WATFORD ELECTRONICS AND SANDERSON response

I read with great interest and some surprise 'Bar Talk' in the 2 April issue of The Lawyer.

The article painted a rosy picture of a secure future for software suppliers, their liability safely protected by standard limitation clauses.

Unfortunately, the article appears to have overlooked some significant aspects of the Court of Appeal's decision.

The main reason that the appeal was successful was that Lord Justice Chadwick came up with a new point which had not been argued at first instance or on the appeal itself. This was that the limitation clause in question did not, as a matter of construction, cover claims for misrepresentation.

Up to that point, the case had proceeded on the basis that the limitation clause covered all forms of liability, including misrepresentation. It was principally for this reason that the judge at first instance had found it to be unreasonable, despite the existence of some of the other factors mentioned in the article, such as the equality of bargaining power of the parties and the appreciation by the purchaser that the clause was there.

Judge Chadwick's narrow construction of the clause resulted from the existence of an entire agreement clause in the standard terms, which purported to exclude pre-contractual representations.

It had been held at first instance that the entire agreement clause did not prevent Watford Electronics bringing claims for misrepresentation and negligent misstatement and this point was not appealed. Judge Chadwick held that it would be extremely difficult to succeed in raising an estoppel based on the entire agreement clause in circumstances where a representation or statement had been made which was intended by the supplier to be relied upon by the purchaser.

The costs order against Sanderson in the court of first instance was not set aside, and Sanderson recovered only part of its costs of the appeal. The misrepresentation and negligent misstatement claims against Sanderson remain and are unlimited.

Software suppliers will have to think extremely carefully when framing such clauses in the future if they wish to have any hope of limiting liability for claims of misrepresentation or negligent misstatement. It will probably be necessary to select a reasonable figure capping the liability for misrepresentation. What software suppliers will not be able to do with impunity is to make extravagant claims for the functionality of their systems and benefits which will be conferred by them. In appropriate circumstances they may be able to limit liability in contract to the cost of the system. But this will not prevent claims for damages based on misrepresentation in excess of the contractual limit. Such claims may well include loss of profit where the purchaser can show that the profitability of his business has been damaged by having to persevere with the unsuitable system, whereas he could have had a suitable one from an alternative supplier. To this extent the Anglo Group and Winther Browne decision, which in effect requires a purchaser to persevere for a time to enable the supplier to sort out problems, may work against the supplier by increasing the damages for which it may be liable if the system eventually has to be scrapped.

Another interesting feature of the Watford v Sanderson case, and one which also influenced the Court of Appeal's decision, is that Sanderson had included a "best endeavours" clause at the request of the purchaser, in order to mitigate the effect of the limitation of liability clause. This too was held to be unaffected by the limitation clause and consequently Sanderson remained liable to an unlimited extent for any breach of this clause which may be established at the eventual trial.

Dhiren Arya is a consultant at Needleman Treon and acts on behalf of Watford Electronics