Enforceable exclusion clauses in IT supply contracts

Typically, when an IT supplier supplies software or hardware to a commercial buyer, the supply contract between two businesses will contain clauses excluding the legal responsibility (“liability”) of the IT software supplier to the purchaser in specific circumstances. This will generally arise where the system fails following installation. These “exclusion” clauses attempt to minimise the future risk to the supplier in the event that things go wrong. A well-drafted exclusion clause is a vital risk management tool for any IT supplier.

If suppliers think that such clauses are necessary in their own contracts, they should think carefully about their standard contract terms in the context of a contract with a buyer. Any inconsistency between what is in the supply contract and the reality of what happens between the supplier and buyer risks the enforceability of exclusion clauses in the contract.

Where disputes occur about the enforceability of exclusion clauses, the clauses are subject to a “reasonableness” test. In these situations, the court considers whether the clause concerned is fair taking in to account the circumstances in which the contract is made.

The importance of matching the supply contract to the reality of the contractual process, and the effect that this can have on the enforceability of an exclusion clause in an IT supply contract, has recently been highlighted in the case of Kingsway Hall Hotel Limited v Red Sky IT (Hounslow) Limited (2010) EWHC 965 (TCC). This case related to the supply of an IT system to a hotel group. The system failed to work properly.

The court decided that Red Sky’s (the IT supplier) attempt to exclude certain terms about satisfactory quality and fitness for purpose of the goods, was unenforceable because the customer had not been able to satisfy itself that the goods/services supplied were of satisfactory quality and fit for the purpose which the parties intended at the time of contracting.

In addition, the contract referred to the fact that the system should comply with the “operation manuals” which should have been supplied by Red Sky before the Red Sky and Kingsway entered in to the contract. Red Sky failed to provide the manuals. The court considered that Kingsway could not decide whether the system was suitable for its needs if it did not have sight of the operation manuals before entering in to the contract. As a result, Kingsway was reliant on the advice of Red Sky when purchasing the system that it would be of a suitable standard for the types of use Kingsway intended. Following the installation of the system, it was apparent the system was not suitable for those purposes and therefore Red Sky had misrepresented the capabilities of the system to Kingsway.

The exclusion clauses in the contract were not reasonable and therefore were not enforceable. The contract did not match the reality of the contractual process between the parties and liability for the unfit system lay with Red Sky.

It is essential that supply agreements reflect the reality of what has been agreed between the parties or IT suppliers are at risk of having unenforceable exclusion clauses in their contracts.

Written by Matthew Read, a Trainee Solicitor in the Commerce and Technology team. For more information on drafting IT supply contracts, please contact Jim Carter, Karen Harrison or Matthew Read.