A recent landmark Court of Appeal judgment has held, for the first time, that it is reasonable for a software supplier to contractually limit its liability to a user in the event of any subsequent claim made by the user. The Court of Appeal made its finding even though the relevant limitation of liability clause was contained within Sanderson Group's standard terms and conditions of business. The court found that, with regard to the relevant factors under Schedule 2 of the Unfair Contract Terms of 1977, it was reasonable for Sanderson to limit its liability.

The case is a significant departure from previous authority, where it was not possible for a supplier to limit liability in this way. Oft-cited cases, including South West Water v ICL, Pegler v Wang and St Albans v ICL, have all previously found that attempts to limit liability in this way were unreasonable.

In reaching its decision, the Court of Appeal took into consideration certain key matters, in particular: that the contract was agreed and negotiated by an experienced user and an experienced supplier, between which there was no inequality of bargaining power or bargaining skill; that the user was well aware of the existence and significance of the clause contained within the contract, which sought to limit the supplier's liability, so the user negotiated with the supplier an amendment to the clause; and that the user had a similar clause in its terms and conditions, and as a consequence the user was well aware of the commercial considerations which led the supplier to include a provision restricting liability.

The court therefore concluded that unless one party had effectively taken unfair advantage of the other, or a term was so unreasonable as plainly not to have been understood or considered, the clause was reasonable. The case will undoubtedly be welcomed by suppliers, since it represents a significant change in approach by the courts and will give suppliers, in the right circumstances, some certainty as to their exposure when a claim is made for breach of contract.

In conjunction with the decision in Anglo Group plc v Winther Browne last year, in which the court found, for the first time, that there were to be implied certain terms in contract made between a supplier and user relating to, among other things, duties of cooperation and duties upon the user to notify the supplier of any particularly special needs when purchasing standard packaged software. The supplier's position in defending claims, then, has been enhanced.

A supplier intent on maximising its position as a result of the case to ensure that its own similar limitation of liability clauses are upheld by the courts will need to ensure, at the very least, that the contracted user is of equal bargaining strength and skill, and that the user is aware of the existence of any relevant contractual term seeking to exclude or limit liability and understands what the implications of the term are. If the user has similar clauses in its contractual terms and conditions, this will enhance the prospects of the supplier's clause being upheld as reasonable. Suppliers that contract simply on the basis of standard terms and conditions and on a "take it or leave it" basis, where there is no negotiation, will almost certainly continue to find that clauses seeking to limit or exclude liability fall foul of the reasonableness test under the Unfair Contract Terms Act 1977.

Undoubtedly, the case will be welcomed by suppliers. Where the facts are the same or substantially the same as those in Sanderson v Watford, suppliers could save significant sums of money in terms of legal fees, damages and insurance premiums, and will also make huge savings on management time in dealing with claims. The case should also be welcomed by the industry as a whole as it should, in conjunction with Anglo Group plc v Winther Browne, discourage claims that might otherwise have been made. At the very least, the combined effect of the two cases should encourage an earlier dialogue between supplier and user in the event of a dispute – something that can only be welcomed.

Fran Davie is a partner at DLA and acted on behalf of the Sanderson Group