Watford Electronics Limited v Sanderson CFL Limited

Where experienced commercial parties of equal bargaining power negotiate a contract which allocates the risk of indirect or consequential loss, the court will ordinarily respect their assessment of commercial fairness. It should intervene under the statutory reasonableness test only where one party has taken unfair advantage, or the term is so unreasonable that it cannot properly have been understood or considered.

A clause excluding indirect loss and a separate cap on direct loss must be construed and assessed separately. An acknowledgement of non-reliance may affect the construction of a limitation clause and does not automatically operate as an exclusion of liability for misrepresentation.

Watford Electronics Ltd bought and licensed a computer software system from Sanderson CFL Ltd under contracts containing an entire-agreement clause and clauses excluding indirect or consequential loss and limiting liability to the price paid. The contracts were supplemented by an undertaking that Sanderson would use its best endeavours to allocate resources to minimise losses.

The system did not perform satisfactorily. Watford claimed damages for contractual breaches, negligent advice and misrepresentation. On preliminary issues, the Technology and Construction Court held the limitation clauses unreasonable in their entirety under the Unfair Contract Terms Act 1977 and the Misrepresentation Act 1967.

Sanderson appealed that ruling. The central issue was whether the clauses, properly construed, satisfied the statutory requirement of reasonableness.

1. Appeal allowed unanimously. Lord Justice Chadwick gave the leading judgment. Mr Justice Buckley agreed. Lord Justice Peter Gibson also agreed and gave additional reasons.
2. The appellate court could interfere with the first-instance assessment of reasonableness because the judge had proceeded on erroneous principles. A reasonableness decision ordinarily receives considerable appellate respect, but the judge had asked the wrong question by treating the two sentences of the limitation clause as a single, indivisible provision.
3. The first sentence excluded contractual claims for indirect or consequential loss, namely losses recoverable only under the second limb of the rule on remoteness. The second separately capped direct warranty loss at the price paid for the relevant equipment or software. The latter substituted the price for the hypothetical warranted value in assessing direct loss under Sale of Goods Act 1979, section 53(3). Each term had to be assessed separately.
4. The acknowledgement that neither party had relied on pre-contract representations meant that the exclusion of indirect loss should not be construed as excluding liability for pre-contractual misrepresentation. An acknowledgement of non-reliance may operate as an evidential estoppel if its requirements are pleaded and proved. It is not, merely by reason of its effect, an exclusion clause within section 3 of the Misrepresentation Act 1967.
5. The addendum was a meaningful qualification. Sanderson could rely on the exclusion of indirect loss only if it had used its best endeavours to allocate appropriate resources to ensure contractual performance and minimise resulting losses.
6. On the relevant circumstances, both limbs were fair and reasonable. The parties were experienced commercial actors of equal bargaining strength. Watford understood the commercial purpose of limiting unquantifiable consequential exposure, negotiated the price and obtained a best-endeavours protection. Its own standard terms showed its appreciation that price reflected allocated risk. The exclusion of indirect loss and the cap on direct warranty loss were therefore effective.

• Court of Appeal (Civil Division) — allowed Sanderson's appeal in [2001] EWCA Civ 317 and held the exclusion and limitation terms reasonable.
• High Court, Technology and Construction Court — His Honour Judge Thornton QC, on preliminary issues, had held the clauses unreasonable in their entirety. The Court of Appeal reversed that part of the order.