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Kwik Fit Insurance Services Ltd v. Bull Information Systems Ltd, Graham Technology plc [2000] EWHC Technology 88 (23rd June, 2000)

IN THE HIGH COURT OF JUSTICE TCC No HT 99-178

QUEEN'S BENCH DIVISION

TECHNOLOGY AND CONSTRUCTION COURT

B E T W E E N :

KWIK FIT INSURANCE SERVICES LIMITED

Claimant

-and-

BULL INFORMATION SYSTEMS LIMITED

Defendant/Part 20 Claimant

-and-

GRAHAM TECHNOLOGY PLC

Part 20 Defendant

______________________________________

JUDGMENT OF COLIN REESE Q.C.

_______________________________________

Pursuant to the Practice Statement of 22^nd April 1998 and/or CPR Part 39 this text is the Official Judgment of the Court and I direct that no further note or transcript be made.

Date of Judgment: 23^rd June 2000

Mark Barnes Q.C. and David Cavender appeared for the Claimant instructed by Slaughter & May

Jeremy Storey Q.C. appeared for the Defendant/Part 20 Claimant instructed by Bird & Bird.

Andrew Sutcliffe appeared for the Part 20 Defendant instructed by Dibb Lupton Alsop.

INTRODUCTION

1. In this action the Claimant, Kwik Fit Insurance Services Limited ("KFIS") claims damages from the Defendant, Bull Information Systems Limited ("BULL") for alleged breaches of a written System Integration Agreement dated 28^th November 1997 ("The Agreement") whereby KFIS engaged Bull as prime contractor to design, develop, deliver, install and implement an enterprise wide computer system. The contract price was Ł7,505,305 (subject to adjustment as provided by the terms of the Agreement).

2. Bull denies liability to KFIS and counterclaims damages from KFIS. In the alternative Bull claims against Graham Technology Plc ("Graham") as a Part 20 Defendant for alleged breaches of a Sub-Contract dated 13^th January 1998 whereby Bull engaged Graham to provide software and services for the purposes of its engagement on the KFIS project. I propose to deal with the preliminary issues arising between Bull and Graham after I have addressed all the issues presently arising between KFIS and Bull and, accordingly, I will say nothing further about the Sub-Contract at this stage.

3. The Agreement was made after KFIS had issued an "invitation to tender for Kwik Fit Insurance Services Enterprise Systems" dated 9^th July 1997 ("the ITT") and Bull had responded thereto on 31^st July 1997 ("the Response"). KFIS wished to have a new computer system suited to the needs of a rapidly expanding call centre based business. KFIS sold/managed motor insurance policies. It dealt with the general public who telephoned its call centre. It operated from premises at Tannochside Business Park, Uddingstone. When the ITT was issued it was utilising a proprietary software known as "Brokerpac". KFIS was predicting a doubling in the number of live policies and associated transactions over a two year period with the potential for a four fold expansion by 2001. It was proposing to acquire a second site at Tannochside Business Park, to double its workforce and to install a new/advanced computer system which would replace the "Brokerpac" system. The new system was to operate across both sites providing greater capacity and a greater range of functions.

4. The first task which Bull was to perform was the preparation of a Specification ("the Specification"). Bull was to prepare this on the basis of the ITT, the Response and user requirements agreed between KFIS and Bull during the "Specification Phase" of the "Project", (see, definitions at Bundle 2 page 8 - references hereafter cited simply as "2/8"). Once it had been produced by Bull and been agreed by KFIS the Specification was to supersede that which had gone before (viz. the ITT, the Response and the agreed user requirements) and the Project was then to move on to "the subsequent three project phases for the design, development, delivery, installation and live implementation of the system..." (see, definitions, 2/8). It was later agreed that the first two of these phases should be amalgamated.

