UK: IT/eCommerce Update

Last Updated: 17 February 2003

1. eCommerce NEWS

1.1 Scope and Enforceability of ADR Clauses

IT contracts often contain an alternative dispute resolution (ADR) clause which requires the parties to attempt to resolve any disputes before resorting to Court proceedings. A recent decision by the UK High Court considered whether parties to a contract could ignore such clauses.

Cable & Wireless and IBM had entered into an agreement for the supply of information technology throughout the world. A dispute arose under the agreement. Cable and Wireless issued court proceedings. IBM successfully made an application to stay the court proceedings due to the failure by Cable and Wireless to first attempt to resolve the dispute using ADR.

The High Court found the ADR clause in question was enforceable as it clearly contained a mutual and unqualified obligation to use an identifiable ADR procedure. While the clause in the contract did not prevent the parties from initiating legal proceedings it did prevent the courts deciding the dispute before the parties had attempted to resolve the matter through ADR.

For business this decision reinforces two key points. Firstly, when entering into a contract ensure that if an ADR clause is included it creates a clear obligation to use ADR and sets out the procedure to be used. Check also to see it does not prevent the parties at least commencing legal proceedings. This allows the parties to seek interim relief from the court if necessary to protect their interests (eg an injunction) pending the results of ADR. Second, if a dispute arises check the obligations under the ADR clause to ensure it does not interfere with any court proceedings that may be planned.

Cable and Wireless plc v IBM United Kingdom Ltd - Please click through for a copy of the decision.

1.2 UK Communications Bill published

In November 2002 the UK government released the Communications Bill, which is to form the basis of a major overhaul of the regulation of media and communications in the UK. It has had to overcome a number of hurdles. An earlier draft of the Bill published in May 2002 was the subject of an extensive public consultation process. It also underwent pre-legislative scrutiny by a Parliamentary committee chaired by Lord Puttnam.

The key features of the current version of the Bill are:

  • The transfer of regulatory power to the Office of Communications (OFCOM). OFCOM is the new super regulator which will replace the existing five regulators (the Independent Television Commission, Radio Authority, Office of Telecommunications, Broadcasting Standards Commission and Radiocommunications Agency)
  • More freedom for public service broadcasters to regulate themselves
  • OFCOM will be given powers concurrent with the Office of Fair Trading to apply competition rules in the communications Sector
  • The establishment of a Content Board to advise OFCOM on the nature and quality of TV and radio programmes
  • The removal of the requirement for licensing of telecommunications systems and the introduction of a new regulatory regime for electronic communications networks, services and associated facilities in line with the recent EU Telecoms Directives
  • The provision for trading of radio spectrum
  • The reform the rules on media ownership

It is anticipated that the Bill will be passed by the House of Commons by early March 2003. It will then still need to be approved by the House of Lords before becoming law.

Please click through for a copy of the Bill.

1.3 New Sale and Supply of Goods to Consumers Regulations start March 31

The Sale and Supply of Goods to Consumers Regulations 2002 implement the EU Directive on the Sale of Consumer Goods and Associated Guarantees. The regulations come into force on 31 March 2003, some 2 years after the due date for implementation of the Directive. The effect on the UK's extensive consumer protection regime will be relatively modest but there will be some important changes:

  • For the first six months after purchase/delivery, the burden of proof when reporting faulty goods will be reversed in the consumer’s favour. During that period if the consumer reports the goods as faulty the onus will be on the merchant to prove there were no faults in the goods as at the date of sale
  • The Directive will require guarantees offered by manufacturers or retailers to be legally binding, to be written in plain language with clear detail on how to claim and to be available on request
  • There will be a right to have goods repaired or replaced or have a price reduction. These remedies are already widely used in the UK but they have not had status in law. The existing right to reject unsatisfactory goods, within a reasonable time, will be maintained

The Directive itself sets a minimum baseline for consumers' rights across Member States of a two year warranty/guarantee. England and Wales have however decided to continue the pre-existing six year liability period for sale of goods rights in England and Wales (limited to six years by the Limitation Act 1980).

