Watford Electronics Ltd v Sanderson CFL Ltd is a 2001 decision of the Court of Appeal of England and Wales about how far a software supplier can limit its liability when an integrated business system fails. Watford, a mail order seller of computer products, licensed the Mailbrain and Genasys packages from Sanderson CFL and bought hardware, and the system never performed satisfactorily. Watford claimed about GBP 5.5 million for lost profits and extra costs. The trial judge held Sanderson’s limit of liability clause unreasonable in its entirety, but the Court of Appeal reversed that, treating the clause as two separate terms that were each fair and reasonable.[1]
Background
In 1992 Watford needed an integrated software system to control mail order sales, warehouse stock and accounts. It dealt with Sanderson, which supplied Mailbrain, a mail order marketing package, and Genasys, which maintained the ledgers. The parties signed three contracts dated 9 October 1992: a sale of equipment for GBP 15,508, a software licence for an initial fee of GBP 70,260 and an annual fee of GBP 14,231, and a software modification licence with training for GBP 3,250. Each one was a single sheet with printed conditions on the back.[1]
The licence conditions contained an entire agreement clause, under which the contract was the whole agreement and no statement or representation had been relied on, and a warranty and limit of liability clause. Its relevant part said that neither party would be liable for indirect or consequential losses, and that Sanderson’s liability would not exceed the price paid for the software connected with the claim. An addendum added at Watford’s request committed Sanderson to use “best endeavours in allocating appropriate resources to the project to minimise any losses that may arise from the Contract”.[1]
The dispute
The system went live around February 1993 and did not perform satisfactorily. After a consultant’s report, Watford bought a larger server and a further licence in August 1993 on the same terms. Between 1992 and 1996 Watford paid Sanderson GBP 104,596 for equipment and licence fees, and in 1996 it replaced the system with one from another supplier.[1]
Watford sued in 1998 for misrepresentation, breach of implied terms and negligence, claiming loss of profits of about GBP 4.4 million, increased costs of working of about GBP 1 million and the cost of replacement software of about GBP 119,000. On preliminary issues the judge found that the contract contained implied terms of fitness and skill, that Sanderson had made the representations alleged, and that the Unfair Contract Terms Act 1977 applied. He then held that the limit of liability clause was unreasonable in its entirety, and Sanderson appealed that finding only.[1]
Decision or outcome
Chadwick LJ, with whom Buckley J and Peter Gibson LJ agreed, allowed the appeal. The court found three errors in the judge’s approach.[1]
- The scope of the clause. Read together with the entire agreement clause, the limit of liability clause did two things: it excluded contractual claims for indirect and consequential loss, and it replaced the value the software would have had if the warranty had been fulfilled with the price paid. It did not exclude liability for pre-contract misrepresentation, so the judge had asked the wrong question when he treated it as depriving Watford of any damages.
- The addendum. The best endeavours obligation was not “virtually meaningless”. It meant that Sanderson could rely on the exclusion of indirect loss only if it had used its best endeavours to make the software perform as warranted.
- Watford’s own terms. Watford’s standard terms for its own customers excluded indirect loss in similar words and said its prices were set on that basis. That showed it understood why a supplier includes such a term and was relevant to reasonableness.
Applying the Schedule 2 guidelines, the court noted that the parties had equal bargaining strength, that Watford had negotiated on price and on this clause and knew the term, that the term would affect the price, and that the risk could be insured against. It held the exclusion of indirect loss fair and reasonable. It also held the cap on direct loss reasonable, since it only substituted the price paid for the value of the software had it complied with the warranty.[1] Peter Gibson LJ added that where experienced parties of equal bargaining power have agreed on an allocation of risk and the price reflects it, there is little scope for a court to remake the bargain.[1]
Significance for software licensing and SAM practice
The case is a leading English example of how liability caps in software licences are tested between businesses. It is a useful counterpoint to Pegler v Wang (UK) a year earlier, where the supplier’s exclusion clauses were held unreasonable on very different facts.
- Caps in vendor paper. A cap at the price paid and an exclusion of indirect loss can be enforced against a business customer, so the remedy for a failed implementation may be limited to a refund of the licence fees.[1]
- Negotiation helps the vendor. The court relied on Watford’s attempt to change the clause and its knowledge of the term when it held the clause reasonable.[1]
- Pre-contract statements. The court distinguished losses from the software failing to do what the manuals say, which the cap covers, from losses from software that does what the manuals say but not what the customer actually needed, which depend on pre-contract statements and were not covered by the cap.[1]
Lessons learned
- Do not assume a cap will be struck down. Between experienced businesses of equal bargaining power, the court treated the parties as the best judges of the fairness of their own bargain.[1]
- Negotiate the cap and the support commitments before signing. The best endeavours addendum was worth something to the customer and gave a route round the exclusion of indirect loss.[1]
- Put material statements into the contract. An entire agreement clause that records non-reliance narrows what a customer can later rely on, so the functions that matter should be in the licence or its schedules.[1]
- Check your own standard terms. Watford’s own exclusion clause was used to show that it understood the commercial reason for a cap.[1]