5. It is KFIS's case that Bull duly delivered the Specification on 24^th March 1998, that its scope and content were agreed on or before 17^th April 1998 but that Bull then failed to fulfil its further contractual obligations on time or at all (paragraph 10 of the Particulars of Claim, 1/17). KFIS alleges that on numerous occasions during the Project Bull made promises and/or representations as to the date on which the software for Model Office would be completed so that pilot evaluation/testing could commence. None of the dates was kept and Bull notified revised dates as appears from the table below -

Date of Bull's promise

Date promised for Model Office start

Date on which KFIS was informed of delay

Contract

15^th July 1998

29^th April 1998

28^th August 1998

20^th August 1998

11^th September 1998

15^th September 1998

1^st December 1998

9^th October 1998

and reconfirmed on

18^th November 1998

8^th December 1998

3^rd December 1998

21^st December 1998

18^th December 1998

6^th January 1999

5^th January 1999

6. KFIS alleges that the inference to be drawn from the lengthy additional delay notified in each case was that Bull knew it would not meet the promised date well in advance but it (Bull) failed to inform the client (KFIS) until shortly before or in one case (viz 11^th September 1998) shortly after that promised date. Such late notifications are alleged to constitute breaches of Bull's contractual obligation to notify KFIS immediately on its becoming aware of delays in the implementation of the Project (see Clause11.1.2, 2/17 and paragraphs 8.2 and 11 of the Particulars of Claim, 1/15, 17 and 18).

7. KFIS alleges that by letter dated 1^st April 1999 its solicitors notified Bull that it was in breach of contract and required matters to be rectified by 30^th April 1999. KFIS further alleges that on or about 23^rd April 1999 Bull withdrew its personnel from KFIS's premises and removed therefrom the router (which would have permitted continued off site working). This state of affairs is said to have continued until 3^rd May 1999. KFIS alleges that by its conduct Bull evinced a continuing intention not to be bound by and repudiated the Agreement. In the alternative KFIS alleges that Bull failed to remedy what were material breaches of the Agreement by 30^th April 1999. By its Solicitors' letter dated 4^th May 1999 KFIS alleges that it accepted Bull's repudiation or alternatively it terminated the Agreement by notice in writing (see Clause 22.1.1, 2/26 to 27 and paragraphs 12 to 15 of the Particulars of Claim, 1/19).

8. Clause 6.6 of the Agreement (2/15) provided for liquidated damages of up to 5% of the adjusted fixed price to be claimable in certain circumstances and Clause 19 of the Agreement (2/22 - 23) provided more generally for the liabilities of the parties to each other. In Clause 19 a distinction was drawn between "direct losses" in respect of which Bull's total aggregate potential liability was not to exceed 150% of KFIS's payment liabilities under the Agreement and "indirect or consequential loss or damage" in respect of which neither party was to have any liability to the other. Whether, by Clause 19.6.2, there was an exception to that general exclusion of such liability in cases of "wilful or deliberate malicious act or omission" is a matter in issue in these proceedings. KFIS's case is pleaded on the basis that the clause does contain an exception.

9. In the light of those provisions of the Agreement KFIS claims to be entitled to recover direct losses (see paragraph 16 of the Particulars of Claim, 1/20 and further information at 1/259 to 261 and 274) and other losses which might be regarded as indirect or consequential losses (see paragraph 17 of the Particulars of Claim, 1/20 to 21 and further information at 1/261 to 269). KFIS claims that all of these latter losses were within Bull's reasonable contemplation and that it is to be inferred that Bull's breaches of the Agreement were wilful acts or omissions and/or deliberate malicious acts or omissions within the meaning of Clause 19.6 of the Agreement (see paragraph 18 of the Particulars of Claim, in its proposed amended form 1/21 to 23). In addition to those sums or in the alternative, KFIS claims to be entitled to the maximum liquidated damages under Clause 6.6 (see paragraph 20 of the Particulars of Claim, 1/24).

10. The sums which KFIS seeks to recover are substantial. For present purposes I leave the liquidated damages aside. The direct losses which KFIS claims are:

(1) pursuant to Clause 19.5.1, restitution of Ł2,897,696.73 being the

monies paid by KFIS to Bull pursuant to the Agreement.

(2) pursuant to Clause 19.5.2, the reasonable and mitigated additional cost of locating and implementing an alternative solution to the System. KFIS estimates that it has expended/will expend Ł75,000 in management time in obtaining/assessing tenders and, more significantly, that the additional sum which will have to be paid to an alternative supplier will fall somewhere in the range Ł5,187,000 to Ł7,387,000.

(3) pursuant to Clause 19.5.3, costs and expenses directly incurred by KFIS in contemplation of and pursuant to the Agreement to the extent that such costs and expenses will be wasted if an alternative solution is implemented by a different supplier. These have been estimated in the sum of Ł2,872,000 (see schedule at 1/274).

The total of those "direct losses" can be seen to be a little over Ł11m if the lower figure for additional cost is taken from (2) above and almost Ł13Ľm if the higher figure is taken.

