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All England Official Transcripts (1997-2008)

Watford Electronics Ltd v Sanderson CFL Ltd

Contract - Unfair terms - Exclusion of liability for misrepresentation - Contract to supply computer system - Whether exclusion clauses fair and reasonable - Unfair Contract Terms Act 1977, s 11 [2001] EWCA Civ 317, (Transcript: Smith Bernal)

COURT OF APPEAL (CIVIL DIVISION) PETER GIBSON, CHADWICK LJJ, BUCKLEY J

23 FEBRUARY 2001

23 FEBRUARY 2001 M Raeside for the Appellant P Irvin for the Respondent DLA, Birmingham; Needleman Treon

CHADWICK LJ [1] This is an appeal against part of an order made on 27 July 2000 by His Honour Judge Thornton QC on the hearing of preliminary issues in proceedings brought in the Technology and Construction Court. The appeal is brought with the permission of this Court (Simon Brown LJ) granted on 27 October 2000. The background facts [2] The claimant, Watford Electronics Ltd (to which I shall refer as "Watford"), is a family owned business engaged in the sale of computer products, principally by mail order. It has particular expertise in the sale or supply of personal computers for educational, commercial and personal use. By 1992 the monthly turnover from its business was 1.5 million or thereabouts, derived from sales of some 8,000 catalogue items. [3] In April 1992 Watford moved to new premises in Luton. It identified a need for an integrated software system which would enable it to exercise greater control over its expanding business; in particular, over mail order sales, warehouse stock and accounts. For that purpose it entered into discussions with the defendant, Sanderson CFL Limited ("Sanderson"), a subsidiary of Sanderson Group Plc. Sanderson was engaged in the supply of software products; including, in particular, a product known as "Mailbrain". Mailbrain was a marketing package for use in connection with mail order marketing; but which could be used in conjunction with another product, "Genasys", for maintaining sales,

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purchase and nominal ledgers and for other accounting functions. The contractual documents [4] Negotiations took place between Mr Shiraz Jessa, then the technical director of Watford, and Mr Paul Broderick, the sales manager at Sanderson with responsibility for Mailbrain. Those negotiations, extending over the summer of 1992, led the parties to enter into three contractual documents. Those documents, under a common reference 1078-92, were: (i) a sales contract for the supply by Sanderson of eight items of equipment at a total price of 15,508; (ii) a software licence in respect of Mailbrain and Genasys products, at an initial licence fee of 70,260 and, thereafter, at an annual licence fee of 14,231; and (iii) a software modification licence, covering certain "bespoke" modifications set out in a letter of 29 September 1992 and training, at an initial licence fee of 3,250. The software was for use with IBM compatible hardware, to be provided, I think, by Watford. [5] Each of those three documents was on a single sheet of paper. On the face of the document there was the date, 9 October 1992, a description of the equipment to be supplied or the product to be licensed (as the case might be) and the words "This contract is subject to the Terms and Conditions set out overleaf". Each document was signed, on the face, by Mr Jessa on behalf of "the Customer" and by Mr Arlidge, then the managing director of Sanderson, on behalf of "the Company". The reverse of each document contains printed terms and conditions. [6] The "Terms and Conditions of Sale", which appear on the reverse of the sales contract, contain an "entire agreement" clause in these terms:

"14. Entire Agreement

The parties agree that these terms and conditions (together with any other terms and conditions expressly incorporated in the Contract) represent the entire agreement between the parties relating to the sale and purchase of the Equipment and that no statement or representations made by either party have been relied upon by the other in agreeing to enter into the Contract."

Clause 7 of the "Terms and Conditions of Sale" is in these terms, so far as material:
"7. Warranty and Limit of Liability

7.1. The Company warrants that the Equipment will perform in accordance with its specification . . .

7.2. The Company and the Customer agree to indemnify each other against any liability arising in respect of injury (including death) to any person or loss or damage to any property which results from the act, default or negligence of itself, its employees, agents or subcontractors.

7.3. Neither the Company nor the Customer shall be liable to the other for any claims for indirect or consequential losses whether arising from negligence or otherwise. In no event shall the Company's liability under the Contract exceed the price paid by the Customer to the Company for the Equipment connected with any claim."

[7] The "Terms and Conditions of Software Licence" which appear on the reverse of the software licence and the software modification licence contain similar provisions at clause 15 (Entire Agreement) and clause 10 (Warranty and

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Limit of Liability). In particular, clause 10.6 of the Terms and Conditions of Software Licence is in the same terms (save for the substitution of "Software" for "Equipment") as clause 7.3 of the Terms and Conditions of Sale. [8] The sales contract, the software licence and the software modification licence are each subject to a contemporaneous addendum to clause 7.3 or clause 10.6 (as the case may be) of the Terms and Conditions. The addendum to clause 7.3 of the Terms and Conditions of Sale is in these terms:
"In addition to Clause 7.3, Sanderson CFL Ltd commit to their best endeavours in allocating appropriate resources to the project to minimise any losses that may arise from the Contract."

The addenda to Clauses 10.6 of the Terms and Conditions of Software Licence are to the same effect. The system fails to perform [9] The system purchased under the October 1992 contracts was brought into operation in or about February 1993. It did not perform satisfactorily. A number of meetings and visits by Sanderson representatives took place in order to identify the problems. A report was commissioned from Bull Information Systems Ltd which recommended upgrading the PC server to a Bull DPX/20. This led to two further documents, each dated 20 August 1993. One was a sales contract for the supply of the Bull mini-computer, with peripherals, at a price of 28,211. The other was a software licence, for which the price was 2,176. The August 1993 documents contained the same terms and conditions as the October 1992 documents. [10] The total paid by Watford to Sanderson for equipment and in licence fees between 1992 and 1996 amounted to 104,596. The system continued to give rise to problems and, in 1996, it was replaced by a new system from a different supplier. Watford sought redress from Sanderson. These proceedings [11] These proceedings were commenced in 1998. The claim is put in three ways. First, it is said that Watford was induced to sign the October 1992 documents as the result of representations made by Sanderson (including, but not limited to, representations made in the Mailbrain product brochure) which were false. Second, it is said that Sanderson was in breach of terms which were to be implied in both the October 1992 documents and the August 1993 documents. These included (i) warranties in the same terms as the pre-contract representations, (ii) a term that the computer system recommended by Sanderson would be of merchantable quality and reasonable fit for the purposes for which it was supplied, (iii) a term that Sanderson would use the skill and care reasonably to be expected of experts in the performance of the contact, and (iv) a term that Sanderson would remedy any defect which became apparent within a reasonable time so as to allow Watford's business to continue without interruption. Third, it is said that Sanderson, as an expert knowing that Watford would rely upon its expertise, owed a common law duty of care to use skill and care in making its recommendations and in performing the contract induced by those recommendations. There follow allegations of the breach of the alleged contractual duties and of the alleged negligence. Put shortly, it is said that the system recommended was not capable of performing satisfactorily; that it was delivered and installed late; that it never did perform satisfactorily; and that Sanderson failed to meet Watford's complaints or to remedy the defects within a reasonable time. [12] The claim for damages for breach of contract is put under three heads: (i) a claim for loss of profits - said to be

