Horace Holman Group Ltd v Sherwood International Group Ltd
- MCLR March 2002
-  All ER (D) 83 (Nov)
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The decision of Judge Havery of the Technology and Construction Court, in relation to certain preliminary issues of interpretation was reported in a previous edition of MCLR ( Masons CLR 72).
The Claimant, Horace Holman Group Limited (“Horace Holman”), was a group of insurance brokers. Essentially Horace Holman was sub-divided into the following groups:
- Horace Holman International;
- Adam Brothers Contingency;
- Horace Holman UK;
- Holman Wade; and
- Hamiliton Barr.
Each sub-division dealt with a specific area of insurance. For example, Holman Wade provided insurance for Lloyds’ names, which was principally personal stop loss insurance (“PSL”). The Defendant, Sherwood International Group Limited (“Sherwood”), was a computer software and system company specialising in systems for the insurance industry.
In 1992, Horace Holman decided that its computer systems were outdated and a radical overhaul was necessary. At this time Lloyds was insisting on strict accounting requirements from Lloyds brokers. The Lloyds requirements included, amongst others, a requirement that client and underwriter accounts would be kept separate from other accounts – this basic accounting system was known as “Insurance Broking Accounts” (“IBA”). Horace Holman required Sherwood to supply and install a uniform computerised system that would comply with these requirements and update its existing system.
Horace Holman and Sherwood entered into a chain of contracts in 1992 whereby Sherwood was to supply and install a new computerised accounting system known as SYMBAL throughout the entire insurance business for the purpose of complying with the Lloyds requirements. Furthermore, Sherwood was to supply, install and commission other software packages and to service and maintain the same. As part of this package, Sherwood agreed to develop the interface between FLOATS (an existing piece of Horace Holman developed software installed to deal with personal stop loss insurance claims) and SYMBAL.
Under the contract SYMBAL was to be delivered in two phases. First, the accounts module, of which IBA was the core, was to go live by April 1994 and secondly, the contracts and claims modules, was to go live by November 1994.
By November 1995, Sherwood had failed to get any part of the SYMBAL system up and running. The judge described the supplied software as “useless”. Resulting from the failure to implement SYMBAL successfully, Sherwood also failed to implement the interface between FLOATS and SYMBAL. Horace Holman justifiably terminated the contract and sued for damages. Sherwood sought to rely on the various limitation and exclusions of liability in the contract. However, as was determined by Judge Havery as a preliminary issue, these clauses failed to exclude or limit liability by application of the Unfair Contract Terms Act 1977.
Horace Holman claimed damages for approximately £3,384,271. Damages were assessed in this judgment.
It was agreed that the action was to be regarded as an action by Horace Holman as a group rather than as an action by one company.
The judge awarded Horace Holman damages for a total sum of £2,622,259.69, together with interest and costs. The details as to how these damages were apportioned is detailed below.
Part of the damages claimed were agreed between the parties. For the purposes of this judgment, Horace Holman submitted an amended Schedule of Damages outlining the respective heads of loss. These were divided into the following heads:
Third Party Costs
- Computer maintenance - liability was agreed at £63,585.25
- Disaster recovery - liability was agreed at £38,166.00
- PC Upgrades – the claimant claimed £27,000 yet damages were assessed at NIL. Whilst it was agreed that £1,000 per personal computer was a reasonable sum to spend, as personal computers used for business purposes must be regularly upgraded, Horace Holman failed to provide any documentary evidence as to when the upgrade had occurred and the cost. Furthermore, it was not established that the cost was incurred as a result of any fault of Sherwood.
- Replacement for SYMBAL (the GPM system) - liability was agreed at £157,383.00
- Temporary Staff – the claimant claimed £15,168. The judge awarded £15,489.08 by following the evidence provided by the defendant’s expert.
- FLOATS – liability was agreed at £6,208.00
- EPSILON - liability was agreed at £8,407.00
- SYMBAL/GPM – the claimant claimed £169,597.87 for consultant’s fees. The judge awarded £99,304.69.
- Policy in-house savings – the claimant claimed £66,561.72. The judge awarded £66,561.72. A company, ITF, had a three year contract to deal with policy preparation for Horace Holman. The judge agreed that had SYMBAL worked, policy preparation could have been brought in-house a year after SYMBAL was due to be operative (i.e. April 1995) and the ITF contract could have been terminated early. As a result, Horace Holman would have made savings.
