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High Court rules software liability clause not 'reasonable'

Supplier should have given more appropriate demo

A software company's stipulation that customers could not take action against it for the poor performance of its software was unfair and could not be enforced, the High Court has said.

The software company should have alerted its customer to problems with the product when demonstrating it and chosen more demonstrations for it that more closely matched the customer's own business requirements, the Court said.

Red Sky sold hotel management software to London's Kingsway Hall Hotel but the Hotel found problems with it almost straight away.

It eventually rejected the software and found a replacement, then sued Red Sky because of the business it said it had lost because of the software's faults and because of the extra staff it said it had had to employ to cover for its failings.

Red Sky tried to rely on a clause in its standard terms and conditions which said that the only remedy available to customers if the software did not perform as advertised was to make use of its maintenance and support functions.

It said that this clause meant that Kingsway could not sue it for a refund on the software or for the additional costs it incurred as a result of its failings.

The High Court disagreed and said that Red Sky's clause was unfair under the Unfair Contract Terms Act. It said that this Act applied and protected Kingsway because negotiations between the companies had been one-sided on the issue of liability.

Red Sky said that its exclusion of liability was permitted by that law because it was 'reasonable' as defined in Section 11(1) of the Act. It says: "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."

The judge said that the exclusion of liability was unfounded because of the particular way in which the software sale had been conducted. The fact that a full set of operating documents for the software had not been provided and the fact that Kingsway made its purchasing decisions largely based on Red Sky's claims for the software eroded Red Sky's ability to limit its liability, the Court 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," said the ruling. "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," it said. "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 Honour Judge Toulmin also said that the software was not up to the tasks that Kingsway needed to use it for, and which Red Sky should have known were part of Kingsway's needs when buying the product.

"Pursuant to … 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," he wrote. "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," he said.

Kingsway had every right to reject the software and to claim damages. It was awarded damages for lost profits and loss of goodwill; for the cost of the software; and for the additional staffing costs incurred because of the software problems.

The Court awarded a total of £110,997.54 in damages to Kingsway.

Tom Greenbank of Pinsent Masons, the law firm behind OUT-LAW.COM, said that the case underlines to software publishers that they need to be careful how they sell their products and make sure their processes are precise if they want to claim that the buyer is responsible for choosing the product.

"If your contract is drafted to push the risk of selecting the solution onto the customer, make sure you supply the customer with all the information that the contract says you will supply in order for them to make an informed choice," he said.

If a software publisher wants to make a customer responsible for product choice it has to give the customer a fair chance of assessing the product, Greenbank said.

"When demonstrating a software product, select a demonstration or reference site that shows the software being used in a similar environment to your customer's," he said. "In this case the judge found that the demonstrations were 'incomparable' and failed to show the potential problems and limitations of the software and how to deal with them.

"This may appear harsh to a vendor in a competitive environment who will inevitably be reluctant to reveal weaknesses in its products, but if you have an off-the-shelf product with a large reference customer base you should make sure you are demonstrating a use of it that is similar to your potential customer's," he said.

Earlier this year the High Court ruled that EDS had lied about its software when selling it to BSkyB and awarded interim damages of £270m against the software supplier.

The IT industry feared that the result would make it harder to make claims for software, but the Court said that EDS's fraudulent misrepresentation was down to the conduct of one employee, not the whole firm. Experts said that this made it less likely that IT suppliers would overhaul the way they sold their systems.

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OUT-LAW.COM is part of international law firm Pinsent Masons.

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