GB Gas entered into an agreement with Accenture for Accenture to design, supply, install and maintain a business-critical IT system, including billing. The agreement defined a ‘Fundamental Defect’ as a fundamental breach of warranty causing a serious adverse effect on GB Gas. A ‘Material Defect’ was a breach of warranty having an adverse effect on GB Gas. If there was a Fundamental Defect, the agreement required Accenture to do what a commercial, reasonable and prudent business acting in its own best interests would do. There were a series of errors in the system and GB Gas claimed that they cumulatively amounted to a Fundamental Defect. However, Accenture refused to fix on the basis that each of the errors were not fundamental. The liability clause in the contract excluded certain heads of loss including any indirect or consequential loss at all and any direct or indirect loss of profits, contracts, business or revenues; the parties also argued whether certain GB Gas losses fell within the exclusions or not.
On a preliminary hearing on these points (rather than a ruling as to whether the system was actually faulty), the Court of Appeal agreed with the High Court in that a series of minor errors could amount to a fundamental breach. Also, all of the following types of loss did not fall within any of the excluded categories:
- Compensation payments to customers.
- Increased gas distribution charges.
- Employing more staff to deal with doing the things that the IT should have done, and also to deal with customer issues.
- Writing off millions of pounds of unbilled or late bills caused by the IT system not working.
- Paying to investigate and get the IT problem resolved.
In addition, the Court of Appeal said that it was not necessary for the customer to state in their warranty correction notice the nature of the alleged material errors or the serious adverse effect.
The Court of Appeal added that the warranty correction clause was construed as requiring the serious adverse effect of the Fundamental Defect to have been suffered by the customer before the end of the warranty period for the supplier to have to remedy. The idea of a limited warranty period was to draw a line in the sand and not create an indefinite warranty obligation, so even if it was known that a future serious adverse effect would take place, the warranty remedy obligation only applied if the serious adverse effects kicked in before the warranty period expired.
This case is interesting for all commercial contracts but especially IT projects (where a number of small errors frequently occurs), particularly for the following two reasons: (1) it shows that breaches which individually are minor can cumulatively mount up to be something entitling the purchaser to more serious remedies; (2) it highlights non-lawyers’ frequent misconception as to what indirect or consequential losses involve, when the reality is that many losses that non-lawyers consider to be ‘indirect’ are really understood at law to be ‘direct’.