Technology suppliers have a legitimate interest in protecting their commercial position by limiting legal liability for breaches of contract.
Two decisions by the Technology and Construction Court have confirmed earlier decisions, which show that it is hard for technology suppliers to limit legal liability by contractual provision, even though the relevant contracts were far from being a ‘standard contract’: all terms were imposed on the user on a take-it-or-leave-it basis.
The court’s approach in South West Water
v ICL [1999] and Pegler v Wang [2000], has been criticised as leaning too far in favour of protecting users at the expense of suppliers. The decisions have sparked a debate as to whether the relevant law (contained in the Unfair Contract Terms Act (UCTA) 1977) should be amended.
Under UCTA, where a party deals on the other’s ‘written standard terms of business’, a clause seeking to limit or exclude legal liability will only be valid to the extent that it is reasonable, with the Act providing a number of guidelines to help determine ‘reasonableness’. In both cases, the defendants had contracted to supply substantial IT systems but their implementation went disastrously wrong, and significant delays and losses were suffered by the claimants.
Both claimants successfully argued that UCTA applied to the supply contracts because they were based on the claimants’ standard terms. The result was that the limitation of liability clause, which would have protected the defendants from most of the losses claimed, had to be shown to be reasonable to be valid. Following earlier cases on failed IT projects, the court held that the clauses were unreasonable and awarded hefty damages in favour of the claimants.
Dislike
Technology suppliers should ensure clear wording that covers all eventualities is included. The approach taken is a fresh reminder of the court’s general dislike of limitation clauses.
Despite wording to the effect that the defendant would not be liable for indirect or consequential loss “in any event” or “howsoever arising”, the court accepted Pegler’s argument that such wording did not cover indirect or consequential losses suffered by the claimant as part of its normal course of business. Again, those drafting supply contracts will need to refer expressly to losses occurring in the normal course of business rather than the practice of attempting to draft a formula that excludes all indirect or consequential loss. The courts had no trouble in deciding it would be unreasonable for the defendants to rely on the limitation clause, making it invalid, even though their construction of the wording meant the issue of reasonableness was not strictly relevant to the decision.
In previous disputes, the courts have often based their finding of unreasonableness on the fact that the limitation sums are too small and/or arbitrary. In Pegler, the judge referred to the large number of misrepresentations made by Wang at the pre-contract stage as a cornerstone for his finding of unreasonableness. Given that ‘overselling’ is a recurring problem in the technology industry, such an approach could be used as an another principle by future claimants to challenge the validity of limitation clauses.