11. The losses which are identified at paragraph 17 of the Particulars of Claim as possibly falling into the "indirect or consequential" loss category are:

(4) loss of revenue from 5^th November 1998 due to capacity constraints which were intended to be and would have been removed by the System. This has been estimated at Ł2,100,000 up to the commencement of the proceedings and is said to be continuing at the rate of Ł350,000 per month.

(5) loss of revenue from 5^th November 1998 due to inability to sell additional products such as breakdown or MOT coverage which were intended to be and would have been sold with the assistance of the System. This has been estimated at Ł900,000 up to the commencement of the proceedings and is said to be continuing at the rate of Ł150,000 per month.

(6) loss of revenue from 5^th November 1998 on each policy due to the absence of the "Priceometer" functionality which would have permitted KFIS to quote higher prices than the quotations it received from insurers in cases where that seemed appropriate. On the basis of an average loss of revenue of Ł5.00 per policy, this has been estimated at Ł567,000 up to the commencement of proceedings and is said to be continuing at the rate of Ł94,500 per month.

(7) loss of revenue from 1^st December 1998 caused by removal from the Royal & Sun Alliance panel due to KFIS's inability to provide adequate information. Estimates have been given for "new business lost" in the sum of Ł720,000 up to 1^st June 1999, continuing at the rate of Ł120,000 per month, for "loss of renewals of existing policies" in the sum of Ł870,000 up to 30th November 1999 and for loss of renewals of new business lost at a rate of Ł66,000 per month from 1^st December 1999 onwards.

(8) the cost of engaging, recruiting and training additional staff which would not have been required if the System had been installed. KFIS alleges that the new System would have produced a productivity saving of 30%. It claims on the basis that it has had to recruit and train 30% more people than would have been needed had the System been implemented. The additional cost to the end of March 1999 is said to be Ł304,000. Losses are claimed on a continuing basis.

(9) loss of revenue due to down-time on the existing Brokerpac System. The sum of Ł281,250 is claimed in respect of the period November 1998 to October 1999.

(10) telephone charges which, it is said, would have been saved after 5^th November 1998 had the System been implemented because the average length of calls would have been reduced by 20%. This has been estimated at Ł149,031 up to the commencement of proceedings and is said to be continuing at the rate of Ł24,838.50 per month.

(11) postage, printing and stationery costs which, it is said, would have been saved after 5^th November 1998 had the system been implemented because only one letter instead of three would have been needed. This has been estimated at Ł102,500 up to the commencement of proceedings and is said to be continuing at the rate of Ł17,084 per month.

(12) the costs of additional personal computers purchased to produce and maintain management information which, it is said, would have been produced by the new System. Ł16,500 is claimed.

(13) the cost of upgrading Brokerpac to ensure Year 2000 compliance. The sum of Ł576,500 is claimed under this head but it seems likely that the same sums have been included as part of the Clause 19.5.3 direct losses identified at (3) above.

If the sum claimed under (13) is ignored it can be seen that the total of the sums estimated up to stated dates together with the modest lump sum claimed at (12) is almost Ł6m and the value claim is said to be increasing at over Łľm per month.

12. Bull disputes KFIS' claims and maintains a counterclaim for substantial damages on the basis that, by a letter dated 23^rd April 1999, the Agreement was properly terminated by it. Bull counterclaims the sum of Ł8,188,000 which is said to be the difference between the costs incurred on the Project and the sums paid by KFIS. In answering KFIS's claims Bull admits that the project did not proceed smoothly in the manner which the Agreement envisaged but responsibility is said to lie with KFIS. Bull alleges that it was KFIS's failures to do that which was required of it that prevented the proper performance by Bull of its obligations. Bull alleges that the "Specification Phase" of the "Project" involved the production of two key documents which were to form the baseline against which the System would be developed and evaluated. One was the Specification which it was to produce (and which KFIS was to "sign off") the other was the Acceptance Tests which KFIS was to produce (and which it was to agree). So far as the Specification was concerned, Bull agrees with KFIS that a document was delivered on 24^th March 1998 but it disputes that this was agreed on or before 17^th April 1998 or at all. What Bull alleges, in essence, is this:

