Ensure you are not trapped by contracts' limited liability
clauses.
IT directors and managers should be aware of clauses in IT
contracts that seek to exclude or limit the liability of the IT
supplier.
Such clauses are commonly used by IT suppliers because they allow
the supplier, and its insurers, to predict with accuracy their
maximum liability if the contract goes wrong, and to fix the price
accordingly.
Essentially what these clauses do is to minimise any damages
payable by the IT supplier to the user should the contract fail.
Unfortunately, the nature of IT contracts means that the
consequences of failure often greatly exceed the price paid for the
contract by the user - hence the necessity for suppliers to
effectively limit their liability.
If IT suppliers did not do this, the market would see higher
prices. It is also true, however, that IT users need to be properly
compensated when an IT project goes wrong.
The law in this area seeks to strike a balance and is heavily
influenced by the Unfair Contract Terms Act 1977 (UCTA). The effect
of UCTA is to strike out contractual limitations (such as a cap on
damages) or exclusions of liability that are deemed "unreasonable".
A clause that unreasonably limits the amount of compensation
payable to the user will be void and the supplier cannot rely on it
to prevent the user seeking to recover its losses in full.
The courts' varied approach in interpreting UCTA have included
"customer-friendly" decisions in cases such as St Albans City and
District Council vs International Computers 1996. The Hertfordshire
council had bought a system from ICL to calculate poll tax. The
system did not work as expected, losing the council £1m in
revenue.
The court held that a cap on liability of £100,000, which was
substantially less than the contract price and ICL's insurance
cover, was unreasonable and therefore unenforcable.
However, five years later, in Watford Electronics vs Sanderson CFL
2001, the court came down on the supplier's side. It ruled that an
exclusion clause limiting its liability was reasonable. The Watford
case is viewed by many as a shift towards the fundamental freedom
of contract principle, allowing the parties to agree their own
contract terms without interference by the courts. Given that
suppliers generally limit their liability, this would be bad news
for users.
Before even considering the suitability of exclusion or limitation
clauses, the user and supplier need to be certain that a
contractual relationship exists in the first place. The recent case
of Co-operative Group vs International Computers - a three-year
legal battle over a till system - has brought into focus the need
for a contract to be signed by both parties before the commencement
of the commercial relationship.
IT suppliers which begin work on the back of unsigned draft
contracts run the risk of contracting without the benefit of any
limitation on their liability, while others might unwittingly enter
into contracts unintentionally.
The significant increase in business correspondence being conducted
via e-mail brings an increased risk that communications by
employees who have no authority to make contracts on behalf of
their employers could result in a binding contract. The device of a
disclaimer on e-mails stating that they will not constitute a
binding contract unless supported by a hard copy formal order
signed by, for example, a director, can exclude such a risk.
The introduction of an internal e-mail and internet use policy,
issued to all members of staff, setting out acceptable use will
also reduce the risk. The policy should set out the sanctions for
breach and should be enforced vigorously through in-house
disciplinary procedures.
The key here is to ensure that the employee understands the limits
on their authority to bind the employer into a legally enforceable
agreement and to make it clear to any third-party supplier
precisely how far the limit of the employee's authority
extends.
Before you sign a contract
IT directors should remember four time-tested principles before
signing a contract with a supplier:
- Ensure that contracts with IT suppliers are negotiated and
agreed in advance by those with authority to bind the
company.
- Use disclaimers in e-mails to avoid inadvertently legally
binding the company.
- Always read the small print in IT contracts, in particular any
clauses that purport to exclude or limit the compensation payable
to the user if a contract goes wrong.
- Always try to negotiate with a supplier if a dispute arises.
Although the courts will step in to protect users from unscrupulous
IT suppliers who seek to rely on exclusion clauses, court
proceedings are expensive and it is best to negotiate with the
supplier about risk and liability in advance.
Ian Tranter and Patricia Jones are partners at law firm
Hammonds