The case of Watford Electronics

The case of Watford Electronics Ltd v Sanderson CFL Ltd was brought in the Court of Appeal before Lord Justice Peter Gibson, Lord Justice Chadwick and Mr Justice Buckley on 5, 6; 23 February 2001. The first order was given on 27 July 2000 made by His Honour Judge Thornton QC on the hearing of the initial issues in the Technology and Construction Court of which the defendant, Sanderson CFL Ltd appealed, granted on 27 October 2000 by Lord Justice Simon Brown.

The claimant, ‘Watford Electronics Ltd’ (Watford), founded in 1972, was a family owned business that specialised in selling computer products and electronic components essentially by mail order, but also through two retail shops. Watford’s expertise was in personal computers for academic, business-related and personal use and in 1992 they had a monthly turnover of around £1.5 million.

The defendant, ‘Sanderson CFL Ltd’ (Sanderson), a subsidiary of Sanderson Group PLC, supplied systems and computer software products, but especially ‘Mailbrain’, a particular software package that dealt with database marketing, telemarketing and wholesale order processing and could be used in conjunction with mail order processing and also ‘Genasys’, another product sold by Sanderson that was an integrated suite of financial accounting packages used for purposes such as payroll and purchase and nominal ledgers. In 1992 Sanderson had a turnover of around £4 million, however the Sanderson Group PLC had a turnover of around £60 million.

Watford approached Sanderson in April 1992 after moving to new premises in Luton to accommodate the expansion of the business and discovering the call for a new integrated system. The new system was intended to process mail orders, stock control and retails sales, and deal with accounting functions in order to control and assist the expansion of the business.

Watford’s technical director, Mr Shiraz, and Sanderson’s sales manager, Mr Paul Broderick, held negotiations in the summer of 1992. This resulted in the parties committing to three contractual documents. These contracts included a sales contract, a software license and a software modification license.

“...documents, under a common reference 1078-92, were: (i) a sales contract for the supply by Sanderson of eight items of equipment at a total price of £15,508; (ii) a software license in respect of Mailbrain and Genasys products, at an initial license fee of £70,260 and, thereafter at an annual license fee of £14,231; (iii) a software modification license, covering a certain “bespoke" modifications set out in a letter of 29 September 1992 and training, at an initial license fee of £3,250."1.

Each of these documents was dated 9 October 1992 and included an explanation of the equipment/license and a determining sentence binding the contracts to a set of terms and conditions. These contractual documents were signed by both parties, by Mr Jessa on behalf of Watford and by Mr Arlidge on behalf of Sanderson.

The “Terms and Conditions of Sale" printed on the reverse of the contract contained a ‘Warranty and Limit of Liability’ in clause 7 and an ‘Entire Agreement’ in clause 14. These stated:

“14. Entire Agreement

The parties agree that these terms and conditions (together with any other terms and conditions expressly incorporated in the Contract) represent the entire agreement between the parties relating to the sale and purchase of the Equipment and that no statement or representations made by either party have been relied upon by the other in agreeing to enter into the Contract.

7. Warranty and Limit of Liability

7.1. The Company warrants that the Equipment will perform in accordance with its specification . . . 7.2. The Company and the Customer agree to indemnify each other against any liability arising in respect of injury (including death) to any person or loss or damage to any property which results from the act, default or negligence of itself, its employees, agents or subcontractors.

7.3. 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."1

Likewise, these statements were printed in the “Terms and Conditions of Software License", which appeared on both software license and software modification license at clauses 15 (Entire Agreement) and clause 10 (Warranty and Limit if Liability).

Sanderson also added in addition to clause 7.3 an addendum that stated:

“In addition to Clause 7.3, Sanderson CFL Ltd commit to their best endeavours in allocating appropriate resources to the project to minimise any losses that may arise from the Contract."1

Addenda to clauses 10.6 of the software license and software modification license were made to the same effect.

