The case of GB Gas Holdings v Accenture, in which the Court of Appeal upheld the first instance judge's findings on preliminary issues relating to the exclusions clause, falls squarely within the existing case law. However, it is well worth a detailed read because it demonstrates very clearly how limited the effect can be of clauses which exclude liability for indirect and consequential loss, and the need to be very specific as to which heads of loss are to be excluded.

The case relates to a claim by GB Gas Holdings against Accenture in connection with a contract for the design, supply, installation and maintenance of a new IT system which included an automated billing system based on pre-packaged SAP IS-U software.

The contract included the following provision:

"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 court was asked to decide whether certain items of loss were irrecoverable under this clause. The judgment states that it was common ground between the parties that the words "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:

"Where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of the such breach of contract should be such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of it."

There were five items or heads of loss to be considered by reference to Clause 16.2 and in each case the court determined as a preliminary issue that the item or head was not irrecoverable.

To put it another way, the heads of loss shown below are determined in principle to be recoverable, and the claimant might succeed at trial subject always to the usual rules such as to proof of breach and proof of loss, assumption or responsibility, and causation. They are not excluded by the provisions of Clause 16.2.

  1.  Gas Distribution Charges (in the region of) £18,700,000

Because meter readings setting out volumes of gas used by customers allegedly were not reliably transmitted to suppliers, GB Gas Holdings was charged by its supplier on the basis of an over-estimation of consumption for these customers. As well as arguing that this was an indirect loss falling within the second limb of Hadley v Baxendale and was not within the contemplation of the parties, Accenture argued that this is a loss of revenue or profits, which were specifically excluded.

The Court of Appeal agreed with the High Court that it was an item of loss which had arisen as a direct result of the automation error and was therefore within the first limb of Hadley v Baxendale, not the second. The court also held that it was not a claim for revenue but for charges paid, which would not have been paid but for the alleged defect.

  1.  Compensation paid to customers - £8,000,000

GB Gas Holdings allegedly suffered reputational damage as a result of the alleged severe disruption to its new billing system. It paid £8 million in compensation to its customers to reflect the billing difficulties and poor customer service they had received.

Accenture claimed that it was an ex gratia payment and clearly an indirect or consequential loss. The court considered the background to the contract, including the recitals, which made it plain that one of the purposes of the new billing system was to improve customer relations and customer services. It therefore determined that this was a direct loss.

The Court of Appeal agreed, but left it open to Accenture to argue on the facts that it had not accepted responsibility for this type of loss.

  1.  Additional Borrowing Charges: £2,000,000

Due to late or non-billing of customers as a result of the defects, GB Gas Holdings' revenue was reduced and it was forced to incur £2 million in additional borrowing charges to finance its business.

The court held that any delay in or non-issuance of bills was certain to adversely affect revenue and that it was very likely that the result would be a need to increase borrowings to make up for the lost revenue. This loss therefore is a direct loss and not excluded by Clause 16.2.

  1. Cost of chasing debt not due: £387,287

GB Gas Holdings chased debt from its customers which in fact was not due, but which it thought was due as a result of defects in the system. The court disagreed with Accenture's submission that this loss was indirect or consequential. It stated that if the alleged breaches of warranty were proved, such loss would flow naturally and in the ordinary course of events from those breaches.

  1. Additional stationery and correspondence costs: £107,120

These costs were incurred in writing to customers to update them on the progress of particular "hot topics" relating to the disruptions in the IT system. As with the ex gratia payments referred to above, the court concluded that Clause 16.2 did not exclude a claim for such expenditure.

Contract negotiations and contract disputes have indicated for many years that there is often considerable confusion in the minds of parties to contracts as to what constitutes direct, indirect or consequential losses, and what will or won't be recoverable in the event of a dispute.

This case, while not introducing new law, is refreshing in identifying five clear and concrete examples of specific losses which are held to be direct loss and recoverable in the context of the design and supply of a new IT system. To this extent in this case the attempt to rely on general exclusions of indirect or consequential loss were ineffective.

Furthermore, the finding that ex gratia payments made by a claimant to its own customers can constitute recoverable direct loss is helpful clarification on "voluntary" payments made in the context of a general duty to mitigate loss. Finally, the decision also points to the value of carefully drawn recitals in assisting a judge to decide whether particular heads of loss will arise naturally in the event of a breach of contract and therefore fall under the first limb of Hadley v Baxendale.

The implications of this decision and other recent case law for the drafting of exclusion and limitation clauses will form the subject of a separate alert.