GB Gas Holdings Limited v Accenture (UK) Limited - A case for crystal ball gazing?

Information technology contracts

With organisations in both public and private sectors striving to achieve improvements in efficiency and advances in the delivery of services using the fast developing competencies of available information technology, there has been a commensurate increase in the frequency of disputes breaking out over what are invariably highly complex agreements for the design, supply and installation of IT systems. These systems will be based on either pre-packaged software platforms or entirely custom designed programs developed to meet the specific business needs of the purchaser, in many cases integrating cross-border operations or intra-group facilities.

Such disputes have become an inconvenient fact of business life given the high costs of these projects, their complexity and the potentially substantial efficiency savings that are hoped for, but which will not be achieved if the project does not succeed. The breakdown of the relationship can be highly problematic. The stakes can be high indeed, and if not handled sensibly such a dispute can take even financially well established organisations to and beyond the brink of business failure.

Whilst the customer will commonly formulate its claims by reference to costs incurred or thrown away and hoped for efficiencies that have not been achieved - lost opportunities, for its part, the IT company will rely on the terms of the agreement that circumscribe its performance warranties and the limitation and exclusion of liability provisions, as it seeks to negate claims for 'indirect and consequential losses'

The vast majority of the claims that arise from these IT development and systems integration agreements are sensibly settled either before or shortly after court proceedings are commenced either directly or with the assistance of a mediator or other consensual adjudication procedure. However, the recent case of GB Gas Holdings Limited v Accenture (UK) Limited [2010] EWCA Civ 912 and [2009] EWHC 2966 Comm is a cautionary tale that such complex arrangements can end up in very costly arguments in Court, and that therefore there is much to be said for giving very careful thought at the outset to the drafting of the agreements that support such projects, in particular the limitation and exclusion terms.

In this case, the agreement between the energy company Centrica and the IT company Accenture went back to 2002 and was for the design, supply, installation and maintenance of a system that included an automated billing system based on pre-packaged software. The system was to be delivered in five software releases, the third of which was to be the billing system. Centrica supplied energy to 18.8 million customers and each month was issuing five million bills. The cost of the system was many millions of pounds. Needless to say, this was a significant project for both developer and purchaser. Problems with the third release - the billing system - arose and by 2006 a substantial backlog of items in the billing system required manual intervention. That is perhaps an understatement. The number of these 'exceptions' was enormous - many millions in fact. This led to Centrica writing to Accenture in February 2007 complaining about what it considered to be the most serious fundamental defects in the system to which these 'exceptions' related. Centrica relied on the terms of the agreement to put Accenture to the effort of remedying the problems, threatening to go elsewhere to resolve them and then seek to recover the costs of doing so from Accenture. For its part, Accenture refused to take the steps requested saying that under the agreement it was not legally obliged to do so. This was the backdrop to the litigation that followed.

The case gave rise to a number of legal and evidential disputes that the Courts were asked to adjudicate as preliminary issues. Most of these have little bearing beyond the particular claim. However, one of the issues that exercised the Courts is a timely reminder of the application of some basic contract law principles in cases such as this. The issue was the extent of the IT company's ability to seek the contract's protection from high value losses that the purchaser suffered when the project had gone horribly wrong. As I have indicated above, commonly, heavy reliance will be placed by an IT company on terms that attempt to exclude 'indirect or consequential' loss so as to minimise its exposure. There was just such a provision in this case.

Whilst the application of such exclusion clauses is inevitably fact sensitive, the precise meaning of 'indirect or consequential' loss has troubled many and there has been a long line of Court decisions on the subject. The Courts have been clear that exclusions of this type of loss do not free the defaulting party from liability for compensatory damages that are a direct and natural result of their breach of contract. Moreover, as affirmed by the Court of Appeal in this case, common law rights to damages for breach of contract can only be excluded by a clear provision to that effect - which provision will be construed against the person relying on it. The scope of such an exclusion can therefore often be much narrower than you might think, providing little, if any protection in many cases.

In the Centrica case, the application of the principles meant that £18.7million of overpayments by it to suppliers resulting from automation errors in the billing system was not excluded by the provision and were in principle recoverable. So too was £8million of compensation paid by it to its customers to reflect billing difficulties and poor customer service received. Furthermore, £2million of additional borrowing charges that Centrica incurred to finance its business as a result of the reduced revenue from billing system failures were also not excluded and in principle were therefore recoverable. Likewise, other expenses such as costs incurred in chasing debts in error and the establishment of an 'Incident Management Team' were allowable. Whilst the contract attempted to exclude claims for 'loss of profit', where the claimant could characterise a loss as a 'revenue' item, then the Courts decided that the claimant could recover it.

This project documentation was not short of detailed drafting, but relying on standard formulations of such provisions can be risky. The drafting needs to meet the specific business reality that the system is being purchased to address and uncomfortable though it may be, an IT company might do well to consider (openly with the purchaser, if it can) what the purchaser might reasonably do, and incur (in terms of costs and losses), if the project breaks down before it reaches a conclusion. This is good risk management and could save you a great deal of money at the end of the day.

Dominic Hopkins
Partner, Commercial Disputes and Litigation