22 July 2010 | Liz Fletcher

Is it unfair to exclude statutory terms of sale from a contract?

The Case

Kingsway Hall Hotel contracted with Red Sky for the supply of a software package to manage the hotel’s reservation system, on Red Sky’s standard terms of business. Following installation, Kingsway experienced problems as the software did not accurately show room availability and kept freezing. Six months later, Kingsway told Red Sky it was rejecting the software as it was not of satisfactory quality nor fit for purpose pursuant to the Sale of Goods Act 1979. Kingsway brought a claim against Red Sky for loss of profits and the cost of a replacement system.

Red Sky’s standard terms contained a clause excluding statutory implied terms “as to performance, fitness, quality, fitness for purpose, etc”. The terms included a warranty the software would “in all material aspects provide the facilities and functions set out in the operating documents”. Red Sky’s terms also contained a clause excluding liability for indirect or consequential loss, excluding loss of profits.

Pursuant to the Unfair Contract Terms Act 1977, a contract clause that excludes or limits a supplier’s liability has to be “reasonable” having regard to the circumstances that were known to the parties at the time of making the contract.

The court held the software was not fit for purpose and was not of satisfactory quality. Red Sky could not rely upon the exclusion clauses within its standard terms as they were unreasonable. The court determined Red Sky’s standard terms were predicated on the fact a customer would decide if the product would meet their needs on the basis of demonstrations of the software and consideration of the software documentation. 

Kingsway had not been provided with the operating documents prior to the contract, its decision to purchase was formed upon Red Sky’s advice and demonstrations. It had no opportunity to check the software met the functions set out in the operating documents, and therefore Red Sky’s exclusions could not apply. The court considered the exclusions had not been highlighted to Kingsway, and it would be denied any effective remedy if the exclusions were held valid, given Red Sky had failed to rectify problems in the software, despite having been given the opportunity to do so.

What this means

Suppliers need to ensure any standard terms they use accurately reflect the sales process adopted, otherwise, exclusion clauses may be held to be unreasonable, and therefore unenforceable, leaving the supplier vulnerable to pay damages.

Suppliers should be careful not to induce customers into buying a product verbally without providing documentation to the customer, particularly in relation to “off the shelf” products. The case serves as a useful reminder that exclusion clauses must be reasonable, and to determine this the courts will consider the circumstances of how the contract was formed.

Where an exclusion clause would leave a customer without a remedy, this will generally be considered unreasonable by the courts, even where that customer is a business rather than a consumer.

By Liz Fletcher, associate, Hugh James