Holman v Sherwood

Out-Law Guide | 02 Nov 2007 | 8:31 am | 5 min. read

An insurance broker claimed that software supplied to it was defective and had not delivered the expected business benefits. The Court considered whether the Supplier's exclusion clauses could be challenged as unfair contract terms and decided that they were unfair and therefore ineffective.

Holman Group Limited v Sherwood International Group Limited

  • [2001] MCLR 72

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Facts

Holman carried on business as an insurance broker.  By 1992, Holman was looking to replace its computer systems.  The group was large, and the different companies used different and sometimes incompatible systems, some of which were in any case very old.  Holman determined that it should acquire an integrated insurance broking system.  One of the requirements for that system would have to be that it could comply with the strict requirements laid down for brokers by Lloyds, one of which was that client and underwriter accounts should be kept separate from other accounts.

At about the same time, a product known as SIMBAL came onto the market.  SIMBAL had been developed for insurance brokers in Norway, and needed further work for the London market.  In 1993, Sherwood acquired the rights to SIMBAL.  One further point about SIMBAL: it was character based, not Windows, which did have the incidental benefit for Holman that it did not have to acquire more powerful hardware.

The contract between the parties was in the form of a software licence executed in August and September 1993, although Holman did also acquire some Sequent hardware from Sherwood.  Essentially, Sherwood agreed to supply SIMBAL to comply with a functional specification.

The contract was on Sherwood’s standard terms although there were some changes set out in Schedule 3, which provided that the specific changes took precedence over the standard terms.  The judgment related a large part of the contract relating to warranties and liabilities.  While it is not possible to set out in full all of these clauses, the more important ones for the purpose of understanding the judgment were as follows:

“15.01  The supplier shall have no liability in respect of any indirect loss of contracts, goodwill, revenue, profits, anticipated savings or other benefits whether arising from negligence, breach of contract or otherwise ….”

15.02  The liability of the supplier in relation to any claim or series of claims arising out of one occurrence or circumstances or series of occurrences or circumstances, consequent on or attributable to one original cause, shall be limited to an amount equal to the licence fees paid by the customer hereunder, except in the case of personal injury to or death of any person resulting from negligence for which no limit applies. ….”

There had been some negotiation and amendment of the terms, but the amendments were minor, and the additions also had little to do with liabilities.

However, Holman did read the contract and even commented on it, except that they did not comment on the question of the limitations and exclusions.  This seemed to be because they thought they were non-negotiable or perhaps because they were just “small print”.

The matter came before the court as a preliminary issue on certain question of interpretation of the contract and precise facts of the case are not given in the judgment.

Judgment

Judge Havery recited at length from the Unfair Contract Terms Act 1977 (UCTA), including sections 3(1), 6(2) and (3), 7(1) and (3), 11(1), (2), (4) and (5) and Schedule 2.

Judge Havery had no hesitation in concluding that the agreement was on Sherwood’s written standard terms of business, thus bringing the case within section 3 of UCTA, notwithstanding the existence of negotiations and the fact that at least some (albeit minor) changes were made.

The next question was therefore whether the limits and exclusions were reasonable in the sense required by UCTA.  Looking at the various clauses, the Judge found that the implied terms of quality and fitness for purpose were excluded by the words of the contract, which purported to set out the entire warranties granted to the user.  Clause 15.01 on its true construction excluded liability for loss of expected savings in costs but did not exclude liability for increased costs of working in attempting to operate the system (e.g. costs of correcting ledgers) or for wasted costs or for costs in researching and acquiring a replacement system.  However, it was also effective to exclude liability for the loss of the value of an expected improvement in cashflow, on the basis that this was included in “other benefits”.

The fact that the contract was negotiated between two substantial enterprises with knowledge of its terms was a factor pointing in favour of the reasonableness of the term, but it was no more than that, and certainly did not create any kind of presumption of reasonableness.

An interesting question related to the applicability of sections 6 and 7 of UCTA.  Holman claimed they did, as software was “goods” in the light of St. Albans v ICL [1966] 4 All ER 481, 492-494.  However, Judge Havery believed this was doubtful in the light of the wording of the contract, which defined Sherwood’s obligations in terms not of delivering a tangible copy of the software, but in terms of delivering and installing object code.  Judge Havery was satisfied that in that case a common law implied term of reasonable fitness for purpose would be applicable and also that section 7 of UCTA would apply.

Judge Havery looked at the factors for assessing reasonableness listed in Schedule 2 of UCTA, it being common ground that they should apply for that purpose, although by the strict wording of UCTA they are relevant only to a consideration of reasonableness under sections 6 and 7.

Both parties were substantial – Holman with a turnover of some £10 million a year, and Sherwood with £20 million.  Holman could have chosen another supplier – Highams – and knew that Sherwood was keen to break into the insurance market.  On the other hand, Sherwood was the preferred supplier with a product that Holman had judged suitable for their purposes.  Judge Havery did not regard these factors as particularly significant either way.

Another factor was that Holman could probably not have obtained much better terms elsewhere.  The evidence in the case was to the effect that the types of exclusion and limitation in this case were commonplace in the software industry as a whole.  Together with the factor above, this meant that Holman was not in a stronger bargaining position.

As to insurance, Sherwood had errors and omissions insurance, £10 million one claim and £20 million in total.  This was increased to £30 million in mid-1993 as a result of a large contract involving Lloyds.  As against this, Holman had no insurance against the software failing and none was available at a reasonable premium.  It was more economical for the supplier in such cases to carry the insurance than the user.  A further factor here was the potential damage could easily exceed the licence fees (which was the limit of liability in the contract) and there seemed to be no obvious relation between the licence fee and the possible loss Holman might suffer.

Looking at the exclusion of loss of anticipated savings or other benefits, computer systems were sold on the basis that they would make savings.  Judge Havery said that a good reason had to be shown to support such an apparently unreasonable exclusion of liability.

Judge Havery commented with regard to clauses 13.01 and 13.02 that it had not been suggested that compliance with the functional specification would necessarily ensure that the software would be reasonably fit for its purpose.  Judge Havery thought that these clauses therefore might lessen the effect of clause 13.04, but did not remove Sherwood’s duty of satisfying the court that it was reasonable.  Clause 13.04 was therefore also held to be unreasonable.

Commentary

This report is included for completeness – although it was decided in 2000, it has not been much reported or commented on.  However, given the more recent judgment of the court of Appeal in Watford Electronics v Sanderson, no further comment will be made on this case and the reader is referred to Watford Electronics for a more authoritative statement of the law.