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measured by a "depression of turnover" - in the amount of 4,402,694; (ii) a claim for damages arising from the increased cost of working - that is to say, from the failure to make savings in staff time and the additional costs incurred in attempting to operate the defective system - in the amount of 996,063; and (iii) a claim for the cost of mitigating the continuing losses equal to the cost of acquiring and installing alternative software in 1996, in the amount of 119,204. The whole amount of the contractual claim is a little over 5.5 million. There is an alternative claim under the Misrepresentation Act 1967 (alternatively for negligent mis-statement). The amounts claimed for misrepresentation and negligence are (i) the 104,596 paid to Sanderson for the equipment and the licence fees, and (ii) the amount of the increased costs of working (996,063). [13] In a defence served in May 1999, Sanderson relied (amongst other matters) on the entire agreement clauses in the documents - that is to say, on clause 14 of the Terms and Conditions of Sale and clause 15 of the Terms and Conditions of Software Licence; and on the clauses excluding and limiting liability - that is to say, on clause 7.3 of the Terms and Conditions of Sale and clause 10.6 of the Terms and Conditions of Software Licence. It was said (i) that the effect of the addenda negotiated on 29 September 1992 (to which I have referred) was that the terms were no longer to be treated as standard written terms - with the consequence that the Unfair Contract Terms Act 1977 did not apply to them; alternatively, (ii) that, if the 1977 Act did apply, then the terms satisfied the requirement of reasonableness under that Act. [14] On 8 October 1999 His Honour Judge Toulmin CMG QC ordered a number of issues to be tried as preliminary issues. Those issues came before His Honour Judge Thornton QC for trial in February and March 2000. For the reasons given in a written judgment handed down on 27 July 2000 the judge held (so far as material in the context of this appeal) (i) that there was a single contract made between the parties, comprising the three documents signed in October 1992 as varied by the two documents signed in August 1993, and that that contract contained implied terms as to merchantability and fitness for purpose and an implied term that the services to be provided thereunder would be provided with reasonable skill and care; (ii) that the representations contained in the Mailbrain product brochure and in two letters dated 19 June and 23 September 1992 were made by Sanderson and were relied upon by Watford as an inducement to enter into the contract; (iii) that Sanderson owed a common law duty to exercise all due skill and care in giving professional advice; (iv) that, on their true construction, clauses 7.3 and 10.6 in the relevant terms and conditions were apt to exclude liability for losses claimed by Watford in excess of the total price paid for the equipment and the licences; (v) that, on their true construction, clauses 14 and 15 of the relevant terms and conditions (the entire agreement clauses) did not prevent Watford from putting forward any of its claims or from contending that representations made by Sanderson induced the contract; (vi) that both the Unfair Contract Terms Act 1977 and the Misrepresentation Act 1967 applied to the contract between Sanderson and Watford; and (vii) that clauses 7.3 and 10.6 of the relevant terms and conditions were unreasonable in their entirety under the Acts of 1967 and 1977 and could not be relied upon by Sanderson to exclude or restrict its liability to Watford or to impose a limit on any such liability. The issue on this appeal [15] Sanderson appeals only against so much of the judge's order as gave effect to his finding under Issue 7 - although referred to in the judgment as "the Eighth Issue" - that clauses 7.3 and 10.6 were unreasonable in their entirety. It will be necessary, however, to say something in this judgment as to the true effect of clauses 14 and 15 (the entire agreement clauses) because, to my mind, the presence of those clauses in the contract colours the meaning and effect which the parties must be taken to have intended should be given to clauses 7.3 and 10.6. The Unfair Contract Terms Act 1977

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[16] The Unfair Contract Terms Act 1977 was enacted following the Second Report of the Law Commission and the Scottish Law Commission on Exemption Clauses (Law Com No 69, Scot Law Com No 39). The purpose of the Act, as proclaimed by its long title is:
"to impose further limits on the extent to which . . . civil liability for breach of contract, or for negligence or other breach of duty, can be avoided by means of contract terms . . ."

Section 3 of the Act applies as between contracting parties "where one of them deals as consumer or on the other's written standard terms of business". The section is, plainly, intended to meet the problem identified by the two Law Commissions at Pt IV of the Second Report - see, in particular, at para 147:
"The case for controlling clauses is evident in a situation where one party acts in the course of a business and the other does not (we refer to such a transaction as a 'consumer contract'). Injustice may arise because the consumer will frequently not understand the implication of the terms of the contract and, even if he does, he may not have sufficient bargaining strength to prevent their inclusion in the contract. But these factors are not limited to consumer contracts . . . Should, therefore, the control over clauses preventing contractual liability arising, or excluding liability for breach of contract, apply to all contracts where one party enters into a contract in the course of a business regardless of whether the customer is acting in the course of a business. We have concluded that this would involve too high a degree of interference with freedom of contract; injustice is unlikely where the parties have been able to negotiate the provisions of the contract on equal terms. We believe that the situations where control is necessary (even though both parties to the contract are acting in the course of a business) arise where one party requires the other to accept terms which the former has decided upon in advance as being generally advantageous to him, and the customer must either accept those terms or not enter into the contract: that is, where there is a standard form contract. To summarise, we can identify the situations where control is needed as where the promisor has contracted in the course of a business, either where it is a consumer contract or where it is a standard form contract."

[17] The control - for which need was identified by the Law Commissions - is provided by s 3(2) of the 1977 Act. Where one contracting party deals on the other's written standard terms of business, then:
"As against that party, the other cannot by reference to any contract term - (a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach; . . . except in so far as . . . the contract term satisfies the requirement of reasonableness."

[18] Whether or not a contract term satisfies the "requirement of reasonableness" is to be determined in accordance with the provisions of s 11 of the 1977 Act. Section 11(1) is in these terms, so far as material:
"In relation to a contract term, the requirement of reasonableness . . . is that the term should have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made."