- Audit Savings not made – the claimant claimed £66,346.00. The judge awarded £10,000. The judge took into account that whilst the replacement of the various different accounting systems in each of the divisions of Horace Holman with one integrated accounting system “SYMBAL” would greatly simplify the tasks of accountants and auditors, auditors’ fee may actually slightly increase in the first year of use of the new system as adjustments were made. The effect of market forces in lowering the audit fees was considered, as was the fact that the additional work was carried out on the accounts in order to organise them into a suitable state. The judge indicated that with all the uncertainties surrounding this head of claim it was difficult to assess the damages.
- Paid to Sherwood (FLOATS) – the claimant claimed £29,351.00. The judge awarded £29,351.00. The FLOATS interface was rendered useless as a direct consequence of the SYMBAL system not working. The judge awarded damages on the basis that Horace Holman paid for a useless product and had to pay for temporary staff to carry out this work. The judge rejected Sherwood’s argument that the correct approach was to value the benefit that would have been derived from FLOATS had it worked in conjunction with the SYMBAL system.
Staff Not Made Redundant Earlier
This was the largest part of the claim with Horace Holman claiming totals in excess of £2.2 million. The judge awarded £1,736,135.00.
Horace Holman argued that had SYMBAL worked, it would have been able to make staff redundancies years earlier than was the case and in the process would have made financial savings. The judge emphasised that damages would be awarded on the basis of the “evidence actually presented” as to whether the computers were the cause for the staff losses. It was unnecessary to make an enquiry into staff losses in the Group company as a whole. The arguments put forward by Sherwood that Horace Holman had failed to take reasonable steps to mitigate its losses under this head were unfounded, it was understandable that Horace Holman should wish to concentrate on getting SYMBAL, the initial and most important part of the system up and running first. Four heads of claim existed within this section:
- Named individuals – The judge awarded £1,736,135.00. This was the figure agreed upon by the experts. Horace Holman satisfied its claim covering a five year period of loss for all broking and claims staff other than those in policy production. This five year period was appropriate because there was (at least) a five year gap between the contractual delivery dates for SYMBAL and the actual delivery date for GPM, the eventual replacement system. The judge accepted the phased redundancy programme that was to take place after implementation of SYMBAL but noted that a certain amount of delay would be expected between implementation of the system and the actual redundancies.
- Accounts Department – The judge awarded £82,132.00. Horace Holman claimed that as a result of Sherwood’s failings, it was not possible to make redundancies in April 1994 and the accounts department was forced to wait until the following year before reducing its size. Furthermore, the PLS run-off element would have been dealt with more speedily, thus producing savings in the accounts department, had SYMBAL been installed successfully. Once again, the judge accepted the concept of a “delay” period before the redundancies became effective and therefore the damages would not run from 1 April 1994. The paperwork produced on this head of claim was lacking for the judge. The defendant’s expert agreed that if causation of redundancies was proved as from 1 April 1994 then the appropriate figure was £164,263.13; the judge awarded, on the balance of probabilities, half of that amount.
- Accounts Department (Individual Employees) – The claimant claimed £196,254 but damages were assessed at NIL. While the defendant agreed the figure, the claim was unsubstantiated by the evidence and failed on causation. The time periods referred to in the supporting documentation were inconsistent, considerable doubt arose as to the pleaded annual average salary cost and no written evidence was produced in support of the claim.
- Adam Brothers Contingency Limited – the judge awarded £96,961.00. This claim was awarded in relation to a single employee. He was moved to this department to carry out menial tasks that could have been carried out by a computer had the system been working. This employee was a skilled broker and should have been spending his time carrying out such activities. From the evidence, it was deduced that 10% - 20% of his time was spent on broking and to that extent the judge deducted 10% from the figure accordingly.
Time Wasted by Directors and Staff
A total figure of £135,567.95 was awarded by the judge out of £142,724.49 claimed. The judge relied on the principles that a claimant may be able to claim for the expense of time lost by directors and staff and that there should be compensation for the cost of managerial time wasted (Tate & Lyle v GLC  1 WLR 149). In the Tate & Lyle case, in the absence of detailed evidence of the wasted time Forbes J. was not prepared to speculate as to damages. However, in this case whilst no documentary evidence existed in the form of records of time etc., the judge was prepared to evaluate oral evidence in the form of a reconstruction from memory of events from the past. The key point was that Horace Holman was paying for employees' time which was intended to be of benefit to it and this benefit was lost. The distinction between short and long periods of wasted time, senior and less senior posts and profit and non-profit makers was not accepted by the judge.
