Most of us are familiar with the legal principle of caveat emptor or ‘let the buyer beware’.

It means simply this: the courts are reluctant to interfere with contracts agreed between parties of equal bargaining power. Which is another way of saying that customers who may be disadvantaged by inexperience or ignorance are expected to equip themselves accordingly, to ensure they get what they want, and at a fair price.

During the 1990s, in a series of IT related disputes, the courts seemed to move away from this principle. They began applying the Unfair Contract Terms Act 1977 (UCTA) in a manner which became increasingly pro-customer. What began with St Albans District Council v ICL reached its zenith in Pegler v Wang in 2000.

Then in 2001 the Court of Appeal decided in Watford v Sanderson that experienced business people at companies of equal bargaining power are the best judges of the fairness of any agreement they reach. Caveat emptor returned and there’s been a marked judicial reluctance ever since to intervene in agreements between commercial organisations of any size.

That was until two cases from last year: BskyB v EDS and Kingsway v Red Sky IT Ltd. These cases show that the Court will still step in where a supplier deliberately mis-sells (or even just over-sells) its capabilities. They’re a salutary lesson for companies which employ highly targetted sales staff. And in the IT sector, that means just about everyone. Here’s a summary of the two cases.

BSkyB v HP Enterprise Services Ltd (formerly EDS)

In 2000 EDS won a £48 million contract to design and implement a new CRM system for BSkyB. After numerous problems and two renegotiations the project was eventually delivered more than five years late and at a total cost of around £265 million.

BSkyB sued EDS for £700 million, claiming additional implementation costs, wasted management time and loss of anticipated savings.

The contract capped EDS’s liability at £35 million, which BSkyB didn’t challenge under the usual UCTA test of reasonableness. Instead it claimed EDS had fraudulently misrepresented its ability to deliver the project on time and on budget. These misrepresentations, so BSkyB argued, had led it to select EDS ahead of competing bidders.

EDS denied most of the alleged misprepresentations, admitting to some but arguing they were not fraudulent and so were excluded by the entire agreement clause in the contract (which stated that the contract “supersed[ed] any previous discussions, correspondence, representations or agreement between the parties”). It also argued that BSkyB’s claim of fraud was a legal fiction introduced by its lawyers to circumvent the contractual limitation of liability provisions.

The Court held that although the entire agreement clause did prevent incorporation of pre-contractual representations into the contract it didn’t prevent BSkyB  claiming reliance on pre-contractual representations in bringing a non-contractual claim for misprepresentation. If the parties had intended to preclude this as well, then the clause should have said so with an acknowledgment of non-reliance (in other words, withdrawing representations for all purposes).

In a damning judgment the Court held that EDS had indeed fraudulently misrepresented its ability to meet BSkyB’s timescales. An internal EDS risk review prior to contract signature had stated that milestones were not achievable and that “none of the team interviewed believe that a solution can be delivered [within the timescales required] that is likely to meet the totality of the client requirement.” Despite these warnings EDS’s divisional head, Joe Gallaway, repeatedly assured BSkyB that EDS could deliver the project on time and on budget. In the Court’s view he had “proferred timescales which he thought were those which [BSkyB] desired, without having a reasonable basis for doing so ... He knew that no proper analysis of time had been carried out and he knew that he had no basis for saying that [the timescales could be achieved] ... His conduct went beyond carelessness or gross carelessness and was dishonest.”

EDS’s case was further compromised when Mr Galloway perjured himself while giving evidence. In the course of establishing his credentials he claimed to have an MBA from ‘Concordia College’ in the British Virgin Islands. BSkyB’s barrister demonstrated in cross-examination that the MBA had in fact been purchased over the internet (illustrating the point by presenting the Court with an MBA from the same college, but this time awarded to his dog, a miniature schnauser called Lulu).

The judgment demonstrates very clearly the potential consequences of a rogue salesman making representations during a bid process which are either plain dishonest or so far removed from what he knows to be reasonable as to be either negligent or fraudulent.

Kingsway Hall Hotel Ltd v Red Sky IT Ltd

Kingsway Hall, a four star hotel in London’s Covent Garden, had for some time used a Red Sky booking and point of sales system which it was obliged to replace when Red Sky withdrew technical support.

Red Sky knew that Kingsway wanted a system which would enable it to increase occupancy and revenue, improve guest service, speed-up check-in and provide better forecasting data. Based on these requirements it advised Kingway to take its Entirety system, which Kingsway duly did, following various demonstrations and a site visit. It licenced Entirety on Red Sky’s standard terms about which there were apparently no specific discussions, save in relation to price. 