Please click through for a copy of the new Regulations

1.4 US website owners subject to Australian defamation laws

Australia's High Court has ruled that it has jurisdiction to hear a defamation case relating to a story published on a U.S Web site. Joseph Gutnick, a businessman from Melbourne, Australia sued the US company Dow Jones over an allegedly defamatory magazine article. Dow Jones & Company publishes the Wall Street Journal and also operates WSJ.com, a news website. WSJ.com allows subscribers and registered users to access a number of newspapers including the magazine where the article appeared. Gutnick successfully argued that the Australian Court has jurisdiction as he had suffered damage to his reputation in Australia. Gutnick also conducts business in the US and has contributed to charities in the US and Israel but the Court accepted that much of his business and social life was focused in Victoria, Australia.

The case understandably caught the attention of media companies around he world and the court received submissions from 18 media organizations including AOL Time Warner, AAP, Reuters and Yahoo. The Court however dismissed the defendant’s arguments that publishers would now need to consider the laws of defamation in every country around the world where the website could be accessed.

The Gutnick decision is a reminder for business engaged in eCommerce that they also need to consider the laws in countries other than their own home jurisdiction. In recent years courts in the UK, US and France have also shown their willingness to apply their domestic laws to protect their citizens from foreign websites.

Dow Jones & Company Inc. v Gutnick - Please click through for a copy of the decision

1.5 Electronic Credit and Hire Purchase Agreements

The EU’s Electronic Commerce Directive 2000 requires member states to ensure their laws allow contracts to be concluded by electronic means. The Directive has been largely implemented in the UK by the Electronic Commerce (EC Directive) Regulations 2002. Those Regulations are discussed in the IT Bulletins in April and November 2002.

When these Regulations were laid, the Government gave a commitment to remove any remaining legal obstacles to the recognition of electronically concluded contracts. The Consumer Credit Act requirements as to the form and content of agreements, rights of cancellation, and procedures for dealing with default and termination were identified as raising such obstacles. The Act applies to individuals who enter into credit and hire agreements for amounts up to £25,000.

A consultation paper has been released to determine the changes that are necessary to the Act to allow consumer credit and hire agreements to be concluded by electronic means. The impact on electronic business of other aspects of the Act, such as advertising, will be reviewed at a later stage. It is not planned to make any changes to the existing level of consumer protection.

Responses to the current consultation should be made by 28 March 2002. The DTI aims to publish a summary of the responses in June 2003.

Please click through for a copy of the consultation paper

2. FEATURE ARTICLE – A BITTER SWEET VICTORY FOR IT SUPPLIERS EXCLUDING LIABILITY

Introduction

Most IT contracts will contain clauses which attempt to limit and/or exclude the liability of the supplier for loss or damage arising out of a fault in the goods or services. For such clauses to be enforceable they must satisfy the "reasonableness" test in the Unfair Contracts Terms Act 1977 (UCTA).

In the May 2001 IT Newsflash we featured the decision of Watford Electronics Limited v Sanderson CFL Limited. Prior to Watford’s case if the parties had contracted on the supplier’s standard form terms and conditions the Court would typically find any clause which excluded/limited liability to be unreasonable and therefore unenforceable.

The recent decision of the UK Technology and Construction Court in Sam Business Systems v Hedley and Co also found in favour of the supplier by finding the supplier’s standard form limitation of liability clause was enforceable. There was a sting in the tail of the decision however as the Court found that the supplier could not charge under a related maintenance agreement for the costs of rectifying defects in software that was sold as ready to use.

Summary of the facts

Hedley was a small firm of stockbrokers which realised in mid-1999 that its existing IT system might not be Y2K compliant. SAM, a small software company, agreed to supply software that was (a) Y2K compliant and (b) able to automatically produce the mandatory reports required by the very strict UK financial services regulation. SAM allowed customers to chose between certain modules and services but sold its software as a developed system that was ready for use. The original verbal estimate for the supply to Hedley was £180,000. Two separate agreements, namely a licence agreement and a maintenance agreement, were concluded.

The licence agreement set out a procedure for acceptance testing of the software, and provided that in the event of non-acceptance in accordance with that procedure, all sums paid to the claimant under the agreement would be refunded (the money back guarantee). The licence agreement provided that the money back guarantee was the sole and exclusive remedy. The licence agreement also contained an entire agreement clause and exclusion of liability clauses. The exclusion clause (i) excluded any implied warranties as to fitness for purpose and (ii) excluded liability for any damages resulting from the use of the software.