It is for the party claiming that a contract term satisfies the requirement of reasonableness to show that it does - see s 11(5) of the 1977 Act. [19] The generality of the provision in s 11(1) is qualified, first, by s 11(2) of the Act in relation to certain implied obligations arising under statute - that is to say, under ss 13, 14 or 15 of the Sale of Goods Act 1979 or under the corresponding provisions in the Supply of Goods (Implied Terms) Act 1973 (see s 6 of the 1977 Act as amended) - or by implication of law from the nature of the contract (see s 7 of the 1977 Act); and, secondly, by s 11(4) in circumstances where the contract term seeks to restrict liability to a specified sum of money. The qualification introduced by s 11(2) is that, in determining (in relation to a contract term to which that sub-section applies) whether the

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contract term satisfies the requirement of reasonableness, "regard shall be had in particular to the matters specified in Schedule 2 to this Act". The further qualification introduced by s 11(4) is that:
"regard shall be had in particular (but without prejudice to subsection (2) above . . .) to - (a) the resources which [the person seeking to restrict liability] could expect to be available to him for the purpose of meeting the liability should it arise; and (b) how far it was open to him to cover himself by insurance."

[20] Sch 2 to the Unfair Contract Terms Act 1977 contains "'Guidelines' for application of reasonableness test". Where applicable, the "guidelines" require that regard is to be had in particular to any of the following which appear to be relevant:
"(a) the strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer'srequirements could have been met;

(b) whether the customer received an inducement to agree to the term, or, in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term;

(c) whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties);

(d) where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable;

(e) whether the goods were manufactured, processed or adapted to the special order of the customer."

The judgment below [21] The issue for the judge - Issue 7 - was posed in these terms:
"Are the Defendant's written terms [contained in clauses 7.3 and 10.6] reasonable under the Unfair Contract Terms Act 1977 and the Misrepresentation Act 1967?"

He answered that question in the negative. He held that the clauses:

"are unreasonable in their entirety . . . and cannot therefore be relied upon by the Defendant to exclude or restrict its liability to the Claimant or to impose a limit on any such liability."

[22] The judge directed himself that the matters set out in Sch 2 to the 1977 Act were relevant whether or not Sch 2 was made applicable by s 11(2) of that Act. As he said, at para 115 of his written judgment:
"I will decide the reasonableness of the clause in question for all claims by reference to all matters including those set out in schedule 2."

He addressed, first, each of the "guideline" matters set out in Sch 2 - other than that in paragraph (d) which, as was common ground, could have no relevance to the contract term in relation to which the requirement of reasonableness

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was in issue. [23] The judge's conclusions in relation to the guideline matters may be summarised as follows: Paragraph (a) - the strength of the bargaining positions of the parties relative to each other The judge held, at para 120 of his written judgment, that there was no inequality of bargaining power between the parties; and, further, that neither was under any particular pressure to contract with the other. He held, at para 121, that there was no inequality of bargaining skill. In particular, he found that:
"Mr Jessa [for Watford] was a skilled and reliable negotiator who successfully negotiated the asking price downwards during his inevitably protracted discussions with Mr Broderick [for Sanderson]."

He accepted that the market for commercially produced software packages could aptly be described as a "buyer's market", at least in the sense that prices were competitive and buyers could negotiate substantial discounts. But, at para 123 of his judgment, he said this:
"However there were other aspects of the market which would more appropriately be called a seller's market. In particular, the terms upon which Sanderson would do business were inflexible and non-negotiable. This was particularly so with the exemption clause. Mr Jessa sought to vary this but could only persuade Sanderson to offer the virtually meaningless addendum contained in the schedule which provided an obligation to use best endeavours to sort out any problem if such occurred. General evidence from Mr Broderick and from the several cases referred to at the trial where software exemption clauses were in issue suggested that it was a standard feature of this industry in the early 1990s to supply software packages on stringent standard terms exempting all or virtually all liability without providing any service or alternative service to deal with defects or breaches of terms concerned with merchantability, fitness and performance. Thus Watford could not reasonably have expected to have been able to have acquired a similar software package, if available, on better terms as to performance and as to the supplier's potential liability for non-performance."

He considered whether there were other sources of supply available to Watford. He concluded, at para 126, that there were other possible mail order packages on the market but that Mailbrain was the only one which appeared to fulfil Watford's needs. He said this:
"Sanderson did not show that such an integrated package would have been readily available elsewhere and such evidence as there was of potential rival packages suggested that no such integrated package was readily to hand."

Paragraph (b) - whether the customer received an inducement to agree the term; or had an opportunity to enter into a similar contract elsewhere without the term? The judge held that there was no financial inducement which led Watford to accept the relevant contract term. He rejected the contention, advanced by Sanderson, that the price reduction was negotiated on the basis that Sanderson would accept a lower price if Watford would accept the term limiting liability. Paragraph (c) - the customer's knowledge of the relevant contract term. The judge held, at para 132:

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". . . Mr Jessa was aware of the existence of the term, only first learnt of its existence towards the end of the pre-contract discussions, attempted unsuccessfully to have it substantially amended, only succeeded in achieving a make-weight amendment and learnt from Sanderson that a term totally excluding liability was standard software industry practice."

Paragraph (e) - were the goods adapted to the special needs of the customer? Plainly there were modifications to the system; it was the modifications which gave rise to the need for the software modification licence. But the judge thought that they were minor in relation to the standard package that was being supplied and were:
"an inevitable part of the process of implementing and configuring the system which Sanderson had contracted to provide and which Watford was paying for as part of the contract price."

[24] The judge then addressed a number of other matters which had been canvassed before him. First, the availability of insurance; to which regard must be had under s 11(4) of the 1977 Act (in a case to which that sub-section applies). He found that Sanderson did not have any insurance cover in respect of liability for indirect and consequential losses arising from the defective performance of the Mailbrain product; but that such cover was available. He referred to the evidence of Mr Bailey, who had become Sanderson's managing director in succession, I think, to Mr Arlidge. The judge said this, at para 136 of his judgment:
"Sanderson's commercial policy at that time [1992] was to seek to maintain its exclusion of liability clause but, if a potential customer insisted on the deletion of this clause from the contract or on an amendment to cover it from an exclusion of liability clause to a limitation of liability clause, to be prepared to modify the clause in an appropriate case. In such cases, Sanderson would consider whether to obtain one-off insurance cover and would do so if Mr Bailey considered Sanderson's risk of exposure was too great. Mr Bailey referred to two contracts where an increased limit of liability had been negotiated and insurance cover had then been obtained. Mr Bailey did not explain why Sanderson had not been prepared to provide such an amendment to its exclusion of liability clause in the contracts with Watford and I infer that the reason was that Sanderson correctly assumed that Watford would be persuaded to contract without such an amendment. Mr Bailey's policy was only to contemplate an amendment if it made the difference between making a sale and not making one. I conclude, therefore, that insurance cover would have been available to Sanderson who chose not to obtain it for commercial reasons and, instead, to exclude its liability for consequential losses."