Both Watford and Sanderson were of equal bargaining power and Mr Jessa, on behalf of Watford, negotiated the asking price of Sanderson down.

In February 1993 the systems bought by Watford from Sanderson were put into force but it was reported it did not work to Watford’s satisfaction. Although Sanderson held meetings and visits to identify the problem, a third party, Bull Information Systems Ltd, recommended an upgrade to a “Bull DPX/20". Following this advice therefore led to an additional two contracts being engaged between Watford and Sanderson, dated 30 August 1993;

“One was a sales contract for the supply of the Bull mini-computer, with peripherals, at a price of £28,211. The other was a software licence, for which the price was £2,176"1

These contracts were bound by the same terms and conditions as the previous contracts.

According to the report, “the total paid by Watford to Sanderson for equipment and in licence fees between 1992 and 1996 amounted to £104,596"1. However, problems persisted within the system and therefore Watford replaced the system with a new system from a different supplier.

“Watford sought redress from Sanderson"1.

Proceedings began in 1998 for damages. Watford claimed they were induced to sign the contractual documents produced in October 1992 as a result of misrepresentation (including false representation of the Mailbrain product shown in the brochure) and that Sanderson were in breach of all contracts and negligence. These included:

“(i) warranties in the same terms as the pre-contract representations, (ii) a term that the computer system recommended by Sanderson would be of merchantable quality and reasonable fit for the purposes for which it was supplied, (iii) a term that Sanderson would use the skill and care reasonably to be expected of experts in the performance of the contact, and (iv) a term that Sanderson would remedy any defect which became apparent within a reasonable time so as to allow Watford's business to continue without interruption."1

Finally Watford claimed Sanderson would have a common knowledge that they would rely upon its expertise and therefore Sanderson “owed a common law duty of care to use skill and care in making its recommendations and in performing the contract induced by those recommendations. There follow allegations of the breach of the alleged contractual duties and of the alleged negligence. “1

Watford alleged that the system was delivered late, not capable of the needs required of Watford and when failing, Sanderson did not remedy the deficiency within a ‘reasonable’ time.

Watford’s claim against Sanderson for damages for breach of contract was sectioned into three headings;

“(i) a claim for loss of profits – said to be measured by a “depression of turnover" – in the amount of £4,402,694; (ii) a claim for damages arising from the increased cost of working – that is to say, from the failure to make savings in staff time and the additional costs incurred in attempting to operate the defective system – in the amount of £996,063; and (iii) a claim for the cost of mitigating the continuing losses equal to the cost of acquiring and installing alternative software in 1996, in the amount of £119,204.

The whole amount of the contractual claim is a little over £5.5 million."1

Alternatively the claim under the Misrepresentation Act 1967 damages amounted to £104,596, the cost of the system from Sanderson, and cost of working fees totalling £996,063. Sanderson relied upon the fact if the Unfair Contracts Terms Act applied, its clauses 7.3 and 14 would be seen reasonable.

The trial was seen in the Technology and Construction Court by His Honour Judge Thornton QC on the 27 July 2000 (Watford Electronics Ltd v Sanderson CFL Ltd - [2000] All ER (D) 1145);

Sanderson appealed on the issue that;

“clauses 7.3 and 10.6 of the relevant terms and conditions were unreasonable in their entirety under the Acts of 1967 and 1977 and could not be relied upon by Sanderson to exclude or restrict its liability to Watford or to impose a limit on any such liability."1 The case was then taken to the Court of Appeal before Lord Justice Peter Gibson, Lord Justice Chadwick and Mr Justice Buckley on 5, 6; 23 February 2001. The appeal was allowed.

Detailed Explanation of the Decision

Technology and Construction Court, held before His Honour Judge Thornton QC on the 27 July 2000.

