Allocating Risk In IT Contracts

Introduction

The past fifteen years have seen a number of cases in the IT sector in which the UK Courts have had to consider the enforceability of contract limitations and exclusions under the Unfair Contract Terms Act 1977 ('UCTA'). The courts' approach in these cases (starting with the landmark decision in St. Albans District Council v ICL1) can broadly be characterised as increasingly pro-customer and interventionist. This interventionist approach appears to have reached a high water mark with the Court's decision in Pegler v Wang (UK) Limited2; subsequent cases suggest a marked change in the courts' approach to enforcing limitations and exclusions, with the courts showing a much greater reluctance to intervene in agreements reached between experienced commercial organisations.

This article looks at the case developments and the lessons that suppliers and customers can learn from them.

Background to the UCTA framework

Under UCTA, contractual terms which exclude or restrict liability for loss or damage caused by negligence are enforceable only to the extent that they satisfy the UCTA 'requirement of reasonableness' (s2(2)). Additionally, in business to business contracts where the supplier is dealing on its 'standard terms of business', contractual terms which seek to allow the supplier to:

limit or exclude liability for contract breach; render a contractual performance substantially different to that which was reasonably expected of him; or render no performance at all, are also only enforceable to the extent that they satisfy the UCTA 'requirement of reasonableness'. Meaning of 'standard terms of business'

UCTA gives no guidance as to what constitutes a party's standard terms of business. However, the English courts have shown that they will give this term a wide meaning.

For example, case law has established that not all of the terms need to be fixed by the supplier for him to be regarded as dealing on standard terms: even where some clauses have been heavily negotiated, the parties can still be treated, for the purposes of UCTA, as dealing on the supplier's standard terms if the limitations and exclusions in the contract have been left untouched; even where changes have been made to the limitations and exclusions, UCTA may still apply if those changes are not material. In Pegler v Wang (UK) Limited, for example, the parties were held to be dealing on the supplier's standard terms, despite the fact that (i) the customer had managed to incorporate into the contract many of its own standard terms, (ii) the parties had agreed that those terms would take precedence over the other terms of the contract, and (iii) the supplier had agreed (minor) changes to the limitations and exclusions.

These judgments indicate that the UK courts are likely to find that a supplier is, for the purposes of section 3 of UCTA, dealing on its standard terms of business unless there have been material changes to the limitations and exclusions in the contract.

The UCTA 'reasonableness test'

A contract term which is subject to the requirement of reasonableness must be 'a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made' (s11(1)).

UCTA sets out a non-exhaustive list of guidelines to be taken into account in assessing whether or not a term satisfies the requirement of reasonableness. In summary, these are:

The relative strength of the parties' bargaining positions; Whether the customer received an inducement to agree to the term in question, or whether the customer had an opportunity of entering into a contract with other persons without having to accept a similar term; Whether the customer knew (or ought to have known) of the existence of the term; Where the term excludes or restricts liability if some condition is not met, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable; and Whether the goods were manufactured, processed or adapted to the special order of the customer...