13. KFIS' requirements continued to evolve or develop over time. Bull was not able to produce a definitive Specification and KFIS was not able to produce definitive Acceptance Tests documents because of this. The Specification delivered in March 1998 was discussed. KFIS amended it and, in addition, identified 119 items as needing to be dealt with before it could be accepted. Notwithstanding these amendments and the 119 items an instruction was given by KFIS to proceed with software development when the Specification was obviously incomplete and not "signed off". In the light of the discussions, amendments and the 119 items Bull produced Version 2 of the Specification at about the end of May 1998. That too was an incomplete document because KFIS had not finalised its business processes and it had not provided Bull with a copy of an important report prepared by Arthur Anderson which would have identified certain "wrong assumptions" which had been made. That report was not provided to Bull until 31^st July 1998. Bull alleges that the Specification could not be completed and was never "signed off" by KFIS prior to the termination of the Agreement in the Spring of 1999.

14. So far as the Acceptance Tests were concerned, KFIS did not produce any document by 24^th March 1998 but it did produce various inadequate or unsatisfactory documents in June, September, November and December 1998. The document could not be properly completed and was not agreed prior to the termination of the Agreement because of KFIS' own failings, as now summarised in paragraph 20 of the Amended Defence and Counterclaim (1/37).

15. Thus, according to Bull, instead of the parties proceeding as the Agreement had envisaged from a concluded "Specification Phase" to the subsequent "Project Phases" (which, it is agreed, were reduced from three to two) the position was -

(1) the development of the software was started before KFIS had applied its mind as to precisely what functionality it required and how such functionality was to operate;

(2) there was no proper baseline against which development of the software could be controlled;

(3) Bull was deprived of the opportunity of "tying down" KFIS to a set of properly identified requirements;

(4) KFIS took the view that it was entitled to make changes to the functionality it required without invoking the procedure laid down in the Agreement;

(5) neither KFIS nor Bull knew with any or any proper definition what was required in order to satisfy Acceptance Testing.

This position became, so it is said, more unsatisfactory as time went on because the procedures which should have been followed in order to maintain discipline/provide a structure for the development of the software (the so-called "dynamic systems development method" - "dsdm") were not followed. This method involved empowering key members of staff to be able to deal authoritatively with Bull, prioritising functionality and developing particular functionality within defined "time boxes". Bull alleges that KFIS' empowered staff found themselves overruled by more senior management, that functionality was not effectively prioritised and that the time-boxes were ignored. It is Bull's case that these matters were linked with what it has termed "requirement creep" viz. the functionality which KFIS demanded became ever more complex and fell outside anything which could properly be required under the terms of the Agreement. Bull alleges that the overall result of these various matters was to extend the time required for the development of the System beyond that which had been allowed in the Project Plan.

16. Other specific matters which are said to have contributed to delays and in respect of which Bull criticises KFIS are: delays to the procurement of the telephone system (the allegation being that the system originally intended was not suited to the intended use - the position not being resolved until June 1998); problems in obtaining information from the owners of the Brokerpac "Quote Engine" (the allegation being that KFIS was conducting parallel discussions with a view to obtaining a different/modified product - this action is said to have hindered progress up to June 1998); and, a failure to provide the underwriting rules, authorised insurer variance information and pricing strategy information (the allegation being that these items were needed to allow Bull to develop the functionality that KFIS required; that none of this was provided before March 1998, that drafts were not produced until July 1998 and that the position was not "signed off" until November 1998).

17. Bull alleges that it delivered software to KFIS for model office pilot testing on 21^st December 1998. Bull alleges that this software complied with Version 2 of the Specification but, as was to be expected in the circumstances, further development work remained to be done and further software remained to be delivered in January, February and April 1999. Bull alleges that further deliveries were made on 19^th January 1999 and 1^st February 1999 at which time Bull claims that it had "fulfilled or substantially fulfilled" its obligation to produce the model office software for pilot testing.

18. In late 1998/early 1999 the respective project teams considered the position. When what had been delivered was compared with "what [KFIS] expected or wanted" (Bull's expression, see 1/61) or with what was "required for completion in accordance with the Agreement" (KFIS's expression, see 1/162), the position was found to be unsatisfactory. The results of the exercise are referred to as the "gap analysis". From KFIS's perspective the analysis showed that Bull was far from completing its contractual obligations. From Bull's perspective the analysis revealed a very wide gap between the functionality which KFIS was expecting and that which it (Bull) had undertaken to provide. On 19^th February 1999 Bull put forward its proposals for completing the project. This envisaged work continuing throughout 1999. Also it required KFIS to acknowledge that much of the functionality required fell outside the scope of the Agreement and would thus qualify for additional payment. KFIS's response to these proposals came in the form of a solicitor's letter dated 26^th February 1999 by which it was contended that all the outstanding work was required to fulfil Bull's obligations under the Agreement, notice was given that Bull was in material breach of the Agreement and termination was threatened. The subsequent solicitor's letter dated 1^st April 1999 (upon which KFIS relies in these proceedings and to which I have already referred above when summarising its case) re-stated KFIS's position but it did so with greater particularity.