The matter for the judge was put in these conditions:

“Are the defendant’s written terms [contained in clauses 7.3 and 10.6] reasonable under the Unfair Contract Terms Act 1977 and the Misrepresentation Act 1967?"1

The view on this was no due to the clauses being;

“unreasonable in their entity… and cannot therefore be relied upon by the defendant to exclude or restrict its liability to the claimant or to impose a limit on any such liability." 1

His Honour Judge Thornton used the aid of the guidelines set out in schedule 2 to the Unfair Contract Act 1977 to assess the reasonableness of the clause, these guidelines are;

“(a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer's requirements could have been met;

(b) whether the customer received an inducement to agree to the term, or, in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term;

(c) whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties);

(d) where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable;

(e) whether the goods were manufactured, processed or adapted to the special order of the customer"1

He excluded paragraph (d) as it had no significance where reasonableness was questionable.

From this he made a number of conclusions. His Honour Judge Thornton found; both parties were equal in their bargaining power and there was no force to contract with each other, particularly; “Mr Jessa [for Watford] was a skilled and reliable negotiator who successfully negotiated the asking price downwards during his inevitably protracted discussions with Mr Broderick [for Sanderson]."1

He realised that the prices in this type of market were competitive and negotiable.

However, despite this Sanderson’s terms were “inflexible and non-negotiable."1 and only agreed to offer the “virtually meaningless addendum"1 addition in the contract which made it a requirement to use best efforts if there was any problems. Mr Broderick gave evidence that in this industry, it was normal to exempt all or almost all liability when providing software packages, without giving any service if any faults or breaches of terms occurred. Therefore Watford would not have found a similar package with better terms of liability. He also found that there were other mail order packages available to Watford, but none of them would satisfy Watford’s needs like the ‘Mailbrain’ intended.

With regards to whether Watford received an inducement to agree the term, the judge found that this was not the case. He rejected the argument from Sanderson,

“that the price reduction was negotiated on the basis that Sanderson would accept a lower price if Watford would accept the term limiting liability."1

The judge held that Mr Jessa knew about the contract term, learning only of its presence near the end of their pre-contact discussions. When he then tried to have the contract amended he was only successful in gaining a ‘make-weight’ amendment and gained knowledge from Sanderson that in the software industry it was ordinary that a term would dismiss liability.

Finally, in respect to paragraph (e), His Honour Judge Thornton found that the modifications made to the system and the need of the software modification license were “an inevitable part of the process of implementing and configuring the system"1.

The judge then spoke of the matter of insurance, which must be regarded under section 11(4) of the 1977 Act. Sanderson held no insurance cover “in respect of liability for indirect and consequential losses arising from the defective performance of the Mailbrain product."1 However it was found that such cover was available. Therefore Sanderson knowingly chose to not hold insurance and instead “to exclude it’s liability for consequential losses"1.

The judge held that the relevant contract term was unreasonable, with reference to considerations given by Watford to support its argument. He found that Watford had not been given any solutions for all of Sanderson’s breaches of contract. He held that Watford was dependent on Sanderson’s advice and representations. He found that the faulty performances had a significant effect on Watford and that Sanderson had guaranteed Watford that the system would perform purposefully.

To conclude, the judge summarised that “Sanderson had not established that the relevant contract term was reasonable."1 He stated;

“... Sanderson has materially failed to perform its contract obligations. I accept the factors stressed by Watford as being ones which make it unreasonable for Sanderson to rely on the clause. It is, therefore, one which may not be relied upon in relation to any of Watford’s pleaded allegations or claims."1

To this Sanderson successfully appealed and the case was taken to the Court of Appeal.

Court of Appeal before Lord Justice Peter Gibson, Lord Justice Chadwick and Mr Justice Buckley on 5, 6; 23 February 2001

Appearing for Sanderson CFL Ltd in Court was ‘Mark Raeside’ and appearing for Watford Electronics Ltd was ‘Peter Irrin’.

