauses in their entirety. This was unnecessary. He could easily have declared the exclusion of the statutory implied terms unreasonable but allowed the cap on and exclusions from liability to apply. Quite why he did not do so is not explained although it is clear he took a dislike to some of the supplier’s key witnesses.
- The judge awarded K damages which included loss of profit, sums in respect of wasted management time and additional staff costs. In aggregate these exceeded the ‘four times the price’ contractual cap.
points to note:
- This is potentially, if followed, a very significant judgement since Red Sky’s approach is not untypical of many software suppliers. It once again demonstrates that on the facts of individual cases the judges are prepared to come to the aid of customers. Of greatest concern is that most suppliers would on this basis be taken to have provided advice to the customer – akin to acting as a consultant – which in most cases is simply not the case.
- The court found that there was a clear disconnect in the way R sold the software to K and the basis on which R's standard terms were drafted.
- If you are a supplier and your standard terms are drafted to place the risk of selecting the software onto customers as is extremely common then you must ensure:
- you supply or make available to potential customers pre-contract all of the documentation against which your warranties are defined so as to enable them to fully assess the product and make an informed choice;
- you demonstrate the software in an environment comparable to that in which the customer will actually use the software.
- Failing to do this could mean loss of key protections in the contract.