Strategy Clinic: What's the damage?

A recent Court of Appeal judgement limited the damages a user was claiming for faulty systems to no more than the purchase price....

A recent Court of Appeal judgement limited the damages a user was claiming for faulty systems to no more than the purchase price. However, suppliers are not off the hook.

In computer contract disputes, users have been used to having it all their own way. Take the case of Salvage Association versus CAP. Damages of about £650,000 were awarded to the user (Salvage Association). A similar amount was paid as damages by ICL when St Albans City and District Council took it to court.

And in one of the more recent cases, decided at the end of 1999, that of Pegler versus Wang, Pegler was awarded a massive £9m in damages, despite having only paid £1.1m for its system. The only reason that Pegler was not awarded the full £22.9m it was claiming was because it had kept inadequate records. The case is a salutary tale for claimants, since Pegler's management had failed to keep proper records of the extra time its staff had had to put in because the system provided by Wang was inadequate.

It has been said that the most recent case - that of Watford Electronics versus Sanderson, decided on 23 February 2001 - changes all that. Fortunately for users, that is not so. If you look at the facts of the case, they give suppliers rather less comfort than they would like.

The case was decided in the Court of Appeal and centred around the validity of a limitation of liability clause. The clause, not uncommon in a computer contract, purported to limit the value of any claim from the purchaser of the system (Watford) to the price paid by it.

Watford's claim, which had been successfully upheld in the lower court, was for £5.5m. This figure included a substantial element for loss of profits, and the additional costs of working caused by a non-functioning computer system. The judgement of the Court of Appeal rested on the issue of 'reasonableness'. The court found that the limitation of any claim to the contract value, in this case £104,000, was reasonable and so a valid limitation of liability.

This was quite possibly the first time ever that the court has found in favour of a supplier in such a case. It is therefore prudent to examine just how much comfort contractors might take from it. Essentially, the case does not necessarily limit a supplier's liability to the price a customer pays for a system because part of the reasons for the Watford versus Sanderson decision were as follows:

  • Watford was itself a computer supplier and therefore relied less upon Sanderson than might usually be the case

  • Waford had a similar limitation of liability in its own contract and therefore ought fully to have understood the implications of a limitation of liability clause

It will be interesting to see how this case affects judgements in cases still to be decided, such as that of WH Smith versus Siemens and Fujitsu. WH Smith is suing the two suppliers for a total of £4.5m. The case arises out of an alleged failure to deliver a software application and database system. That case would seem to be different from the Watford case on a number of grounds, not least if WH Smith is able to prove, as it alleges, that it relied on a "guarantee" from Siemens that its sizing calculations for WH Smith were accurate.

Dai Davis is a chartered engineer and solicitor, and a consultant at law firm Nabarro Nathanson.
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