[25] There was no evidence as to the availability to Watford of insurance cover against loss of profits or turnover resulting from the failure of the system which it was to purchase. The judge held that he must leave that possibility out of account. He said this, at para 137:
"Since the burden of proof in establishing the reasonableness of the exclusion clause rests with Sanderson, I conclude that I should not regard it as relevant to the potential reasonableness of the clause that it might have been possible for Watford to take out its own insurance."

[26] There were two other matters which the judge thought he should leave out of account. First, he re-affirmed his view - of which he had already given an indication when considering the question of inducement to agree the term - that the fact that an overall discount was negotiated, which (as he thought) was not referable to the relevant contract term, when agreeing the contract price had no bearing on the reasonableness or unreasonableness of the term (see para 139). Second, he regarded it as irrelevant that Watford's own standard terms of business contained a clause excluding liability in respect of consequential losses. The clause - clause 10 in Watford's "Terms and Conditions of Sale" - was in these terms, so far as material:
"10. Liability

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(a)The Company shall not be liable to the Customer

(i) . . .

(ii) . . .

(iii) . . . for defects in the goods caused by fair wear and tear, abnormal conditions of storage or use or act,neglect or default of the Customer or of any third party,

(iv) . . . for other defects in goods or the media uponwhich software is supplied, unless notified to the Company within seven days of receipt of the goods or software, or where the defect would not be apparent on reasonable inspection within seven days of delivery.

(b)(i) . . . Where liability is accepted by the Company under paragraph (a), the Company's only obligation shall be at its option to . . . replace or repair any goods or software found to be . . . defective and/or to refund the cost thereof to the Customer, and in no event shall the Company be under any liability whatsoever and howsoever arising from any loss of profit, interruption of business or any other indirect, special or consequential losses of any type rising or alleged to have arisen out of any act or default of the Company in respect of its obligations hereunder.

(ii) the Company's aggregate liability to theCustomer hereunder or otherwise arising whether fornegligence, breach of contract, misrepresentation orotherwise shall in no circumstances exceed the cost of the defective . . . goods which give rise to such liability . ..

(c) . . .

(d) The Company's prices are determined on the basis of the limits of liability set out in this Condition. The Customer may by written notice request the Company to agree a higher limit of liability provided insurance cover can be obtained therefor."

In declining to treat as relevant the existence of that clause in Watford's own terms of business, the judge observed that:
"Watford is a retailer of PCs, Sanderson is a supplier of tailored software systems. Those are very different businesses and, besides, Watford's exclusion clause might well be held to be unreasonable in a dispute with one of its customers."

[27] The judge treated as irrelevant, also, the fact that Watford had had the opportunity to see the Mailbrain product in operation in a working environment similar to its own; and that Watford had had the benefit of a demonstration at its own premises. He held that neither the inspection nor the demonstration would have provided Watford with any opportunity to assess the risk that the system might not perform. [28] Finally, the judge referred, at para 142 of his judgment, to a number of general considerations which had been advanced by Watford in support of its contention that the relevant contract term was unreasonable: (i) that the contract was for the supply of software for a particular use - so that the relevant contract term deprived Watford of any effective remedy for all possible significant breaches of contract by Sanderson; (ii) that Watford was particularly dependent on the representations made to it by Sanderson - because it was dependent on Sanderson's expertise; (iii) that the consequences of defective performance on Watford were potentially very significant; and (iv) that Sanderson had assured Watford, after having acquired some knowledge of its business, that the software system supplied would be fit for its purpose.

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[29] With all those factors in mind, the judge reached the conclusion that Sanderson had not established that the relevant contract term was reasonable. He expressed that conclusion in the following passage, at para 144 of his judgment:
"The clause is not justified by any particularly onerous or unusual liabilities that Sanderson might encounter, nor by any difficulties in obtaining insurance nor by any particular features of either the negotiations or of the parties. Watford would have had considerable difficulties in obtaining the relevant software elsewhere without such a clause since it was a common feature of the software supply industry at that time. The effect of the clause is to deprive Watford of the opportunity of recovering any damages in circumstances in which, given the assumptions I must make about the correctness of Watford's pleaded allegations, there have been significant failures accurately to represent the features of the software and to comply with the contractual requirements as to merchantability and quality. Indeed on the basis of these assumptions, Sanderson has materially failed to perform its contract obligations. I accept the factors stressed by Watford as being ones which make it unreasonable for Sanderson to rely on the clause. It is, therefore, one which may not be relied upon in relation to any of Watford's pleaded allegations or claims."

The approach to be taken by an appellate court [30] We were, of course, reminded (rightly) of the observations of Lord Bridge of Harwich in George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 AC 803, [1983] 2 All ER 737 - a case on the rather different provision in s 55(4) of the Sale of Goods Act 1979 (as applied to contracts made on or after 18 May 1973 and before 1 February 1978 by para 11 of Sch 1 of that Act). Lord Bridge said this, at pages 815F-816C of the former report:
"This is the first time your Lordships' House has had to consider a modern statutory provision giving the court power to override contractual terms excluding or restricting liability, which depends on the court's view of what is 'fair and reasonable'. The particular provision of the modified section 55 of the Act of 1979 which applies in the instant case is of limited and diminishing importance. But the several provisions of the Unfair Contract Terms Act 1977 which depend on 'the requirement of reasonableness', defined in section 11 by reference to what is 'fair and reasonable' albeit in a different context, are likely to come before the courts with increasing frequency. It may, therefore, be appropriate to consider how an original decision as to what is 'fair and reasonable' made in the application of any of these provisions should be approached by an appellate court. It would not be accurate to describe such a decision as an exercise of discretion. But a decision under any of the provisions referred to will have this in common with the exercise of a discretion, that, in having regard to the various matters to which the modified section 55(5) of the Act of 1979, or section 11 of the Act of 1977 direct attention, the court must entertain a whole range of considerations, put them in the scales on one side or the other, and decide at the end of the day on which side the balance comes down. There will sometimes be room for a legitimate difference of judicial opinion as to what the answer should be, where it will be impossible to say that one view is demonstrably wrong and the other demonstrably right. It must follow, in my view, that, when asked to review such a decision on appeal, the appellate court should treat the original decisions with the utmost respect and refrain from interference with it unless satisfied that it proceeded upon some erroneous principle or was plainly and obviously wrong."

That passage was cited and applied by this Court in the recent appeal in Overseas Medical Supplies Ltd v Orient Transport Services Ltd [1999] 2 Lloyd's Rep 273, at page 276. That that is the correct approach is not in dispute. The scope and effect of the relevant contract term [31] In order to decide whether the relevant contract term was a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made it is necessary, as it seems to me, to determine, first, the scope and effect of that term as a matter of construction. In particular, it is necessary to identify the nature of the liability which the term is seeking to exclude or restrict. Whether or not a contract term satisfies the "requirement of reasonableness" within the meaning of s 11 of the Unfair Contract Terms Act 1977 does not fall to be determined in isolation. It falls to be determined where a person is seeking to rely upon the term in order to exclude or restrict his liability in some context to which the earlier provisions of the 1977 Act (or the provisions of s 3 of the Misrepresentation Act 1967) apply.

