Unreasonable Liability Clause

The High Court has ruled that a clause in a software contract to the effect that customers could not take any action against it for the poor performance of the software was unfiar and thus could not be enforced.

Red Sky, a software company sold hotel management software to London’s Kingsway Hall Hotel. Unfortunately there were a number of problems with the software, eventually the hotel rejected the software and found a replacement. The hotel then issued proceedings against Red Sky for loss of business as a result of the software not performaing as advertised. Red Sky attempted to rely on a clause in its standard terms and conditions which said that where software did not perform as advertised then the customer was to use Red Sky’s maintenance and support functions – this was their only remedy under the terms.

As a result of this clause Red Sky claimed that the hotel could not sue it for a refund or additional damages in respect of loss of business etc. However the High Court disagreed and determined that the afforementioned clause was unfair under the Unfair Contract Terms Act. Red Sky argued that the exclusion of liability was ‘reasonable’ as per Section 11(1) of the Act i.e. “The term shall have been a reasonable one to be included having regard to the circumstances which were or ought reasonably to have been known to or in the contemplation of the parties when the contract was made”. However the court disagreed, simply due to the way in which the software sale had been conducted a full set of operating documents had not been provided to the hotel and thus their decision as to whether to purchbase the software was made on the basis of Red Sky’s description of the software and their claims regarding it.

Judge Toulmin said:

“Red Sky’s’ standard terms were predicated on the fact that a prospective customer would investigate Entirety [the software] and make up its own mind whether or not to purchase based on demonstrations and the Operating Documents which Red Sky had previously supplied…It did not apply to circumstances in which the customer relied on Red Sky’s’ advice in deciding to purchase Entirety…The exclusions in clause 10.2 [of the terms and conditions] only applied where the Operating Documents as defined in Clause 1.1.6 were supplied to the customer before the contract was signed…In this case such documents were not supplied by Red Sky to Kingsway. Therefore, Clause 10.2 and the exclusions derived there from did not apply.”

His view was that the software was not up to the task that the hotel needed it for (which Red Sky should have known), under the “Sale of Goods Act 1979, a term is to be implied into the contract that Entirety would be fit for the purpose for which it was bought, namely that the system would increase revenue and occupancy levels and would allow quicker check-in and check-out, including accurately processing groups and making changes to group reservations while preserving the accuracy of the system…I am satisfied that Entirety was not fit for the purpose for which it was sold…Pursuant to Section 4 of the Supply of Goods and Services Act 1982 a term is to be implied into the contract that the goods were of satisfactory quality. Entirety did not meet the standard that a reasonable person would regard as satisfactory, taking into account any description of the goods, the price and all other circumstance so as to satisfy … [the] Act,”.

The hotel was awarded damages of £110,007.54 for lost profits, loss of goodwill, the price of the software and additional staffing that were needed as a result of the software problems.

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