In November 2009 the High Court decided that a contractual clause excluding liability for indirect and consequential loss did not prevent the recovery of five items of claimed loss, each of which was found to be a direct loss, not of a type covered by the exclusion (see Contract Law Alerter Issue 11, dated March 2010). The Court of Appeal has upheld this decision and provided further reasoning on the recovery of compensation payments made to customers

Facts: British Gas had contracted with Accenture for the design, supply, installation and maintenance of a new IT system. The IT system was to be released in five phases, the third of which was an automated billing system. Disputes developed between the parties over the performance of the first two releases and in particular the severe disruption caused to British Gas's billing processes by problems with the automated billing system.

The fourth and fifth releases were cancelled and British Gas brought proceedings including a claim for damages caused by the failures of the automated billing system.

These damages consisted of five items of loss including extra gas distribution charges, ex-gratia compensation payments to dissatisfied customers and additional borrowing charges. Accenture claimed that British Gas was prevented from recovering these losses by the following contractual exclusion clause:

"16.2 Consequential Loss

... in no event shall either Party be liable whether in contract, tort (including negligence) or otherwise in respect of any of the following losses or damages:

16.2.1 loss of profits or of contracts arising directly or indirectly;

16.2.2 loss of business or of revenues arising directly or indirectly;

16.2.3 any losses, damages, costs or expenses whatsoever to the extent that these are indirect or consequential or punitive; ..."

The parties agreed that "directly" and "indirectly" in Clause 16.2 referred respectively to the first and second limb of the rule in Hadley v Baxendale (1854) 9 Exch. 341, but disagreed as to which limb each item of loss came under. This distinction was crucial as clauses 16.2.1 and 16.2.2 excluded both direct and indirect losses, but only if they were losses of profits, contracts, business or revenues. Clause 16.2.3 was drafted to exclude all other losses, but only if they were indirect within the meaning of the second limb of Hadley v Baxendale.

High Court: The High Court considered the preliminary issue of whether British Gas was prevented by Clause 16.2 from seeking to recover the claimed items of loss. In its judgment the High Court held that each item of loss was direct and fell under the first limb describing the items variously as "a direct result of the automation error" and a loss that "flowed naturally and in the ordinary course of events".

Accenture also pleaded that British Gas' claim for gas distribution charges was in truth a claim for loss of revenue or profits. If this pleading had been accepted, then the direct or indirect nature of this loss would not have affected its exclusion from recovery as clauses 16.2.1 and 16.2.2 had been drafted to exclude such losses whether they were direct or indirect. The High Court disagreed with Accenture. Therefore the designation of this loss as 'direct' was central to its recoverability under Clause 16.2.3.

Court of Appeal: The Court of Appeal upheld the High Court's finding that each item of loss was direct and, accordingly, not excluded from recovery by clause 16.2. The Court of Appeal further agreed that the claimed gas distribution charges were not lost revenue but charges which would not have been paid but for the automation error, and were therefore direct losses and potentially recoverable under Clause 16.2.3.

The Court of Appeal provided further reasoning on the implications of how the claim for ex-gratia compensation payments had been pleaded. The Court of Appeal disagreed with Accenture's submission that it was a claim for loss of revenue, and therefore excluded by clause 16.2.

It should be noted that while British Gas accepted that such a claim could be made, it submitted that this claim had in any event always been pleaded as damages for loss of good reputation caused by Accenture's failure to comply with its obligations under the agreement. The Court of Appeal cast doubt, however, on the legal basis for the claim as pleaded. British Gas may, therefore, find it difficult to succeed with this element of its claim at a future trial.

Key Messages: Both the High Court and Court of Appeal's judgments are limited to preliminary issues on interpretation and despite its success in both cases, British Gas will still need to prove at a full trial that it has suffered each loss as a result of Accenture's breach of their original agreement and that they are recoverable.

The case serves as a reminder of the damage that can be caused by the failure of a critical IT system. Although the judgment is context-specific and reflects the particular facts of this case, the five items of claimed loss which the Court of Appeal upheld as direct losses are clear and useful examples of the Hadley v Baxendale principles applied in a modern commercial context.

Source: GB Gas v Accenture (and others) [2010] EWCA Civ 912, Court of Appeal, Civil Division, LJ Mummery, LJ Longmore, LJ Wilson, 30 July 2010