Kingsway Hall Hotel Ltd. v Red Sky IT (Hounslow) Ltd.

In a business software contract, exclusion clauses must be construed in their contractual and factual context. Where the supplier recommended the system as suitable for the customer’s needs, and the contractual exclusions were predicated on the customer independently assessing the system from operating documents and demonstrations, those exclusions may not apply. In any event, liability restrictions may fail the reasonableness test under the Unfair Contract Terms Act 1977 where bargaining power was unequal and the terms were not negotiated. A system supplied for a commercial hotel was not fit for purpose or of satisfactory quality where fundamental defects affected group bookings, room availability and system stability. The customer was entitled to reject it after giving the supplier a reasonable opportunity to remedy the defects.

Kingsway operated a busy London hotel and purchased Red Sky’s Entirety property-management software, together with related systems. It alleged that the system was defective, particularly in handling group bookings, reporting room availability and avoiding screen freezing. After an extended period during which Red Sky attempted fixes and enhancements, Kingsway rejected the system and claimed damages.

Kingsway also sought to withdraw an earlier admission that Red Sky’s standard terms formed part of the contract. The court refused that late amendment because it would impose unfair prejudice shortly before trial. The central issues were whether the contractual exclusions applied, whether the software was fit for purpose and of satisfactory quality, whether rejection was valid, and what damages were recoverable.

1. Late amendment. The application to withdraw Kingsway’s admissions was refused. The principles summarised in Braybrook v The Basildon and Thurrock University NHS Trust were properly treated as considerations rather than a statutory code. The court added that an application should be made reasonably promptly after the factual position becomes known. The amendment was made shortly before trial, after prolonged reliance on Red Sky’s standard terms, and would create an unfair additional burden which could not adequately be addressed by costs.
2. Contractual exclusions. Red Sky’s standard terms were predicated on the customer receiving operating documents, examining the demonstrations and deciding independently whether the system was suitable. The operating documents had to enable a prospective customer to understand the system’s functionality and sophistication before contracting. They had not been supplied before the contract was signed. Kingsway had instead relied on Red Sky’s recommendation. The exclusions in clause 10.2 therefore did not apply.
3. The restrictions were also unreasonable under section 11 of the Unfair Contract Terms Act 1977. The parties were not of equal bargaining power; the standard terms were not negotiated apart from price; there was no sufficient course of dealing; and Red Sky was the specialist supplier best placed to assess the risks.
4. Fitness and quality. Terms were implied under section 14 of the Sale of Goods Act 1979 and section 4 of the Supply of Goods and Services Act 1982. Entirety was not fit for its purpose or of satisfactory quality. Its group-booking process was slow and unwieldy, room-availability reports were unreliable, and screen freezing occurred frequently to an unacceptable extent. These were fundamental defects, not merely training issues.
5. Kingsway was entitled to reject the system after allowing Red Sky an opportunity to improve it. Judgment was entered for Kingsway for £110,997.54, after allowing £50,000 for lost profits and goodwill, £23,738.79 for wasted expenditure and £38,290 for additional staff costs and wasted staff time. Red Sky’s counterclaim failed save for the agreed credit relating to retained Kx software and related charges.