Immediately after "go live" serious problems were apparent, many of which were fixed. Problems continued to arise so within 18 months of "go live" Hedley outsourced their IT system to another supplier. Hedley also purported to terminate the licence agreement but did not follow the procedure required by the "money back guarantee". By the time of the trial Hedley had already paid approximately £184,000 to SAM. SAM claimed a further total of £310,000 under both the licence contract and the maintenance contracts. Hedley counterclaimed for almost £800,000 being all sums paid to SAM and damages.

The Court had to consider the following issues:

  1. Did the exclusion clause in the license agreement prevent Hedley from recovering the cost of the software and damages?
  2. Could SAM charge for remedying defects in the software under the maintenance contract?

The Exclusion Clause in the Licence Agreement

The Court was aware that Hedley could be closed down by the financial services sector regulators for failure to comply with the mandatory reporting requirements. If that occurred Hedley would no doubt sue SAM for damages including loss of profits, costs of paying off staff and seek to recover any claims made by clients. Given that risk together with the money back guarantee the Court found it was reasonable for the licence agreement to exclude liability. Although Hedley may not have been in an equal bargaining position with SAM the Court stated this was due to Hedley leaving it so late to address the Y2K issue. The evidence also suggested that the majority of suppliers at the time used similar exclusion clauses. Hedley could therefore not recover the cost of the software or damages under the licence agreement.

The cost of remedying the defects

The Court dismissed SAM’s claim for monies outstanding under the maintenance contract. The evidence showed that the vast majority of SAM’s maintenance work was in fact rectifying defects in the software. The Court found these were pre-existing problems in the software rather than faults that had occurred after use. In a very strongly worded judgement Judge Bowsher QC stated, "no consumer would or should accept liability to pay for rectification of defects existing in goods on delivery even if there was no contractual liability on the part of the supplier to pay damages arising out of those defects".

Practical impact of the Case

Impact of the decision for IT suppliers

Sam v Hedley is confirmation that Courts are now more prepared to enforce exclusion clauses in IT contracts. The court did make it clear that the onus is still on IT suppliers to ensure that their exclusion/limitation of liability clause does not contravene UCTA.

SAM however did not escape unscathed and this decision offers the following lessons for IT suppliers:

  • The protection provided by an "entire agreement clause" to exclude representations made prior to signing the contract can be lost if the supplier is not careful
  • Payment clauses that provide for a final instalment upon completion need to be drafted carefully. In this case the Court found that due to the persistent defects the contract had technically not been completed. SAM therefore had to refund the completion payment of £29,000
  • IT suppliers need to be wary about making inaccurate claims about the performance and state of development of their product. The supplier may be obliged to repair any defects free of charge under a maintenance agreement if it is sold as a product that is ready to use

Impact of the decision for IT customers

The decision highlights the need for IT customers to:

  • Be more proactive when negotiating clauses that limit or exclude liability. The days when customers could blithely consent to such clauses safe in the knowledge that UCTA would render them unenforceable are long since gone. The end result for the customer in this case was that it paid approximately £180,000 for software it had to replace within 18 months of purchase
  • Manage the implementation of the software and acceptance testing. If problems arise in the software a failure to comply with the acceptance testing procedure can result in the customer losing the right to reject the software

The decision does however offer a glimmer of hope for IT customers. The customer in this case was not held to ransom under the maintenance contract for the costs of rectification of developed software that contained defects.

Conclusion

SAM v Hedley is a decision of a single judge in the Technology and Construction Court. Judge Bowsher QC, made it very clear it was a decision that was limited to the unique facts of the case. It will be interesting to see how the decision is subsequently viewed by other UK Courts.

In the interim it raises a number of issues for both IT customers and suppliers. It is also a good example that care needs to be taken when drafting, negotiating and managing IT contracts for even relatively small amounts. Although the initial software purchase price was £180,000 the difference in the positions of the parties when it reached trial exceeded £1 million. Few would argue that an ounce of prevention is preferable to a £1 million cure.

Sam Business Systems v Hedley and Company - Please click through for a copy of the decision

 

 

© Herbert Smith 2003

The content of this article does not constitute legal advice and should not be relied on as such. Specific advice should be sought about your specific circumstances.

For more information on this or other Herbert Smith publications, please email us.

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