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[32] Clause 7.3 in the Terms and Conditions of Sale and clause 10.6 in the Terms and Conditions of Software Licence each contain two sentences (i):
"Neither the Company nor the Customer shall be liable to the other for any claims for indirect or consequential losses whether arising from negligence or otherwise."

(ii):
"In no event shall the Company's liability under the Contract exceed the price paid by the Customer to the Company for the [Equipment/Software] connected with any claim."

It is, to my mind, plain that the reason why the clauses each contain two sentences is that each sentence is intended to have its own separate and distinct purpose. In so far as the judge held otherwise, I am satisfied that he was wrong to do so. At para 145 of his judgment he said this:
"I do not need to consider separately whether the clause could be reasonable in so far as it limits Sanderson's liability to the ceiling of recoverability imposed by the contract price. The parties accepted that the clause was either reasonable or unreasonable in full and was not one to which a blue pencilling exercise could be carried out so as to uphold it in part. In any case the very low ceiling imposed by the limitation clause is such as to render that part of the clause unreasonable for the reasons I have already provided, even if that provision stood on its own."

The need to recognise that each of the two sentences in the clause has a separate and distinct purpose - and to identify that purpose - is not to be dismissed as "a blue pencilling exercise". It is essential to a determination whether or not the relevant contract term - that is to say, the contract term which is relevant to the liability which Sanderson seeks to exclude - satisfies the requirement of reasonableness. [33] The purpose of the second sentence of the clause is, I think, clear enough. It is intended to restrict Sanderson's liability under the contract with its customer to a specified sum of money. The sum specified is the price paid by the customer for the "[Equipment/Software] connected with the claim". In that connection it is relevant to have in mind the warranties given in clauses 7.1 and 10.1 respectively. In clause 7.1 of the Terms and Conditions of Sale Sanderson warrants that "the Equipment will perform in accordance with its specification". In clause 10.1 of the Terms and Conditions of Software Licence the warranty is that:
"the Software (as supplied by or modified by the Company) will during normal use perform the functions detailed within the manuals supplied . . ."

[34] It is relevant also, I think, to have in mind the provisions of ss 53(2) and 53(3) of the Sale of Goods Act 1979:
"(2) The measure of damages for breach of warranty is the estimated loss directly and naturally resulting, in the ordinary course of events, from the breach of warranty.

(3) In the case of breach of warranty of quality such loss is prima facie the difference between the value of the goods at the time of delivery to the buyer and the value they would have had if they had fulfilled the warranty."

Those provisions provide a starting point, at least in the case of any defect in the quality of the Equipment or in its failure to perform in accordance with specification. It is, I think, obvious that the attempt in the second sentence of the

Page 12

clause - clause 7.3 in the Terms and Conditions of Sale and clause 10.6 in the Terms and Conditions of Software Licence - to limit liability for breach of warranty to the price of the equipment or software connected with the claim is an attempt, in the context of s 53(3) of the 1979 Act, to peg the value which the goods would have had if the warranty had been fulfilled to the price paid by the buyer. [35] But, as s 53(3) of the 1979 Act makes clear, the difference in the value of the goods is only a prima facie measure of the damages for breach of warranty of quality. The buyer can claim loss of profits or other consequential losses where he can show that the seller knew, or ought reasonably to have had in contemplation, that a breach of the warranty would give rise to such losses - see Hadley v Baxendale (1854) 9 Exch 341, 354; Victoria Laundry (Windsor) Ltd v Newman Industries [1949] 2 KB 528, [1949] 1 All ER 997, p539 of the former report; Cullinane v British "Rema" Manufacturing Co Ltd [1954] 1 QB 292, [1953] 2 All ER 1257, p301 of the former report. It is sufficient to identify the point by reference to a passage in the judgment of Lord Evershed, Master of the Rolls, in the last of those three cases, at page 301 of the former report:
"In the present case it is plain that to the knowledge of the defendants this machine was required to perform a particular function, and the warranty given shows what the function was that the machine was designed to perform. There is, therefore, no doubt at all that the plaintiff is entitled to rely on [the second limb of the rule in Hadley v Baxendale], and to claim as damages the business loss which must reasonably be supposed to have been, in the contemplation of both parties at the time when they made the contract, the probable result of the breach. In other words, this plaintiff is not confined to the loss which might be called the natural result of having a machine which turned out to be less that the purchase he has paid for it."

[36] The purpose of the first sentence of the clause is (at the least) to exclude contractual claims for indirect and consequential losses; that is to say, to exclude liability in contract for losses which could be recovered only under the second limb of the rule in Hadley v Baxendale. Those are losses which do not result "directly and naturally" from the breach; but which, nevertheless, were or must reasonably be supposed to have been in the contemplation of both parties at the time when the contract was made. [37] The judge took the view that the purpose of the first sentence of the clause went beyond the exclusion of contractual claims. He thought that the clause was intended to exclude claims in respect of pre-contractual misrepresentations. That he took that view appears from the answer which he gave to Issue 7. I think that he was wrong to reach that conclusion. The effect of the entire agreement clause [38] The purpose of the first sentence of the clause must be ascertained not only in the light of the second sentence, but also in the light of the entire agreement clause. The entire agreement clause - clause 14 in the Terms and Conditions of Sale, clause 15 in the Terms and Conditions of Software Licence - is also in two parts. The second part of the clause contains an acknowledgement by the parties that "no statements or representations made by either party have been relied upon by the other in agreeing to enter into the contract". [39] The effect of an acknowledgement of non-reliance, in terms which were sufficiently similar to those in the second part of the entire agreement clause in the present case as to be indistinguishable, was considered in this Court in E A Grimstead & Son Ltd v McGarrigan (unreported, 27 October 1999). In a passage which was obiter dicta - but which followed full argument on the point - I said this (at page 32A-C of the transcript):
"In my view an acknowledgement of non-reliance . . . is capable of operating as an evidential estoppel. It is apt to prevent the party who has given the acknowledgement from asserting in subsequent litigation against the party to whom it has been given that it is not true. That seems to me to be a proper use of an acknowledgement of this nature, which, as Mr Justice Jacob pointed out in the

Page 13

Thomas Witter case [Thomas Witter Ltd v TBP Industries Ltd [1996] 2 All ER 573], has become a common feature of professionally drawn commercial contracts."

