Minor breaches of contract can combine to make major breach, rules Court of Appeal

Accenture supplied energy company Centrica with a billing system for its British Gas subsidiary. British Gas claimed that there were many problems with the system, and that those were 'material defects' as defined by that contract.

It said that these material defects could be added together to form a 'fundamental defect', a more serious category of flaw which was defined in the contract. Accenture had more responsibility for fixing fundamental defects and was liable for damages if it did not fix those defects in the way described in the contract.

The Court of Appeal has agreed with the High Court's earlier ruling in the case that material defects could combine to create a fundamental defect that would trigger greater liability for Accenture.

The contract was changed part of the way through its operation so that Accenture paid for Centrica to fix any problems that were material defects, but committed itself to fixing any fundamental defects.

"In my opinion [the contract means that] a fundamental breach of warranty can be constituted by individual breaches of warranty," said the High Court in that earlier ruling. "The consequences of such individual fundamental breaches of warranty can be aggregated for the purposes of determining whether there was a severe adverse effect on the British Gas Business."

"In my judgement, the categories of Material Defects and Fundamental Defects are not mutually exclusive," that ruling said. "There is no obligation under the [contract] on Centrica to classify an apparent breach of warranty as either a Material Defect or a Fundamental Defect and I can see nothing in the agreement that prevents Centrica from asserting that a breach is a Fundamental Defect when to begin with they thought that the effects of the breach did not justify such an assertion, and may even have attempted to fix it."

The contract said that something was a fundamental defect if it breached certain warranties in the contract and would case a "severe adverse effect on the British Gas Business".

The Court of Appeal agreed with the High Court's reading of the contract.

"On Accenture's case, if I have understood it correctly, no Material Defect can, in the contractual scheme, be combined with any other material defect to produce a severe adverse effect for the purpose of constituting a Fundamental Defect," said Lord Justice Longmore in the Court of Appeal. "Yet ... this would have the effect that even fundamental breaches of warranty (individually causing an adverse effect) could not be combined, nor could breaches of warranty (of a non-fundamental kind) be combined although they each had a severe adverse effect."

"It is not likely that the parties could have contemplated such a (to my mind) bizarre result," he said. 

Centrica conceded that if a material defect was identified and fixed by it with the bill for that fix paid by Accenture, as the contract stipulates, then that material defect could not then be combined with any others to form a fundamental defect.

Lord Justice Longmore said, though, that the ruling only means that more minor defects can be combined to constitute more major ones in the eyes of the law. He pointed out that a full trial would be necessary to decide if it should be in this case.

"[Centrica] submitted that the judge had merely held that there was no obstacle in law to accumulating or aggregating individual Material Defects to constitute a severe adverse effect but left to the trial judge the question whether any such aggregation did in fact produce a severe adverse effect. To my mind the use of the word "can" in both limbs of the issue indicates that [it is] right about that and that the judge did not purport to decide what the factual position was," he said. "That would have required factual evidence not deployed before the judge."

"The decision of this court is confined to the legal questions whether it is contractually possible for individual breaches of warranty to be aggregated to produce a 'fundamental' breach of warranty and whether the consequences of individual fundamental breaches of warranty can be aggregated to produce a severe adverse effect," he said.