The Court used the guidance of Lord Bridge of Harwich in George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803 to determine the way that they should review a lower court’s decision. Lord Bridge said that “The appellate court should treat the original decision with the utmost respect and refrain from interference with it unless satisfied that it proceeded upon some erroneous principle or was plainly and obviously wrong."1

The court held that it would be necessary to firstly identify the scope and the effect of the relevant contract term, to decide whether this term was fair and reasonable. It is necessary to find out “Whether or not a contract term satisfies the “requirement of reasonableness" within the meaning of section 11 of the Unfair Contract Terms Act 1977 does not fall to be determined as in isolation. It falls to be determined where a person is seeking to rely upon the term in order to exclude or restrict his liability in some context to which the earlier provisions of the 1977 Act (or the provisions of section 3 of the Misrepresentation Act 1967) apply."1

Clause 7.3 in the Terms and Conditions of Sale and clause 10.6 in The Terms and Conditions of Software License each have two sentences “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."1 The court held that the reason that these clauses had two sentences was that they are both to be treated as separate from one another with their own meaning. The court held that the judge’s decision of not considering these sentences as separate was wrong.

Section 53(7) of the 1979 Act states that “the difference in the value of the goods is only a prima facia measure of the damages for breach of warranty of quality."1 If the buyer can prove that the seller had knowledge that a breach of the warranty would give rise to such losses, then they can claim for loss of profits. This was the case in Hadley v Baxendale [1854] 9 Exch 341, 354; Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528, 539; Cullinane v British “Rema" Manufacturing Co Ltd [1954] 1 QB 292, 301.

The first sentence in the clause is to rule out contractual claims for indirect and consequential losses. The court found that the judge was wrong to reach the conclusion that “the clause was intended to exclude claims in respect of pre-contractual misrepresentations."1

The court also took into consideration the entire agreement clause. Clause 14 in the Terms and Conditions of Sale and clause 15 in the Terms and Conditions of Software Licence are also split into two parts. The second part states that “no statements or representation made by either party have been relied upon by the other in agreeing to enter into the contract."1 This non-reliance was considered in this court in Grimstead (EA) & Son Ltd v McGarringan 27 October 1999 (unreported). The judge held that “Sanderson could not rely on the acknowledgement of non-reliance contained in the second part of the entire agreement clause."1

The court found a number of errors in the judge’s decision. The first error that they found was that the fact that the judge did not identify the scope and effect of the limit of liability clause. Therefore did not address the right questions. The court held that they thought the effect of the limit of liability was more limited than the judge found.

The judge thought that the effect of the clause was “to deprive Watford of the opportunity to recover any damages in circumstances in which... there have been significant failures accurately to represent the features of the software and to comply with the contractual requirements as to merchantability and quality."1

The second error they found was that the judge should not have treated the responsibility of the addition to the contractual documents as “virtually meaningless."1 The court found that Sanderson agreed to the addition in the contract “to minimise any losses that may arise from the contract."1

The third error that the court found was the judge’s decision to treat Watford’s own terms of business as irrelevant. The material provisions in clause 10 of Watford’s Terms and Conditions include;

“(i) a restriction on liability, the terms of which are indistinguishable in effect from those of the first sentence of Sanderson’s limit of liability clause which stated “in no event shall the company be under any liability ... from any loss of profit, interruption of business or any other indirect, special or consequential losses..."; and (ii) a clause which explains this restriction.. “The company’s prices are determined on the basis of the limits of liability set out in this Condition.""1

The court held that the judge’s decision to reject the first of these terms, as Watford was prevented from declaring their own standard conditions, was correct and that the Sanderson’s limit of liability clause was not fair and reasonable, but these are not to be seen as irrelevant just because they do not support the disagreement. The court thought that these provisions were relevant and they showed that Watford was fully aware that the seller would provide a price at which it would sell the product with the consequence of suffering from losses if something went wrong.