Following go-live in October 2006 the system was plagued with a series of faults, including inaccurate information about room availability and group bookings, which caused disruption to hotel operations. Red Sky failed to resolve the problems despite repeated requests over several months. Kingsway subsequently claimed the software was neither fit for purpose nor of satisfactory quality.

Red Sky’s standard contract excluded all implied terms relating to performance, quality and fitness for purpose except as provided in Clause 10.2. This clause stated that the software would “in all material respects provide the facilities and functions set out in the Operating Documents”. The Operating Documents were defined as “such operating documents as may be supplied by [Red Sky] to [Kingsway] in conjunction with the equipment and the Red Sky IT system”. The sole remedy for any breach was limited to maintenance and support. The terms excluded liability for any indirect or consequential loss, and expressly excluded loss of profits and similar losses. Finally, liability for direct loss was limited to four times the total price (agreed to be £70,463).

Red Sky therefore argued that its standard contract excluded the terms implied by the Sale of Goods Act 1979 and Supply of Goods and Services Act 1982 as to satisfactory quality and fitness for purpose. While accepting that s.3 of UCTA applied, it argued that these exclusions were reasonable:

1. 1.The parties were of equal bargaining power, not least because there were over 30 property management systems available in what was a highly competitive market.
   

2. 2.Kingway had received an inducement to agree to the terms in the form of a significant discount and concessions on payment terms.
   

3. 3.Kingsway was an existing customer and so there was a long course of dealing between the parties – Kingsway should have been aware of the exclusions and limitations in the contract.
   

4. 4.This was not bespoke software (although it had been configured for Kingsway) and as it was used by a wide range of customers, the consequences of a breach would differ widely.
   

Kingsway countered that the exclusions didn’t apply because it hadn’t received a copy of the Operating Documents prior to signing the contract. Without these it had no way of knowing whether Entirety was suitable for its requirements. It had relied instead on advice from Red Sky staff who knew Kingsway’s business well and understood what it wanted from a new system.

It also claimed that the exclusions of implied terms in Red Sky’s contract were unreasonable under UCTA.

1. 1.Except for price and payment terms, Kingsway had no bargaining power at all – it had had to replace its old system because Red Sky was withdrawing support and maintenance, and Entirety was an off-the-shelf product offered on Red Sky’s standard terms on a take-it-or-leave-it basis.
   

2. 2.Although Kingsway did bargain on price, there was no evidence that it had received any inducement to agree to Red Sky’s standard terms (which conferred no benefit on the customer).
   

3. 3.There was no evidence that Kingsway knew of the existence of the exclusions in Red Sky’s contract.
   

4. 4.Red Sky were experts in the supply of this sort of software and were in the best position to assess the likelihood of defects and their consequences.
   

The High Court agreed with Kingsway. It held that Red Sky’s standard terms were predicated on a prospective customer buying off-the-shelf software which it could judge for itself to be suitable through access to the operating documents and attendance at demonstrations. Statements in the operating documents would be key to explaining to potential customers whether the system’s functionality was appropriate to their requirements. Construing the contract contra proferentem (i.e. where it was ambiguous, against the party seeking to rely on it), the Court held that since operating documents had not been supplied prior to contract signature, Red Sky could not rely on the exclusions which were qualified only by reference to them. It held in effect that Kingsway had relied on Red Sky’s positive recommendation that the software was suitable and that it had therefore been induced to make the purchase by representations from Red Sky staff.

As a result Red Sky could not rely on the exclusion clauses in its standard terms.

It followed that s.14 of the Sale of Goods Act 1979 implied that Entirety would be fit for the purpose for which it was bought, namely to increase revenue and occupancy levels and allow quicker check-in and check-out, including accurately processing groups and making changes to group reservations. On this basis the Court held that it was not fit for purpose.

On the same basis, s.4 of the Supply of Goods and Services Act 1982 implied that Entirey should be of satisfactory quality. The Court held that it did not meet the standard a reasonable person would regard as satisfactory, taking into account any description, the price and all other circumstances.

Kingsway was therefore entitled to reject Entirety, having given Red Sky every opportunity to improve it.

The Court awarded Kingsway damages of £111,000 for wasted expenditure on Entirety, lost profits and wasted management time.

The principle lesson from the case is that sales staff should be educated on their company’s standard terms and on how to conduct themselves during the sales process. Where procedures are not aligned with the subject matter of the contract this may deprive a company of standard exclusions and protections.

It also underlines the principle that suppliers are generally better placed to enforce contractual exclusions where they have been negotiated. Written standard terms of business tend to be construed by the Court in the customer’s favour wherever there is any ambiguity in the drafting.