Unreasonable Liability Clause
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13 May 2010
The High Court has ruled that a clause in a software contract to the effect
that customers could not take any action against it for the poor performance of
the software was unfiar and thus could not be enforced.
Red Sky, a software company sold hotel management software to London's
Kingsway Hall Hotel. Unfortunately there were a number of problems with the
software, eventually the hotel rejected the software and found a replacement.
The hotel then issued proceedings against Red Sky for loss of business as a
result of the software not performaing as advertised. Red Sky attempted to rely
on a clause in its standard terms and conditions which said that where software
did not perform as advertised then the customer was to use Red Sky's maintenance
and support functions - this was their only remedy under the terms.
As a result of this clause Red Sky claimed that the hotel could not sue it
for a refund or additional damages in respect of loss of business etc. However
the High Court disagreed and determined that the afforementioned clause was
unfair under the Unfair Contract Terms Act. Red Sky argued that the exclusion of
liability was 'reasonable' as per Section 11(1) of the Act i.e. "The term shall
have been a reasonable one to be included having regard to the circumstances
which were or ought reasonably to have been known to or in the contemplation of
the parties when the contract was made". However the court disagreed, simply due
to the way in which the software sale had been conducted a full set of operating
documents had not been provided to the hotel and thus their decision as to
whether to purchbase the software was made on the basis of Red Sky's description
of the software and their claims regarding it.
Judge Toulmin said:
"Red Sky's' standard terms were predicated on the fact that a prospective
customer would investigate Entirety [the software] and make up its own mind
whether or not to purchase based on demonstrations and the Operating Documents
which Red Sky had previously supplied...It did not apply to circumstances in
which the customer relied on Red Sky's' advice in deciding to purchase
Entirety...The exclusions in clause 10.2 [of the terms and conditions] only
applied where the Operating Documents as defined in Clause 1.1.6 were supplied
to the customer before the contract was signed...In this case such documents
were not supplied by Red Sky to Kingsway. Therefore, Clause 10.2 and the
exclusions derived there from did not apply."
His view was that the software was not up to the task that the hotel needed
it for (which Red Sky should have known), under the "Sale of Goods Act 1979, a
term is to be implied into the contract that Entirety would be fit for the
purpose for which it was bought, namely that the system would increase revenue
and occupancy levels and would allow quicker check-in and check-out, including
accurately processing groups and making changes to group reservations while
preserving the accuracy of the system...I am satisfied that Entirety was not fit
for the purpose for which it was sold...Pursuant to Section 4 of the Supply of
Goods and Services Act 1982 a term is to be implied into the contract that the
goods were of satisfactory quality. Entirety did not meet the standard that a
reasonable person would regard as satisfactory, taking into account any
description of the goods, the price and all other circumstance so as to satisfy
... [the] Act,".
The hotel was awarded damages of £110,007.54 for lost profits, loss of
goodwill, the price of the software and additional staffing that were needed as
a result of the software problems.
Ben Evans
is a trainee solicitor at Lawdit. ben.evans@lawdit.co.uk
About the Author
Lawdit Solicitors offer services and
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