DRAFTSMEN BEWARE: 'STANDARD' exclusion clauses might not always provide the protection that is expected. This article focuses on Field J's recent judgment in GB Gas Holdings Ltd (Centrica) v Accenture (UK) Ltd & ors [2009].
GB Gas Holdings is a subsidiary of Centrica, and a supplier of gas and electricity to residential customers in England and Wales (Centrica). Accenture's business is as a global management consulting, technology services and outsourcing provider.
Although Centrica itself had several elements, Field J's analysis of whether the losses suffered by Centrica in respect of the defective customer billing system provided by Accenture were direct or indirect is of particular interest.
BACKGROUND
In January 2002 Centrica and Accenture entered into an agreement for the design, supply, installation and maintenance, by Accenture, of a new IT system. The agreement provided for a phased release of the various elements (including an automated billing system).
There were numerous problems with the automated billing system that caused significant disruption to Centrica's business. For example, bills sent out by Centrica's customers were inaccurate, delayed, sent in error or not sent at all. Centrica received a large number of customer complaints and a considerable number of customers (estimated to be around 770,000 between March 2006 and March 2007) terminated their contracts with Centrica.
Centrica brought an action against Accenture for breach of various warranties in the agreement, including a warranty that the system would be free from material design, programming and implementation errors.
As part of a trial of various preliminary issues (including whether Centrica could bring a breach of warranty claim), the court was asked to establish whether the losses suffered by Centrica fell within the exclusions of liability set out in the agreement.
LEGAL ISSUES
Field J's analysis as to what losses were recoverable by Centrica as a result of Accenture's breach had to be considered in the light of the following exclusion clause in the agreement:
'16.2 Consequential Loss
Subject to clause 16.7 or as otherwise expressly provided in this agreement, in no event shall either party be liable whether in contract, tort (including negligence) or otherwise, in respect of any of the following losses or damages:
16.2.1 loss of profits or of contracts arising directly or indirectly;
16.2.2 loss of business or of revenues arising directly or indirectly;
16.2.3 any losses, damages, costs or expenses whatsoever, to the extent that these are indirect or consequential or punitive;
save that this clause 16.2 shall not apply in the event that either party terminates this agreement other than in accordance with clause 21.'
This provision effectively excluded all direct and indirect loss of profits, contracts, business and revenue, as well as all other forms of indirect loss. The provision was drafted by two sophisticated parties, each of whom received legal advice, and the enforceability of the exclusion clause under the Unfair Contract Terms Act 1977 was not considered. Most readers will be struck by how familiar or 'industry standard' the exclusion wording used in the agreement was. Indeed, it had been better drafted than several other similar clauses that have been considered by the courts in recent years.
Accordingly, Centrica had to be able to demonstrate to Field J that:
1) it suffered loss as a result of Accenture's breach;
2) the relevant loss was a direct (rather than indirect) loss; and
3) the loss was a form other than a loss of profits, contracts, business or revenue.
On the facts, Field J was satisfied that Accenture had breached the agreement and that certain losses had been caused as a result. In determining whether the losses claimed by Centrica were direct or indirect, Field J applied the rule in Hadley & Anor v Baxendale & ors [1854], namely:
'Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract should be such as may fairly and reasonably be considered either arising naturally, ie according to the usual course of things, from such breach of contract itself or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.'
Losses that fall under the definition provided by the test (ie those that arise naturally) are considered to be direct losses, whereas losses falling under the second definition (ie those within the reasonable contemplation of the parties) are considered to be indirect losses.
Field J considered all of the following heads of loss claimed by Centrica to be recoverable notwithstanding the exclusion clause, finding in each case that the type of loss was direct and that it did not fall within the other excluded categories. The heads of loss and some of the reasoning is as follows:
1) Gas distribution charges (£18.7m claimed) – Centrica purchased gas wholesale from distributors. The charges were based on the estimated amount of gas used by customers. Automation errors in the billing system resulted in the pricing charged by the distributors being based on an over-estimation of gas usage. Field J considered that this loss arose as a direct result of the automation error. The loss was not a loss of revenue or profits, but rather a charge that Centrica would not have had to pay had the system functioned correctly.
2) Compensation paid to customers (£8m claimed) – Centrica compensated customers for the billing difficulties and poor service they received over the relevant period. Notwithstanding that the amounts were paid ex gratia , Field J considered that one of the purposes of the new system was to improve customer relations and services, and the agreement made it clear that Accenture would assume responsibility for compensation paid to customers if the billing system failed. In this respect, Field J distinguished Lord Hoff man's judgment in Transfield Shipping Inc v Mercator Shipping Inc [2008] ( The Achilleas ), which refers to the assertion that losses that are reasonably foreseeable, but which the parties would not have assumed responsibility for at the outset of the arrangement, may well not be recoverable.
3) Additional borrowing charges (£2m claimed) – due to the late or non-billing of customers, Centrica's revenue was reduced for a period of 15 months resulting in additional borrowing to fund its business. Field J considered that Centrica's revenues depended on the efficient operation of the billing system and it was a very likely consequence that there would have to be borrowing if the system failed.
4) Cost of chasing debt (£387,287 claimed) – Centrica incurred costs as a result of chasing debts from customers that were not, in fact, due. Field J considered that the sums were incurred as a direct failure of the system.
5) Additional stationary and correspondence costs (£107,120 claimed) – Centrica incurred costs as a result of writing to its customers to keep them up to date about the issues that were ongoing with the billing system. Again, Field J considered these costs to be direct loss.
COMMENT
Clearly, the heads of loss were specific to the arrangements and failures that occurred in respect of this project. Although the judgment of Field J does not change current law, it serves as a timely reminder of the broad range of losses that a customer may suffer if there is a failure of a critical IT system.
Even fairly extensive and well-drafted exclusion clauses will not prevent a court from finding that losses can be claimed. In Centrica , Field J does seem to have made a concerted effort to consider the relevant losses suffered by Centrica as direct rather than indirect.
Accordingly, if suppliers envisage that specific types of loss may arise as a result of a breach of their agreement(s), they would be well advised to ensure that these losses are specifically excluded and/or subject to a separate cap.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
