Factual and Procedural Background
The Plaintiff, Company A, a family-owned business specialising in mail order sales of computer products, sought an integrated software system to improve control over its operations. In 1992, Company A engaged Defendant, Company B, a software supplier, to provide software products including "Mailbrain" and "Genasys" through three contractual documents dated 9 October 1992. These documents included a sales contract, a software licence, and a software modification licence, each subject to printed terms and conditions on their reverse sides.
The software system was implemented in early 1993 but failed to perform satisfactorily, leading to further contracts in August 1993 for additional equipment and licences. Company A paid a total of £104,596 between 1992 and 1996 for equipment and licence fees. Due to ongoing problems, the system was replaced in 1996 with one from a different supplier, prompting Company A to commence proceedings in 1998 against Company B.
The claim was made on three bases: inducement by false representations, breach of implied contractual terms including merchantability and reasonable skill, and breach of a common law duty of care in negligence. Company B relied on entire agreement and exclusion clauses in its defence, asserting their reasonableness under the Unfair Contract Terms Act 1977.
Preliminary issues were tried in early 2000, with the trial judge holding that the contract contained implied terms, that representations had been made and relied upon, and that Company B owed a duty of care. The judge also found the exclusion clauses applicable but unreasonable and thus unenforceable. Company B appealed against the finding of unreasonableness of the exclusion clauses.
Legal Issues Presented
- Whether clauses 7.3 and 10.6 of the contract's terms and conditions, which exclude or limit liability for indirect or consequential losses and cap liability at the contract price, were reasonable under the Unfair Contract Terms Act 1977 and the Misrepresentation Act 1967.
- The proper construction and scope of the entire agreement clauses (clauses 14 and 15) and their effect on claims based on pre-contractual representations.
- The applicability and interpretation of the Unfair Contract Terms Act 1977 to a business-to-business contract involving standard form terms.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Hadley v Baxendale (1854) 9 Exch 341 |
Establishes the rule for consequential damages recoverable for breach of contract where losses were in contemplation of parties. |
Used to distinguish between direct losses recoverable under warranty and consequential losses excluded by the contract clauses. |
| Victoria Laundry (Windsor) Ltd v Newman Industries [1949] 2 KB 528 |
Application of consequential loss principles in contract damages. |
Supported the analysis of recoverable losses beyond the immediate value of goods. |
| Cullinane v British "Rema" Manufacturing Co Ltd [1954] 1 QB 292 |
Clarified the scope of consequential loss recoverable for breach of warranty. |
Confirmed that consequential losses may be claimed where in contemplation of parties. |
| George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803 |
Guidance on the court's approach to reasonableness under statutory provisions limiting liability. |
Instructed appellate courts to respect trial judges' reasonableness assessments unless plainly wrong. |
| The Salvage Association v CAP Financial Services Ltd [1995] FSR 654 |
Commercial contracts between experienced parties with knowledge of risks are likely to be fair and reasonable. |
Supported the view that courts should be cautious to interfere with negotiated risk allocations. |
| Lowe v Lombank Ltd [1960] 1 WLR 196 |
Requirements for evidential estoppel based on acknowledgements of non-reliance. |
Referenced in discussion of entire agreement clauses and their effect on claims of reliance. |
| Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573 |
Common use and effect of non-reliance acknowledgements in commercial contracts. |
Supported the view that such clauses promote commercial certainty and limit litigation on pre-contractual statements. |
Court's Reasoning and Analysis
The Court undertook a detailed construction of the limitation of liability clauses (7.3 and 10.6), distinguishing between two separate purposes: the first sentence excludes liability for indirect or consequential losses; the second caps liability at the contract price for direct losses resulting from breach of warranty. The Court held that the trial judge erred in treating these as a single indivisible clause and in concluding the clauses excluded liability for pre-contractual misrepresentations, which they do not.
The Court emphasized the significance of the entire agreement clauses, which include acknowledgements of non-reliance on pre-contractual representations, thereby undermining claims based on such representations and limiting the scope of exclusion clauses.
The Court examined the reasonableness of the exclusion clauses under the Unfair Contract Terms Act 1977, applying the statutory guidelines. It found that the parties were of equal bargaining power, that the Plaintiff understood the clauses and negotiated the price accordingly, and that the Defendant had committed to using best endeavours to minimise losses. The Court also considered the Plaintiff’s own standard terms containing similar liability limitations as relevant to understanding commercial fairness.
On balance, the Court concluded that the term excluding indirect loss was fair and reasonable given the circumstances, including the availability of insurance and the commercial context. Similarly, the term limiting direct loss to the contract price was not unreasonable as it replaced the standard valuation of goods for breach of warranty purposes.
The Court held that the trial judge had proceeded on erroneous principles, particularly by misunderstanding the scope of the clauses and undervaluing the addenda commitments and the Plaintiff’s awareness of the commercial risk allocation.
Holding and Implications
The appeal is allowed.
The Court overturned the trial judge’s finding that the limitation of liability clauses were unreasonable in their entirety. It held that the exclusion of indirect and consequential losses and the limitation of direct losses to the contract price were fair and reasonable terms in the context of a negotiated contract between experienced parties of equal bargaining power.
The decision restores the enforceability of the limitation clauses and clarifies the importance of entire agreement clauses and non-reliance acknowledgements in limiting claims based on pre-contractual representations. No new precedent was set beyond the application of established principles of contract construction and statutory reasonableness under the Unfair Contract Terms Act 1977.