Technology Supplier Pays the Price for Provision of a "Useless" Accounts System

When a computerised accounts system failed to meet a client’s requirements, the company which installed it was forced to pay £2.6 million in damages.

In this article, IT litigation partner Mark Lewis of City law firm Field Fisher Waterhouse considers the recent decision in Horace Holman Group Limited v Sherwood International Group Limited.

The claim was brought by a group of insurance companies collectively known as Horace Holman Group Limited after a computerised accounts system, supplied by the defendant Sherwood, failed to work as required by the customer.

The claimant Horace Holman sought to recover various heads of losses, including:

• the cost of upgrading its PCs to work with the alternative system it was forced to buy;
• savings it had expected to make on implementation of the Sherwood system;
• the cost of retaining staff who would otherwise have been made redundant;
• lost revenue opportunities; and
• management and staff time wasted.

The judge awarded damages as follows:

Third party costs accounted for the cost of computer maintenance, disaster recovery, replacement of the SYMBAL system with the GPM system, time spent by a consultant on the project and temporary staff who had been employed in connection with it. It also included savings which would have been achieved if policy preparation had been bought in-house and audit savings not made as a result of the system’s installation.

Had the various different accounting systems within the Horace Holman Group been replaced by a single integrated accounting system as intended, it would have simplified the auditors’ tasks. However, the damages awarded in relation to audit savings not made amounted to just £10,000 on the basis that market forces would have reduced the level of audit fees anyway and, even without the computerised system, a rationalisation of the Group’s affairs, including the sale of one of its members, would have brought savings.

The claimant also argued that more powerful PCs were needed to access the replacement GPM system. The judge rejected this claim. He was not satisfied that the cost of the upgrade could be blamed on the defendant as there was no documentary evidence of when the PCs were upgraded and, in any case, all PCs have to be replaced from time to time anyway.

Had SYMBAL worked, the claimant would have made staff savings through redundancies years earlier than it in fact did. The defendant argued that staff savings produced by the computer were to a certain extent counter-balanced by necessary increases in the IT department, though this was rejected on the grounds of lack of evidence.

The defendant also argued that staff losses were the result of a downturn in business, but the judge said that this was due to a drop in the premium rates rather than in the amount of transactions.

It wasn’t until the implementation of the replacement GPM system that the clerical tasks which had previously been undertaken by nine people in the Broking and Claims Department could be carried out successfully by a computer. Had SYMBAL worked effectively, this would have been the case five years earlier.

The defendant argued that not all of the employees had clerical jobs. However, the judge said that the elimination of the clerical element from their work, and that of others, meant that the individuals named could be, and indeed were, made redundant. For this, the claimant was awarded over £1.7 million in damages.

There had also been a delay in downsizing the accounts department following the sale of the claimant’s Personal Stop Loss business. This left a run-off element which could have been dealt with more speedily had SYMBAL worked. However, it was also noted that the redundancies would not have taken immediate effect once the system went live.

The defendant accepted that, in principle, a claimant might be able to claim for the expense of time lost by directors and staff in reorganising its systems in anticipation of the integrated computer system and in attempting to implement SYMBAL and, in particular, resolving the problems caused by its inadequacies.

The judge referred to the decision in Tate & Lyle v GLC, in which Forbes J indicated that, in principle, compensation was recoverable for the cost of managerial time wasted but that, in the absence of evidence as to exactly how much time had been wasted, he was not prepared to speculate.

In Horace Holman, there was evidence in the form of a reconstruction from memory of past events. Particularly of note in this case is that the absence of written records did not prevent the full recovery damages claimed in this respect.

The defendant initially argued that the employees in question were "back office" rather than fee earning staff, so their salaries were part of the claimant’s fixed costs. However, the judge dismissed job status and a distinction between short and long periods of downtime as irrelevant to the matter at hand. The defendant’s expert later conceded that the amount of time certain employees had spent trying to resurrect the aborted system was so extensive that it was properly claimable as damages.

The defendant also argued that, as senior employees do not work fixed hours, time wasted on the SYMBAL problems would have been made up in the evenings or at weekends. However, the judge said that if an employee is deprived of benefits of leisure time, productivity during the paid hours suffers.

The judge awarded all the time wasted on the basis that employees would have been carrying out work of benefit and value to the company if they hadn’t been wasting time sorting out the SYMBAL problems.

A claim for lost opportunities to make profits on the basis that, when certain staff were helping with certain queries, they were not broking was rejected by the judge.

The claimant contended that cash flow had been hindered by the lack of a computerised system and that it had lost interest as credit control was slowed by cash being unallocated and debts being recovered late or becoming irrecoverable because of the late issuing of debit notes. The judge allowed the amount claimed for interest lost as a result of the absence of SYMBAL.

The most controversial aspect of the judge’s decision was to award damages for wasted staff time – regardless of any proof of loss of expenditure or of revenue.

With this in mind, companies which find that a system they have bought is not all they had hoped it to be would be wise to keep records of time wasted by staff trying to resolve problems caused by the system’s inadequacy so that losses might be recoverable as damages.