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High Court rules exclusion clause unenforceable

16 June 2010

A recent High Court ruling has highlighted the potential dangers in relying on standard exclusion clauses, ordering damage payments of almost £111,000.

Almost without exception, suppliers look to exclude or limit liability within their standard terms and conditions, including terms relating to the quality and fitness for purpose of goods. However, these exclusions are only enforceable if satisfied that they are reasonable under the Unfair Contract Terms Act 1977.

In the recent case of Kingsway Hall Hotel Ltd v Red Sky IT (Hounslow) Ltd, the High Court held that such an exclusion in a contract for the purchase of software did not satisfy the Acts test of reasonableness and was therefore unenforceable.

Kingsway Hall Hotel purchased reservations software from Red Sky under standard terms and conditions which included a clause excluding implied terms regarding performance, quality and fitness for purpose and an express warranty of performance in accordance with operating documentation.

Continuing errors in reporting room availability and revenue and on-going problems with group bookings rendered the software defective and, in particular, of unsatisfactory quality and not fit for purpose.

Red Sky claimed that these implied terms were excluded from its contract with Kingsway; the High Court disagreed.

The High Court concluded that Red Skys terms had been drafted on the basis that it was selling the software as off the shelf rather than as customised and that its manuals and demonstrations would enable a purchaser to understand the strengths and limitations of the software and thus whether it would meet its needs. However, Red Sky failed to supply any operating documentation meaning Kingsway was unable to satisfy itself about the softwares capabilities and the express warranty could not, therefore, be relied upon.

Other factors that the High Court took into account were:

  • That the parties were not of equal bargaining power; Red Sky was withdrawing maintenance on Kingsways existing system and Kingsway needed a replacement
  • Kingsway and Red Sky had negotiated the price but no other contract terms
  • There was no evidence that Kingsway knew of the exclusion
  • This was not bespoke software and Red Sky were the specialists

For breach of implied terms, Red Sky was ordered to pay damages of almost £111,000.

The Kingsway case clearly demonstrates that simply excluding implied terms is not always enough. Suppliers wishing to rely on such exclusions should:

  • Ensure that their standard terms are not drafted based on a contracting process that does not reflect actual practice
  • Bring any liability exclusions to the express attention of the purchaser
  • Ensure that express warranties are capable of being relied upon
  • Ensure that purchasers have the information available to them before contract to make an informed decision about fitness for purpose.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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