Paul Gershlick, a Partner at Matthew Arnold & Baldwin LLP and editor of Upload-IT, comments: ‘This case shows the scale of the damages that can be incurred if something goes wrong, which frequently does happen with IT projects. That is why it is important for a supplier to have a good contract in place at the outset so as to be protected against a catastrophic event that could cause disproportionate losses. In most cases, it is possible to cap liability, although the clause needs to be well-drafted to comply with the law. If the clause does not work legally, courts often refuse to uphold them.‘

The High Court said that the warranty did not apply because no operating documents had been provided by the time of the contract. There was therefore a disconnect between what Red Sky provided in its contracts and its actual processes. Instead of the contractual warranty, implied warranties applied based on the Sale of Goods Act and Supply of Goods and Services Act (notwithstanding that the contract terms had purported to exclude those terms) as no other reasonable warranty applied. The software was not of satisfactory quality or fit for its purpose. In addition, the exclusions and proposed cap on liability did not apply because, in deciding upon reasonableness, the judge took account of the fact that the parties were not of equal bargaining power, the standard terms had sought to exclude the statutory implied terms without providing reasonable replacements, and Kingsway did not know of the existence of the exclusions and limitations on liability. The judge sided with the customer to a large part based on its inability to satisfy itself with the system unless there were clear demonstrations or operating documents.

The High Court ruled that the total liability in contract included liability for contractual interest. However, any interest applied by statute was a discrete statutory liability arising from the exercise of the court’s discretion and was therefore not covered by the contractual cap on liability.

The High Court also ruled on other matters that emphasised the need to draft exclusions or limits on liability absolutely clearly beyond doubt. Failure to do so could result in the liability clause being interpreted against the person looking to rely on it.

One clause said: ‘Neither party shall be liable to the other for any indirect or consequential loss (including but not limited to loss of goodwill, loss business[…]) arising out of or in connection with this Agreement.’ Endsleigh argued that the specific types of losses in brackets could apply to direct or indirect losses, but the court rightly disagreed. The phrase ‘including but not limited to’ gave a clear indication that those losses were a type of indirect or consequential loss.

More surprising, perhaps, was the court’s interpretation of the following clause: ‘Endsleigh will not be liable to Markerstudy for any indirect or consequential loss or loss of profit or loss of business arising out of…’ The court ruled that only indirect loss of profit or business was covered by the exclusion. Endsleigh argued that the specified types of loss were free-standing from the phrase ‘any indirect or consequential loss’ and could therefore be direct or indirect loss of profit or loss of business, but the court rejected that argument too.

I would say that some of the court’s findings here are surprising. However, what is not surprising is that if someone wants to exclude or limit its liability, the clause has to be drafted very clearly – more so, perhaps, than many people realise. Failure to do this could result in not having liability limited or excluded in the way intended. Since the liability clause nearly always crop up in the event of a dispute, it is arguably the most important clause in the contract, but the one drafted incorrectly most often.