Lost Revenue Opportunities
- Adam Brothers Engineering – the claim for the lost broking opportunities was rejected by the judge.
- Cash Flow Improvements – the claimant claimed £77,008.00 for interest lost as a result of the absence of SYMBAL. The judge awarded the full £77,008.00. It was agreed that a large part of a broker’s income is from interest on money not belonging to the broker but simply passing through his bank account. Through Sherwood’s failure to implement the SYMBAL system, the claimant had suffered a loss. The judge preferred a conservative assessment and applied the following approach: had Sherwood fulfilled its contractual obligations then 5% more interest may have been earned by Horace Holman, however a 25% discount should be applied for uncertainty making a net addition of 3.75%. The months November and December 1994 were excluded from the calculation to take account of the time it would have taken for the management to adjust and benefit from the SYMBAL system.
Application for leave to appeal to the Court of Appeal
Sherwood applied for leave to appeal to the Court of Appeal at a hearing held on 7 February 2002. The application was made on five specific grounds under the main head of claim above, namely Staff Not Made Redundant Earlier. The specific grounds raised by Sherwood were the following:
- There was no causal link between the implementation of the SYMBAL system and four of the named employees being made redundant as these certain individuals did not undertake clerical tasks or work that could have been undertaken by a computer;
- Damages had been awarded on the basis of a 60 month period, when they should have been calculated on a 48 month period taking into account a “delay” from implementation of the computer system to the point when redundancies could have been made;
- Certain of those individuals for whom damages were awarded, were not employed for the whole 60 month period and there was no evidence that there were predecessors to their employment;
- The redundancies for which damages were awarded were a direct result of the “downturn in business” for Horace Holman thus causing the need for Horace Holman to make savings, and not a result of Sherwood failing to perform its contractual obligations; and
- There were problems of over-staffing at Horace Holman and this was the reason for the redundancies, again they were not a result of Sherwood failing to perform its contractual obligations.
Dyson LJ heard the application and concluded that the challenges raised by Sherwood were all based on findings of pure fact. The specific grounds raised by Counsel had all been concluded by Judge Bowsher at the previous hearing on 7 November 2001. Accordingly, the application by Sherwood for leave to appeal was dismissed
The most significant point to remember when considering the award of damages in this case is that the preliminary issues relating to the enforceability of the exclusion and limitation clauses contained within the contract were considered by Havery J. in the Technology and Construction Court before the Court of Appeal judgment in Watford Electronics Limited v Sanderson CFL Limited ( Masons CLR 57). Following the Court of Appeal judgment in that case it is unclear whether the exclusion and limitation clauses contained within the contract would, today, be found to be similarly unreasonable and unenforceable. As a consequence, the assessment of damages awarded by Judge Bowsher must be treated with care both in terms of the value and the heads of loss recovered. It is worth revisiting the issue of the exclusion and limitation clauses.
In the contract the relevant exclusion and limitation clauses 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 or for death of any person resulting from negligence for which no limit applies…"
Although there had been some negotiation and amendment of the terms and conditions by the parties, any changes were minor and the above clauses remained as per Sherwood's standard written terms of business.
Judge Havery at the preliminary issues stage found that the agreement was on Sherwood's written standard terms of business and that the limitation and exclusion clauses were unreasonable. In his deliberations Judge Harvery held that the fact the contract was negotiated between two substantial enterprises with knowledge of its terms was only a factor pointing in favour of the reasonableness of the term, and nothing more than that.
In Watford Electronics, Chadwick LJ (giving the judgment of the Court) took a more robust attitude towards negotiations, stating that where experienced businessmen representing substantial companies of equal bargaining power negotiate an agreement, they may be taken to have had regard to the matters known to them. They should be taken to be the best judges of the commercial fairness of the agreement which they have made, including the fairness of each of the terms in that agreement and whether the terms are reasonable. The Court should not assume that either is likely to commit his company to an agreement which he thinks is unfair, or which he thinks includes unreasonable terms. Unless satisfied that one party has, in effect, taken unfair advantage of the other - so that a term is so unreasonable that it cannot properly have been understood or considered - the court should not interfere.
In Watford Electronics the user had attempted to negotiate changes to the exclusion and limitation of liability clauses but without success. Chadwick LJ found that the terms excluding indirect loss were fair and reasonable. The main factors influencing his decision were (a) the equal bargaining power of the parties, (b) the fact the key terms of the contract were subject to negotiation; including price and who would bear the risk of remedying loss of profits and other consequential losses, and (c) the fact Watford’s own written standard terms contained similar exclusion clauses. These factors may be used to test the enforceability of other exclusion and limitation clauses, however, the Watford Electronics case was substantially fact based with the result that this Court of Appeal judgment may well be distinguished.
