It is common place for information technology companies to seek to limit their liability to their clients through a contractual limitation of liability clause. The recent High Court decision of {St Albans City Council -v- International Computers Limited} ("ICL") (3rd October 1994) graphically shows that such attempts to limit liability do not automatically work.

In this case a software error by ICL led to St Albans City Council suffering a loss of around £1.3 million. One of ICL's defences was that their standard terms limited their liability to £100,000. This was rejected by Mr Justice Scott Baker who decided that such a clause did not, in all the circumstances, satisfy the requirement of reasonableness set out in the Unfair Contract Terms Act 1977 ("UCTA"). ICL, in fact, held £50 million of product liability insurance to cover against such an eventuality and this was very much the factor which tipped the balance of reasonableness away from ICL. The Judge was left to answer the following question:-

"On whom is it better that a loss of this size should fall, a local authority or an international computer company? The latter is well able to insure (and in this case was insured) and pass on the premium costs to the customer. If the loss is to fall the other way it will ultimately be borne by the local population either by increased taxation or reduced services. I do not think it unreasonable that he who stands to make the profit (ICL) should carry the risk".

ICL obviously had adequate insurance for this problem. But the result would have been the same if they had no insurance. Section 11(4)(b) of UCTA specifically provides that when assessing whether such a clause satisfies the requirements of reasonableness, regard shall be had to how far it was open to the business to protect itself by insurance. It is, therefore, the availability of insurance at a suitable price which is relevant.

This means that if suitable insurance cover is available to an information technology business for a premium which would have limited impact on that business' overheads (and so the cost at which it provides services to its customers) then any attempt by that business instead to put their faith in a standard limitation clause runs a very real risk of being unsuccessful.

Keywords:Information Technology Companies - Ineffectiveness of Limitation of Liability Clauses - Professional Indemnity Insurance

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