Case No. DMC/E-c/01/01

The Facts
Sanderson, a software products systems supplier, contracted with Watford Electronics in 1992 to supply Watford with certain software systems for marketing and accounting purposes. The software was supplied under a contract based on the standard trading conditions of Sanderson. These terms included clauses by which:
a) neither party would be liable to the other for claims for indirect or consequential losses whether arising from negligence or otherwise;
b) the supplier’s liability under the contract would not exceed the price paid by the customer for the supply.
These clauses were recognised to be a common feature of software supply contracts at that time. The contract also contained an additional clause by which Sanderson committed ‘to their best endeavours in allocating appropriate resources to the project to minimise any losses that may arise under the Contract’.

The systems were installed in early 1993 but did not perform satisfactorily. Despite the intervention of a third party expert, problems with the systems continued until, in 1996, Watford decided to replace it with a new system from a different supplier. Between 1992 and 1996, Watford had paid Sanderson a total of £104,596 for equipment and licence fees.

The Judgment
The appeal court held that the purpose of term a) above was to exclude liability for losses that could be claimed under the ‘second limb of the rule in Hadley v. Baxendale [1854] 9 Exch.341, 354, (namely) losses which do not result "directly and naturally" from the breach of contract but which, nevertheless, were or must be reasonably supposed to have been, in the contemplation of the parties at the time the contract was made, the probable result of the breach’. Contrary to the opinion of the Judge at first instance, term a) did not exclude claims in respect of pre-contractual misrepresentations.

The purpose of term b) was to limit liability for breach of warranty in respect of the supply, in the context of Sections 53(2) and (3) of the Sale of Goods Act, 1979, by pegging the value which the supply would have had, had the warranty been fulfilled, to the price paid by the buyer.

The Judge at first instance had erred in under-estimating the importance of the additional ‘best endeavours’ term that Sanderson had agreed, since it could give rise to a liability for ‘all losses’ incurred by Watford – including indirect and consequential losses.

The Judge was also incorrect in treating Watford’s own Standard Terms & Conditions of business as irrelevant. They contained a term very similar to term a) and a further provision that "the Company’s prices are determined on the basis of the limits of liability set out in this Condition." The relevance of these provisions was that they showed that Watford were "well aware of the commercial considerations which lead a supplier to include a provision restricting liability for indirect or consequential loss and……that a supplier was likely to determine the price at which it was prepared to sell its products by reference to its exposure to risk of unquantifiable claims to indirect or consequential losses which might be suffered by the customer if things went wrong".

Where parties "of equal bargaining power negotiate a price for the supply of product under an agreement which provides for the person upon whom the risk of loss will fall… the court should be very cautious before reaching the conclusion that the agreement which they have reached is not a fair and proper one……Unless satisfied that one party has, in effect, taken unfair advantage of the other – or that a term is so unreasonable that it cannot properly have been understood or considered – the court should not interfere."

In the present case, "Sanderson did not take unfair advantage of Watford and Watford did understand and consider the effect of the term excluding indirect loss."