I went on, at page 35A-C, to say this:

"There are, as it seems to me, at least two good reasons why the courts should not refuse to give effect to an acknowledgement of non-reliance in a commercial contract between experienced parties of equal bargaining power -a fortiori, where those parties have the benefit of professional advice. First, it is reasonable to assume that the parties desire commercial certainty. They want to order their affairs on the basis that the bargain between them can be found within the document which they have signed. They want to avoid the uncertainty of litigation based on allegations as to the content of oral discussions at pre-contractual meetings. Second, it is reasonable to assume that the price to be paid reflects the commercial risk which each party - or, more usually, the purchaser - is willing to accept. The risk is determined, in part at least, by the warranties which the vendor is prepared to give. The tighter the warranties, the less the risk and (in principle, at least) the greater the price the vendor will require and which the purchaser will be prepared to pay. It is legitimate, and commercially desirable, that both parties should be able to measure the risk, and agree the price, on the basis of the warranties which have been given and accepted."

[40] Those passages were not cited to the judge. He held that Sanderson could not rely on the acknowledgement of non-reliance contained in the second part of the entire agreement clause. He said this, at para 107 of his judgment:
". . . the clause is, in substance, one that excludes liability rather than precludes liability from ever occurring. The clause states that no statement or representation has been relied on. It follows that the clause can only first bite once a statement or representation has been made that is capable of being relied on. The clause bites, therefore, on a potential misrepresentation that has been made. It is not preventing words that have been uttered from being a misrepresentation at all. Furthermore, the words that were used did, as a matter of fact, as I have found, induce the contract. Thus, this clause is one which is in substance an exclusion clause to which section 3 of the Misrepresentation Act is applicable"

I confess to some difficulty in following the reasoning in that passage. It is true that an acknowledgement of non-reliance does not purport to prevent a party from proving that a representation was made, nor that it was false. What the acknowledgement seeks to do is to prevent the person to whom the representation was made from asserting that he relied upon it. If it is to have that effect, it will be necessary - as I sought to point out in Grimstead v McGarrigan -- for the party who seeks to set up the acknowledgement as an evidential estoppel to plead and prove that the three requirements identified by this Court in Lowe v Lombank Ltd [1960] 1 All ER 611, [1960] 1 WLR 196 are satisfied. That may present insuperable difficulties; not least because it may be impossible for a party who has made representations which he intended should be relied upon to satisfy the court that he entered into the contract in the belief that a statement by the other party that he had not relied upon those representations was true. But the fact that, on particular facts, the acknowledgement of non-reliance may not achieve its purpose does not lead to the conclusion that the acknowledgement is "in substance an exclusion clause to which section 3 of the Misrepresentation Act is applicable". Nor does it lead to the conclusion that the entire agreement clause can be disregarded when construing the earlier limit of liability clause - clause 7.3 in the Terms and Conditions of Sale and clause 10.6 in the Terms and Conditions of Software Licence. [41] The importance of the entire agreement clause in the present context - and, in particular, the importance of the acknowledgement of non-reliance which constitutes the second part of that clause - is that the first sentence in clause 7.3 (or clause 10.6, as the case may be) has to be construed on the basis that the parties intend that their whole agreement is to be contained or incorporated in the document which they have signed and on the basis that neither party has relied on any pre-contract representation when signing that document. On that basis, there is no reason why the parties should have intended, by the words which they have used in the first sentence of the limit of liability clause, to exclude liability for negligent pre-contract misrepresentation. Liability in damages under the Misrepresentation Act 1967 can arise only where the party who has suffered the damage has relied upon the representation. Where both parties

Page 14

to the contract have acknowledged, in the document itself, that they have not relied upon any pre-contract representation, it would be bizarre (unless compelled to do so by the words which they have used) to attribute to them an intention to exclude a liability which they must have thought could never arise. Was the judge's approach wrong? [42] As I have already indicated, this Court should not substitute its own view of what is fair and reasonable for that of the judge unless satisfied that the judge proceeded upon some erroneous principle or was plainly and obviously wrong. I am satisfied that the judge fell into error in three respects; and that those errors do vitiate his conclusion. [43] The first error, in my view, lies in the judge's failure properly to identify the scope and effect of the limit of liability clause; and in the resulting failure to address the correct question or questions. For the reasons which I have sought to explain, I am satisfied that, as a matter of construction, the true scope and effect of the limit of liability clause is more restricted than the judge appreciated. The clause seeks to do two things: (i) to exclude contractual claims for indirect and consequential losses - that is to say, to exclude liability in contract for losses which could be recovered only under the second limb of the rule in Hadley v Baxendale - and (ii) to restrict liability for loss directly and naturally resulting, in the ordinary course of events, from breach of warranty to the price paid for the equipment (or the software, as the case may be), so avoiding an enquiry into what would have been the value of the equipment (or software) if the warranty had been fulfilled. The clause does not seek to exclude or restrict liability for pre-contract misrepresentation, whether such liability arises at common law or under statute. Liability for negligent performance plainly lies in contract and is within the scope of the clause. It has not been suggested that there could be additional, non-contractual, liability for the negligent performance of the contract. [44] The judge thought that the effect of the clause was:
"to deprive Watford of the opportunity to recover any damages in circumstances in which . . . there have been significant failures accurately to represent the features of the software and to comply with the contractual requirements as to merchantability and quality."

- see para 144 of his judgment. To ask whether a clause which has that effect is reasonable was the wrong question. It was the wrong question because the clause does not have that effect. On the basis that the purpose and effect of the limit of liability clause is as I have described, the relevant questions are: (i) was it fair and reasonable, having regard to the circumstances which were, or ought reasonably to have been in the contemplation of the parties when the contract was made, to include a term which sought to exclude contractual claims for indirect and consequential losses; and (ii) was it fair and reasonable, having regard to those circumstances, to include a term which sought to restrict loss directly and naturally resulting, in the ordinary course of things, from breach of warranty to the price paid for the equipment (or the software, as the case might be). [45] The second error, as it seems to me, was to treat the obligation added by the addenda to the contractual documents signed in October 1992 as "virtually meaningless" - see para 123 of the judgment. The true position was that, in addition to the obligations under the relevant standard terms and conditions, Sanderson committed itself, by the addenda, to use best endeavours to allocate appropriate resources to the project "to minimise any losses that may arise from the contract." That obligation is superimposed on the obligations under the relevant standard terms and conditions. [46] The position can be illustrated by reference to the software licence. Clause 10.1 contains the warranty that the Software will perform the functions detailed within the manuals supplied. Clause 10.2 requires that, if the Software fails

