GB Gas Holdings Ltd v Accenture (UK) Ltd & Ors

A contractual warranty scheme may permit individual breaches within the same warranty category to combine into a fundamental breach, and individual fundamental breaches to be aggregated when assessing severe adverse effect. However, a Fundamental Defect requires an actual severe adverse effect by the end of the Warranty Period. An inevitable future effect is insufficient. Contractual notice may be construed against the parties’ prior knowledge, without implying a mini-pleading requirement. Clear words are required to exclude common-law damages. Such damages are not confined to a time-and-materials measure where the contract preserves damages for failure to take prescribed remedial steps. Losses falling within the first limb of Hadley v Baxendale are not indirect or consequential losses.

GB Gas Holdings brought proceedings concerning alleged breaches of software-system warranties in an amended joint project agreement with Accenture. Field J determined a series of preliminary contractual issues in the Commercial Court, including aggregation of warranty breaches, the requirements for notifying Fundamental Defects, the availability and measure of damages, excluded losses, and recovery of hardware costs: [2009] EWHC 2734 (Comm).

Accenture appealed. The central questions were whether breaches could be combined to constitute a Fundamental Defect, whether severe adverse effect had to exist by the end of the Warranty Period, and whether the contractual remedies displaced common-law damages.

Lord Justice Longmore gave the judgment of the court. Lord Justices Wilson and Mummery agreed. The appeal succeeded only on issue 2; the other material answers of the judge were upheld.

1. Aggregation. Individual warranty breaches falling within the same subparagraph of the warranty provisions could constitute a fundamental breach. The consequences of individual fundamental breaches could also be aggregated when deciding whether there was a severe adverse effect on the business. The court decided only the contractual possibility of aggregation, leaving the factual effect of the alleged breaches to trial. It declined to express a final view on the broader submission that any material breaches could combine in every circumstance. A Material Defect which had actually been fixed could make no further contribution to a Fundamental Defect, as Centrica conceded.
2. Timing of severe adverse effect. The distinction between a Fundamental Defect, which causes a severe adverse effect, and a Material Defect, which has or is likely to have an adverse effect, was deliberate. A Fundamental Defect had to have caused an actual severe adverse effect by the end of the Warranty Period. An effect which was merely inevitable in the future was insufficient. The judge’s answer to issue 2 was therefore varied.
3. Notification. A notification could be construed against the background of the parties’ prior knowledge to determine what a reasonable recipient would understand it to mean, applying Mannai Investment Co v Eagle Star [1997] AC 749. That construction did not itself determine whether the notice was valid. Clause 15.4.3 did not expressly require the notice to identify the warranties, SoRR requirements, errors, or severe adverse effect. No mini-pleading requirement was to be implied.
4. Damages. Common-law damages are not excluded merely because a contract requires defects to be repaired or remedied, as recognised in Hancock v Brazier [1966] 1 WLR 1317. Clause 15.4.3 preserved a claim for damages where Accenture failed promptly to use the prescribed endeavours. Centrica’s damages were consequently at large and were not limited to losses arising after notification, losses arising after a reasonable remedial period, or losses calculated on a time-and-materials basis.
5. Excluded losses. Losses within the first limb of Hadley v Baxendale (1854) 9 Exch. 341 were not indirect or consequential for the purposes of clause 16.2. Gas-distribution charges were overpayments, not lost revenue. Compensation paid to customers, as pleaded, was not a claim for lost revenue, although an alternative mitigation formulation would be treated as a revenue claim.
6. Hardware and contractual procedures. Hardware costs could form part of common-law damages for a Fundamental Defect. The hardware provisions in Schedules 3 and 10 did not clearly confine that entitlement. Requests for hardware under those provisions could not be made after 28 February 2007, but a purchase following a timely request was not necessarily required to occur by that date.

The parties were directed to draw an order reflecting the single variation to the answer on issue 2.

1. Court of Appeal (Civil Division): Allowed the appeal in part by varying the answer to issue 2 and upheld the other relevant answers.
2. High Court (Queen’s Bench Division, Commercial Court): Field J determined the preliminary contractual issues in the judgment appealed from: [2009] EWHC 2734 (Comm).