With this is mind, how could Sherwood have effectively excluded its loss? Loss of anticipated savings made up the significant element of the recoverable losses in this case. Of the £2,622,259.69 awarded £1,894,828.72 related to loss of anticipated savings, being for policy in-house savings, audit savings and staff not made redundant earlier. Could these losses have been excluded by effective drafting? Judge Havery made an interesting comment at the preliminary issues stage. In his view, computer systems were sold on the very basis that they would make savings. As such, a good reason had to be shown to support an exclusion of loss of anticipated savings or other benefits. It is therefore submitted that irrespective of the drafting of clause 15.01, it would have been extremely difficult for Sherwood to have successfully excluded its loss regarding anticipated savings given the nature of the system sold and the purpose for which it was to be used.
Suppliers of systems which are geared more towards making profit or for purposes other than savings, may, it is submitted, effectively exclude this loss. This issue naturally overlaps with the law relating to direct and indirect loss. If the system is procured for certain purposes, such as savings, then if these savings do not materialise as a result of the supplier's breach, they are direct losses which are normally recoverable under the first limb of Hadley v Baxendale. As such, greater justification must exist in order to reasonably exclude liability. If, however, the system is procured for purposes other than cost savings, any such losses which flow from the breach are likely to be indirect losses under the second limb of Hadley v Baxendale. It may be more reasonable to exclude these losses by an appropriate contractual clause. Unfortunately, neither the present case nor Watford Electronics provides a definitive answer to this point.
Clause 15.02 in the current case was an attempt of limiting liabilities of certain matters to the licence fees paid. Judge Havery found that although it was common place for suppliers of software to limit their liability to the sum payable by the customer under the contract, the clause was objectionable since the possible damage could easily far exceed the limit imposed by the court. By comparison, in Watford Electronics Chadwick LJ found that a clause limiting liability to the price paid by the customer was in the circumstances reasonable. Ascertaining the level of financial cap remains a key issue for all contract drafters.
Could Sherwood have effectively excluded liability for wasted management and staff time? Horace Holman recovered a relatively small amount of damages under this head of loss. Judge Bowsher rejected Sherwood's argument that wasted directors/senior managers time should not be recoverable as these individuals would naturally make up this time by working in the evenings or at weekends. Instead, Judge Bowsher found that loss of leisure time led to less productivity. Interestingly, though, instead of calculating the financial impact of this loss of productivity, Horace Holman was awarded damages for the actual time spent by the senior staff dealing with the matter. Further, these damages were based on fairly scant documentary evidence as to the time actually spent.
It is submitted that it would be reasonable to exclude loss for wasted management and staff time by agreeing, for example, that all such loss was a natural overhead of the project. Nonetheless, the actual savings achievable by doing so are rather small in the scheme of things.
Could Sherwood have excluded loss of profits? Horace Holman recovered £77,008.00 under this head of loss. The Court of Appeal case Deepak Fertilisers v Davy McKee & ICI ((1999) 1 Lloyds Rep 387) is authority that loss of anticipated profits may be effectively excluded. In that case liability was expressly excluded for "loss of anticipated profits… or for indirect or consequential damages". In relation to this Smith LJ held, "wasted overheads incurred during the reconstruction of the plant as well as profits lost during that period, are no more remote as losses than the cost of reconstruction. Loss of profits cannot be recovered because they are excluded in terms, not because they are too remote" (emphasis added). That said, whether it is reasonable to exclude loss of profits/revenue must be assessed on a case by case basis. Again, however, in many situations the relative value of excluding loss of profits may have little overall impact on the amount of damages recoverable by a user. By way of illustration, in Pegler v Wang ( Masons CLR 19) Pegler recovered only £640,000 of a £12,500,000 loss of profits claim with the judge holding that the period over which the profits were likely to have been affected was more likely 18 months rather than 5 years or ‘in perpetuity’, as claimed.
In conclusion, a supplier’s attempts at excluding certain heads of loss may be worthwhile, but also may be of little overall impact to the damages claim. Successful limitation of losses is, on the other hand of key importance. However, without further case law subsequent to Watford Electronics little concrete guidance may be given as to what the court will consider to be a reasonable limitation clause and consequently enforceable.