Page 15

to comply with that warranty, Sanderson will modify the Software until it complies with the warranty, or will replace the Software with other Software which does comply with the warranty. It is necessary to distinguish between (i) losses suffered by Watford because the Software does not perform the functions detailed in the manuals (which, subject to the limit of liability clause, are recoverable by a claim for breach of warranty) and (ii) losses suffered by Watford because Software which does perform the functions detailed in the manuals does not, nevertheless, meet Watford's real requirements (which losses are recoverable, if at all, by a claim for negligent pre-contract statement - on the basis that Watford entered into the contract on the basis that the functions detailed in the manuals were the functions which Watford required - and which are not subject to the limit of liability clause). It is, to my mind, reasonably plain that the obligation, assumed by Sanderson under the addendum to clause 10.6, to use best endeavours to allocate appropriate resources to minimise any losses that may arise under the contract, is confined to losses resulting from breach of warranty; but it plainly extends to all losses arising from breach of warranty, including indirect and consequential losses. The effect of the addendum is that Sanderson cannot (as the judge thought) walk away from the contract on the basis that the only claim to which it is exposed if it fails to ensure that the Software performs the specified functions is a claim for the price paid. Unless Sanderson can show that it did use its best endeavours to allocate appropriate resources to ensure that the Software performs the specified functions, it cannot rely on the provision in clause 10.6 excluding claims for indirect or consequential losses. [47] To put the point another way, the effect of the limit of liability clause with the addendum is that Sanderson will not be liable for indirect or consequential losses suffered by Watford provided that Sanderson has done what it can to allocate appropriate resources to making the equipment and the software perform according to warranty. The safeguard which Mr Jessa obtained on behalf of Watford when the standard terms and conditions were varied by addenda signed in October 1992 was that Sanderson undertook to do its best to see that losses (including indirect or consequential losses) were kept to a minimum. If, despite Sanderson's best endeavours, indirect or consequential losses were suffered, those losses would fall on Watford. But if Sanderson had not used its best endeavours, then Watford could recover such losses (including indirect or consequential losses) as resulted from Sanderson's failure to comply with its undertaking. The judge described that safeguard as "virtually meaningless" and "a make-weight amendment" (see paras 123 and 132 of his judgment). In my view, that is not an apt description of its effect. [48] The third error lies in the judge's decision to treat as "irrelevant" Watford's own standard terms of business - see para 139 of his judgment. I have set out, earlier in this judgment, the material provisions in clause 10 of Watford's Terms and Conditions of Sale. They include (i) a restriction on liability, the terms of which are indistinguishable in effect from those of the first sentence of Sanderson's limit of liability clause (but which are, if anything, more explicit) viz:
"in no event shall the Company be under any liability whatsoever and howsoever arising from any loss of profit, interruption of business or any other indirect, special or consequential losses of any type . . ."

and (ii) a clause which explains why the restriction is there - viz. "The Company's prices are determined on the basis of the limits of liability set out in this Condition." The judge was correct to reject the argument that the presence of the first of those provisions in Watford's own standard conditions had the effect, in some way, of preventing Watford from asserting that the inclusion of the first sentence in Sanderson's limit of liability clause was not fair and reasonable. But the provisions cannot be dismissed as irrelevant simply because that they do not support that argument. The relevance of the provisions, to my mind, is that they show that Watford was well aware of the commercial considerations which lead a supplier to include a provision restricting liability for indirect or consequential loss; and, in particular, was well aware that a supplier would be likely to determine the price at which it was prepared to sell its products by reference (amongst other things) to its exposure to the risk of unquantifiable claims to indirect or consequential losses which might be suffered by the customer if things went wrong. In my view, Watford's obvious appreciation of the problem which the limit of liability clause was intended to meet - and its own method of dealing with that problem in the

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standard terms under which it supplied goods to its own customers - were very relevant to a consideration of the matter which the judge had to decide; that is to say, whether the inclusion of the limit of liability clause in Sanderson's standard terms and conditions was fair and reasonable having regard to the circumstances which were, or ought reasonably to have been known to or in the contemplation of the parties when the contract was made. Was the term a fair and reasonable one to be included? [49] For the reasons which I have set out, I am satisfied that this is a case in which, if this Court takes a different view from that of the judge on the question whether the inclusion of the limit of liability clause in Sanderson's standard terms and conditions was fair and reasonable having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made, it is entitled to give effect to its own view. That is because I am satisfied that the judge reached his conclusion on the wrong basis. [50] I have explained why I take the view that, on a true analysis of the limit of liability clause, it comprises two distinct contract terms in relation to which it is necessary to consider whether the requirement of reasonableness is satisfied. One (to which I shall refer for convenience as "the term excluding indirect loss") is that contained in the first sentence of the clause. The other ("the term limiting direct loss") is contained in the second sentence. It is, I think, appropriate to consider, separately in relation to each term, whether the requirement of reasonableness is satisfied; although, of course, in considering whether that requirement is satisfied in relation to each term, the existence of the other term in the contract is relevant. [51] I turn, therefore, to consider whether the requirement of reasonableness is satisfied in relation to the term excluding indirect loss. It is important to keep in mind (i) that, as a matter of construction, the term does not seek to exclude loss resulting from pre-contractual statements in relation to which a claim lies (if at all) in tort or under the Misrepresentation Act 1967 and (ii) that the term is qualified by the addenda so that it does not exclude indirect or consequential loss resulting from breach of warranty unless Sanderson has used its best endeavours to ensure that the equipment and the software does comply with the warranty. [52] I accept that the court is required to have regard, in the present case, to the "guideline" matters set out in Sch 2 to the 1977 Act. There are factors, identified by the guidelines, which point to a conclusion that the term excluding indirect loss was a fair and reasonable one to include in this contract. The parties were of equal bargaining strength; the inclusion of the term was, plainly, likely to affect Sanderson's decision as to the price at which was prepared to sell its product; Watford must be taken to have appreciated that; Watford knew of the term, and must be taken to have understood what effect it was intended to have; the product was, to some extent, modified to meet the special needs of the customer. Other factors point in the opposite direction. The judge found that, although there were other mail order packages on the market, Mailbrain was the only one which appeared to fulfil Watford's needs (para 126); and, further, that Watford could not reasonably have expected to have been able to have acquired a similar software package, if available, on better terms as to performance and as to the supplier's potential liability for non-performance. [53] I do not, for my part, accept that the term excluding indirect loss is a term to which s 11(4) of the 1977 Act applies. It is not, I think, properly to be regarded as a term by which a person (Sanderson) seeks to restrict liability to a specified sum of money; rather the term seeks to exclude liability for indirect or consequential loss altogether, in those circumstances in which it is intended to have effect. Nevertheless, it seems to me right to have regard, as part of the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made, both to the resources which could be expected to be available to each party for the purpose of meeting indirect or consequential loss resulting from the failure of the equipment or software to perform in accordance

