Download Courts Reluctance to Interfere with Commercial Bargains

COURTS RELUCTANCE TO INTERFERE WITH COMMERCIAL BARGAINS
The case of Watford Electronics Limited v Sanderson CFL Limited provides a useful update
on the court’s attitude towards the terms of commercial contracts and in particular, towards
exclusion clauses, which companies have habitually litigated over since the introduction of
the Unfair Contract Terms Act in 1977. The Act (you will no doubt recall) imposes a
requirement of reasonableness in relation to such clauses where one contracting party deals
on the other’s written standard terms of business and where the party who is in breach of
contract seeks to exclude or restrict liability for that breach.
The Facts of the Case
Watford Electronics Limited is a business engaged in the sale of computer products
principally by mail order, Sanderson CFL Limited supply software products, in particular in
this case, a marketing package for use in connection with mail order marketing and in
conjunction with another accounting package which they supply.
Sanderson supplied equipment, together with software licences to Watford Electronics at a
total cost of approximately £104,000.00, subject to its standard Terms and Conditions of
Supply.
The relevant Terms & Conditions in this case were the entire agreement clause and the
warranty and limit of liability which provided as follows:
“no statement or representations made by either party have been relied upon by the other in
agreeing to enter into the contract”.
“neither the company nor the customer shall be liable to the other for any claims for indirect
or consequential losses whether arising from negligence or otherwise. In no event shall the
company’s liability under the contract exceed the price paid by the customer to the company
for the equipment connected with any claim”.
In addition, Watford Electronics managed to persuade Sanderson to add an extra clause
which provided that “Sanderson CFL Limited commit to their best endeavours in allocating
appropriate resources to the project to minimise any losses that may arise from the
contract”.
It goes without saying that the system purchased by Watford Electronics did not perform
satisfactorily and between 1993 and 1996 was beset by problems, ultimately being replaced
by a new system purchased from a different supplier.
Watford Electronics’ Claim
Watford Electronics contended that they were induced to sign the agreement as a result of
representations made by Sanderson which were false and that Sanderson were in breach of
the implied terms:
(i)
that the system would be of merchantable quality and reasonably fit for the purpose
for which it was supplied and
(ii)
that Sanderson would use the skill and care reasonably to be expected of experts in
their field and would remedy any defect within a reasonable time. Watford’s claim for
loss of profits amounted to approximately £4.5 million, together with a claim for
additional costs incurred in attempting to operate the defective system and for
mitigating continuing losses by purchasing alternative software, totalling in all
approximately £1 million.
Watford Electronics further argued that the exclusion clauses referred to above were
unreasonable under the Unfair Contract Terms Act 1977.
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What the Court thought
On appeal, Lord Justice Chadwick found that the relevant question to be asked was whether
it was fair and reasonable “having regard to the circumstances which were, or ought
reasonably to have been in the contemplation of the parties when the contract was made, to
include a term which sought to exclude contractual claims for indirect and consequential
losses” and was it fair and reasonable “having regard to those circumstances, to include a
term which sought to restrict loss directly and naturally resulting in the ordinary course of
things, from breach of warranty to the price paid for the equipment”.
In considering those questions, the court also took on board the clause added by Watford
Electronics requiring Sanderson to use its best endeavours to allocate appropriate resources
to the project and found that the effect of that added clause was that Sanderson could not
walk away from the contract on the basis that the only claim to which it was exposed was a
claim for the price paid for the goods, because unless Sanderson could show that it had
used its best endeavours to allocate appropriate resources to the project, it would be unable
to rely on the clause excluding claims for indirect or consequential loss. In other words,
Sanderson would only be able to escape liability for indirect or consequential losses
provided it had done what it could to allocate appropriate resources to make the equipment
perform.
Interestingly, the Judge also had regard to Watford Electronics’ own standard terms of
business which included a restriction of liability which was pretty much identical to the one
contained in Sanderson’s terms and which showed that Watford Electronics was well aware
of the commercial considerations which might lead to the inclusion of such a clause and also
that they were well aware that a supplier would determine the price at which goods would be
sold by reference to its exposure to the risk of claims such as these. The Judge found that
all this was very relevant when deciding whether the clause in Sanderson’s standard Terms
and Conditions was fair and reasonable having regard to all the circumstances.
Unsurprisingly, The Judge found that there is a significant risk that a non standard software
product may not perform to the customer’s satisfaction and that a loss of profit might well
result in such cases. Those risks were clearly in the contemplation of Sanderson and
Watford Electronics when the contract was made and although Sanderson was in the better
position to assess the risk of the product failing to perform, Watford Electronics was in a
better position to assess the amount of potential loss if the product did fail to perform.
As the Judge pointed out, “where experienced businessmen representing substantial
companies of equal bargaining power negotiate an agreement, they may be taken to have
had regard to the matters known to them. They should, in my view be taken to be the best
judge of the commercial fairness of the agreement which they have made… unless satisfied
that one party has, in effect taken unfair advantage of the other - or that a term is so
unreasonable that it cannot properly have been understood or considered - the court should
not interfere”.
In this case, the parties were of equal bargaining power, had negotiated on price and
Watford Electronics had secured substantial concessions from Sanderson, together with the
additional clause inserted into the contract. The court therefore had no hesitation in holding
that the terms excluding indirect loss and limiting direct loss to the cost of the goods were
fair and reasonable. This has a strong impact on our advice to clients, in an area where, up
to now, there has been no such strident judgment from the courts. We are no longer able to
say that the question of reasonableness is a matter to be decided in every case (although,
clearly each case turns to a certain extent upon its facts). All other matters being equal, it
seems the court will not interfere with the parties’ bargain. The advice is therefore, read the
small print even more carefully before you sign up.
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Katherine Campbell
Associate, International Commercial Litigation Department
DISCLAIMER: This document is for general guidance only. All liability is excluded for
actions taken or not taken in reliance on these guidelines alone. Specific advice
should be obtained in each specific case. Please contact Katherine Campbell on 024
7629 3038 at Reed Smith Warner Cranston, Coventry to review your specific
circumstances.
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