To conclude, the court stated that “the judge had reached his own conclusion on the wrong basis."1 The court stated that “the parties were at equal bargaining strength; Watford must be taken to appreciate that Sanderson’s decision of the price was likely to affect Sanderson; Watford knew the term and understood it; the product was modified to meet the user’s needs. Lord Justice CHADWICK stated that “It follows as I would hold that the term excluding indirect loss, applicable in the circumstances which I have described, was a fair and reasonable one to include in the contract... I would allow this appeal"1 Mr Justice BUCKLEY states “I agree" and Lord Justice PETER GIBSON states “I also agree."1

Past cases were made reference to within the judgement on this case;

Cullinane v British “Rema" Manufacturing Co Ltd [1954] 1 QB 292;

Grimstead (EA) & Son Ltd v McGarringan 27 October 1999 (unreported);

Hadley v Baxendale [1854] 9 Exch 341;

Lowe v Lombank Ltd [1960] 1 WLR 196;

Mitchell (George) (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983]2 AC 803; [1983] 2 Lloyd’s Rep 272;

Overseas Medical Supplies Ltd v Orient Transport Services [1999] 2 Lloyd’s Rep 273;

The Salvage Association v CAP Financial Services Ltd [1995] FSR 654;

Victoria Laundry (Windsor) Ltd v Newman Industries Ltd [1949] 2 KB 528.

The Implication for I.T. Staff

Watford Electronics Ltd v Sanderson CFL Ltd is a prime example of how IT professionals need to review their contract, in this case computer software contracts, licenses, written standard terms of business, the effect of the ‘entire agreement’ clause and whether limitation of liability clause satisfied statutory requirements of reasonableness.

The judgment in this case is a clear indication to customers and suppliers that the Court will generally be reluctant to intervene in agreements between two organisations of equal experience and bargaining power. Both customer and supplier must review their overall contracts and approach the negotiations of liability clauses and also any other clauses within the terms and conditions that have risks in technology contracts.

“Watford v Sanderson could be seen as indicating a generally non-interventionist approach in commercial contracts between parties of basically equal bargaining power."2

On the other hand this case also shows that the Court will be willing to intervene in a case with poor facts, where the supplier has overstated to the client its ability to meet their requirements whether it was deliberate or reckless.

The decision made also demonstrates that if a customer goes into a contract and accepts the limitations and exclusions put forward without any attempt to negotiate any changes within the terms can be dangerous for them if there is a problem, this results in the Court putting a dim view on the customer for not attempting to negotiate and accept there is a risk within the contract.

The IT professional will need to make sure that any ‘entire agreement’ clause in their agreement includes an acknowledgement by the parties involved that they have not relied on any statement not included in the contract.

From this case IT professionals will need to ensure that the entire agreement clause and also any exclusions and limitations do not exclude them from liability for fraudulent misrepresentations, this avoids the risk of those requirements failing on a legal technicality. If they do decide to exclude liability for negligent misrepresentations they must ensure that the entire agreement clause includes this specifically.

IT professionals have a common law duty of care to provide and use their skills and care in making recommendations and also to exercise all due skill and care in giving professional advice to clients and providing the required expertise to the customer. They will need to consider the consequence if they fail to meet the customer’s requirements and keep to the standards set in the arranged contract whether it is in the functionality of the product, the timescale or the price.

In Watford Electronics Ltd v Sanderson CFL Ltd there were allegations of the breach of the contracts and the alleged negligence, the system recommended and provided by Sanderson didn’t perform satisfactory and was delivered and installed late. The system then had a number of occurring problems and Sanderson failed to meet Watford’s complaints or to rectify the problems within a reasonable time, leading Watford to replace the system with a different supplier and have considerable losses for the company.

It is unreasonable for suppliers to put in their terms and conditions within a contact a limit or to restrict their liability and exclude them from any indirect or consequential losses whether they arise from negligence or otherwise, as in this case a clause in the contract limited Sanderson’s liability to the amount paid by Watford for the equipment and the software concerned it also excluded liability for any losses recoverable.