Watford Electronics Ltd v Sanderson CFL Ltd

JurisdictionEngland & Wales
CourtCourt of Appeal (Civil Division)
Judgment Date23 Feb 2001
Neutral Citation[2001] EWCA Civ 317
Docket NumberCase No: QBENF/2000/3077/A1

[2001] EWCA Civ 317





His Honour Judge Thornton QC

Royal Courts of Justice


London, WC2A 2LL


Lord Justice Peter Gibson

Lord Justice Chadwick and

Mr Justice Buckley

Case No: QBENF/2000/3077/A1

Watford Electronics Limited
Sanderson Cfl Limited

`Mr Mark Raeside (instructed by Messrs DLA of Birmingham for the Appellant)

Mr Peter Irvin (instructed by Messrs Needleman Treon of London for the Respondent)


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 (Lord Justice Simon Brown) granted on 27 October 2000.

The background facts


The claimant, Watford Electronics Limited (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.


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, purchase and nominal ledgers and for other accounting functions.

The contractual documents


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.


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.


The "Terms and Conditions of Sale", which appear on the reverse of the sales contract, contain an 'entire agreement' clause in these terms:


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"


The Company warrants that the Equipment will perform in accordance with its specification …"


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."


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."


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 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.


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


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.


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


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.


The claim for damages for breach of contract is put under three heads: (i) a claim for loss of profits – said to be 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).


In a defence served in May 1999, Sanderson relied (amongst...

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