Extended liabilities

As the party season approaches, computer lawyers have been rehearsing their chat-up lines in front of the mirror and practising their dance routines. But this year we sad people have something new to talk about at Christmas parties – the High Court's decision in St Albans City and District Council v ICL on the limitation of liability in computer contracts.

Billions of pounds of computer products and services

are supplied on suppliers' standard terms of business; the limitation of liability clauses in those contracts are often a supplier's last line of defence in the event of a claim by a disgruntled customer.

Lawyers in the computer industry have long drafted and negotiated contracts comfortable in the knowledge that:

IT projects involve shared responsibilities and shared risk for customer and supplier alike;

customers are free to make their own bargains even if that involves signing a supplier's standard contract;

the courts will not intervene in contracts made between mature business people;

clauses excluding consequential loss are reasonable in standard contracts, because consequential loss is difficult to insure, and a supplier is not an insurer of the customer's business; software is not 'goods' under the Sale of Goods Act 1979.

Each of these assumptions has been shaken by the St Albans decision.

On 3 October 1994, Mr Justice Scott Baker gave judgment of u1,314,846 in favour of St Albans against ICL for breach of contract. In 1990, ICL had supplied St Albans with a community charge system (COMCIS) which contained a software error. COMCIS calculated that there were 2,966 more people eligible to pay the charge than lived in St Albans. As a result, the charge was set too low, and there was a shortfall in central government support to St Albans. St Albans brought proceedings to recover these losses.

The court held that ICL had a duty to provide software that would maintain a reliable database of the names entered on the community charge register, accurately count the names, and accurately retrieve and display the figures resulting from the count. It had to be reasonably fit for the purpose of maintaining and retrieving a reliable register. Those duties were created by the invitation to tender and the tender itself, which were contract documents. The court found that ICL was in breach of contract because COMCIS had produced erroneous figures for the population return to the Department of Environment.

The court also concluded that software was goods for the purpose of the Sale of Goods Act 1979. The act implies conditions of fitness for purpose and merchantable quality into contracts for the sale of goods.

The court ruled it unnecessary to decide the point because of the decision concerning breach of ICL's express duties created by the invitation to tender and the tender itself.

ICL relied on its standard terms of business which limited ICL's liability to u100,000.

Applying the Unfair Contract Terms Act 1977 (UCTA), the court held that ICL had not satisfied the reasonableness test. In reaching that decision, the court took into account a number of factors:

The parties were of unequal bargaining power – ICL was one of a limited number of companies which could meet St Albans' requirements; ICL was therefore in a very strong bargaining position.

ICL's resources to meet any liability – ICL was a very substantial international company with ample resources to meet any liability.

ICL's failure to justify the figure of u100,000, which was small in relation to the potential risk and the actual loss.

ICL was insured for losses of up to u50 million.

It was fairer that the loss should fall on ICL, which could pass insurance premiums on to customers, than St Albans, which would have to pass the loss on to the local population.

Before the case, most lawyers assumed that well drafted limitation of liability clauses in standard terms of business would be upheld; after the case, that is a dangerous assumption to make.

We can expect to see more claims against computer suppliers with more companies taking out professional indemnity cover. This will mean higher levels of cover, higher premiums and higher limits of liability in computer contracts and more work for lawyers.

Finally, a handy tip for when you find yourself trapped talking to a boring stranger at a Christmas party – tell them you are a computer lawyer.

John Yates is a partner at Oxley & Coward.