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with specification, and to the possibility that such loss could be covered by insurance. [54] It seems to me that the starting point in an enquiry whether, in the present case, the term excluding indirect loss was a fair and reasonable one to include in the contract which these parties made is to recognise (i) that there is a significant risk that a non-standard software product, "customised" to meet the particular marketing, accounting or record-keeping needs of a substantial and relatively complex business (such as that carried on by Watford), may not perform to the customer's satisfaction, (ii) that, if it does not do so, there is a significant risk that the customer may not make the profits or savings which it had hoped to make (and may incur consequential losses arising from the product's failure to perform), (iii) that those risks were, or ought reasonably to have been, known to or in the contemplation of both Sanderson and Watford at the time when the contract was made, (iv) that Sanderson was in the better position to assess the risk that the product would fail to perform but (v) that Watford was in the better position to assess the amount of the potential loss if the product failed to perform, (vi) that the risk of loss was likely to be capable of being covered by insurance, but at a cost, and (vii) that both Sanderson and Watford would have known, or ought reasonably to have known, at the time when the contract was made, that the identity of the party who was to bear the risk of loss (or to bear the cost of insurance) was a factor which would be taken into account in determining the price at which the supplier was willing to supply the product and the price at which the customer was willing to purchase. With those considerations in mind, it is reasonable to expect that the contract will make provision for the risk of indirect or consequential loss to fall on one party or the other. In circumstances in which parties of equal bargaining power negotiate a price for the supply of product under an agreement which provides for the person on whom the risk of loss will fall, it seems to me that the court should be very cautious before reaching the conclusion that the agreement which they have reached is not a fair and reasonable one. [55] Where experienced businessmen representing substantial companies of equal bargaining power negotiate an agreement, they may be taken to have had regard to the matters known to them. They should, in my view be taken to be the best judge of the commercial fairness of the agreement which they have made; including the fairness of each of the terms in that agreement. They should be taken to be the best judge on the question whether the terms of the agreement are reasonable. The court should not assume that either is likely to commit his company to an agreement which he thinks is unfair, or which he thinks includes unreasonable terms. Unless satisfied that one party has, in effect, taken unfair advantage of the other - or that a term is so unreasonable that it cannot properly have been understood or considered - the court should not interfere. [56] In the present case the parties did negotiate as to the price. Mr Jessa, on behalf of Watford, secured substantial concessions on price from Mr Broderick. The parties negotiated, also, as to which of them should bear the risk (or the cost of insurance against the risk) of making good the loss of profits, and other indirect or consequential loss, which Watford might suffer if the product failed to perform as intended. Mr Jessa was less successful in obtaining from Mr Broderick the concession which he wanted. The most that he could get was an undertaking that Sanderson would use its best endeavours to allocate appropriate resources to ensuring that the product performed according to specification. But, for the reasons which I have sought to explain, that was worth something to Watford; and Mr Jessa decided that he would be content with what he could get. In my view it is impossible to hold, in the circumstances of the present case, that Sanderson took unfair advantage of Watford; or that Watford, through Mr Jessa, did not properly understand and consider the effect of the term excluding indirect loss. [57] It follows that I would hold that the term excluding indirect loss, applicable in the circumstances which I have described, was a fair and reasonable one to include in the contract. [58] In the light of that conclusion, the question whether the requirement of reasonableness is satisfied in relation to the term limiting direct loss can be answered shortly. Properly understood, all that the second sentence of the limit of

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liability clause seeks to do is to substitute a value equal to the price paid by the buyer for the goods for "the value which the goods would have had if they had fulfilled the warranty" for the purposes of the rule in s 53(3) of the Sale of Goods Act 1979 or the equivalent rule at common law. It seems to me impossible to hold that that is an unfair or unreasonable substitution to make in a case like the present. [59] I would allow this appeal.

BUCKLEY J [60] I agree.

PETER GIBSON LJ [61] I also agree. But as we are differing from the conclusion reached by the Judge in a full and careful judgment and in deference to Mr Irvin's able submissions I add a few words of my own. [62] At first blush it appears to me surprising that the Judge was able to find, and that he found "unhesitatingly", that the limit of liability clause (cl 10.6 of the Terms and Conditions of Software Licence and cl 7.3 of the Terms and Conditions of Sale) was unreasonable in circumstances where: (1) the contracts were agreed by an experienced buyer and an experienced seller, between whom there was no inequality of bargaining power or bargaining skill, (2) the market, albeit for an integrated package not readily available elsewhere, was sufficiently a buyer's market for the buyer to have been able to talk down the price by a significant amount, (3) the buyer was well aware of the existence and significance of the clause from inclusion of such a clause in its own standard terms (which included a provision that the seller could be asked to agree to a higher liability limit provided insurance cover could be obtained therefor), and (4) the buyer had sought the substantial amendment of the clause and had obtained the seller's commitment to best endeavours in allowing appropriate resources to the project to minimise any losses that might arise from the contract. [63] Where in such circumstances the parties have agreed on the allocation of risk and the price must be taken to reflect that allocation there might be thought to be little scope for the court to unmake the bargain made by commercial men. As His Honour Judge Thayne Forbes observed in The Salvage Association v CAP Financial Services Ltd [1995] FSR 654 at p 656:

"Generally speaking, where a party well able to look after itself enters into a commercial contract and, with full knowledge of all relevant circumstances, willingly accepts the terms of the contract which provides for apportionment of the financial risks of that

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transaction, I think that it is very likely that those terms will be held to be fair and reasonable."

[64] However, as Mr Irvin correctly insisted, the decision below, reached on the basis of an assumption that what the Claimant pleaded was true, must be treated with the utmost respect and this court should not interfere with it unless satisfied that it proceeded upon some erroneous principle or was plainly and obviously wrong. [65] The correct, indeed necessary, starting point is to construe the limit of liability clause and to decide on its scope and effect. On this it is unfortunate that the Judge did not have the benefit of rival submissions. Mr Irvin submitted that as the unitary nature of the clause was conceded below, it would be wrong to overturn the Judge's decision on the basis of a different view of the clause or on points not put to the Judge. I see the force of that. But as the true meaning of the clause is a question of law and one of some significance in the determination of the issues on this appeal, this court is not bound by the concessions before the Judge and in my judgment should proceed on what it perceives to be the correct basis. [66] For the reasons given by Chadwick LJ I too have reached the clear conclusion that the Judge was wrong to treat the limit of liability clause as a single provision to be judged either reasonable or unreasonable as a whole and thus as not susceptible to a blue pencilling exercise. It is unfortunate that the unreported decision of this court in E A Grimstead Ltd v McGarrigan was not drawn to the Judge's attention to assist him on the significance of the entire agreement clause in each contract, and its effect on determining the scope of the provisions in the limit of liability clause. [67] That error by the Judge and the other errors identified by Chadwick LJ entitle this court to interfere with the Judge's decision. I also agree with Chadwick LJ for the reasons which he gives on the reasonableness of each limb of the limit of liability clause. I too would allow this appeal. Appeal allowed.