19. Bull's response to the allegations that it was in material breach of the Agreement are at paragraphs 61 and 62 of the Amended Defence and Counterclaim (1/63). What is said is that by the beginning of April 1999 the relationship between the parties had broken down. KFIS's refusal to acknowledge that it was required to "sign-off" the Specification, that it was in breach of the Agreement in failing to provide Acceptance Tests, that it had caused or contributed to the delay that had been incurred and its refusal to acknowledge that the functionality it required fell substantially outside the scope of Agreement were evidence of its intention not to be bound by the Agreement. By letter dated 23^rd April 1999, Bull exercised its right to terminate the Agreement for those reasons and the Agreement was so terminated 20 business days thereafter. Bull, it is said, thereby accepted KFIS's repudiation of the Agreement and/or such repudiation was accepted by service of the pleading.

20. At paragraph 53 of the Amended Defence and Counterclaim (1/52 to 1/61) Bull responded to the table of dates upon which KFIS relies and which I have set out at page 4 above. For the purposes of this Judgment I do not think it necessary to set out Bull's position with regard to each of the alleged late delay notifications in detail. I think it sufficient to note that the notifications alleged are generally accepted but earlier intimations/notifications are sometimes asserted. The main thrust of this part of Bull's pleading is that KFIS's staff were in regular/day to day contact with its (and its sub-contractor's staff) and were at all material times well aware that delays were occurring and/or were likely and well aware of the reasons therefor. KFIS responded at paragraphs 62 to 88 of the Amended Reply and Defence to Counterclaim (1/153 to 1/162). Once again, for the purposes of this Judgment I do not think it necessary to set out KFIS's position with regard to Bull's individual responses in detail. However, one of the matters raised by KFIS concerned the knowledge which its staff had of delays to the progress of Bull's work and the need for written notices. What was said, at paragraph 63 of the pleading is this -

"It is denied ...... that the fact that some [of KFIS's] staff worked in relatively close proximity to [Bull's] staff entailed that [KFIS] knew of the delays referred to or the likelihood of any such delays. [KFIS] was entitled to (and did) rely upon the contractual provision that [Bull] would give immediate written notice of any delay of which it was aware, together with [Bull's] repeated assurances that it would comply with its contractual commitments and subsequent promises as to delivery."

The main thrust of KFIS's responses can, I think, be summarised in this way: up to September 1998 Bull adopted a reassuring attitude informing KFIS that steps were being taken to resolve or overcome the delays which had occurred. In mid September 1998 Bull acknowledged/admitted a delay until the beginning of December 1998 which had serious consequences. There was no attempt at that stage to attribute responsibility for this delay on KFIS and matters then progressed until early December when the further delay in delivery until 21^st December 1998 was notified. The unsatisfactory nature of what was then delivered (in KFIS's view) has been covered earlier.

21. It is against this background that contractual issues came to be raised in the pleadings. One obvious area for debate in the light of Clause 19 of the Agreement (see page 5 above and 2/22-3) is the extent of Bull's potential liability in damages to KFIS if KFIS establishes its case. Once the extent of the disagreement had become apparent, Bull considered that these matters might conveniently be raised in the context of an Application to strike out paragraphs 17 and 18 of the Particulars of Claim - in the alternative Bull sought Summary Judgment under CPR, Part 24 in respect of the issues arising out of those paragraphs (see 1/228). In response KFIS applied to amend paragraph 18.2 of the pleading (see page 6 above and page 47 below).

22. The other contractual issues raised concern the meaning/effect of certain notice or notification provisions which are to be found at Clauses 11 and 35 of the Agreement (2/17-18 and 2/33-34). KFIS contends that Bull can only rely on duly notified breaches, failures or defaults on its (KFIS's) part as reasons for lateness in implementation and/or for non performance (see paragraphs 8 to 10 of the Amended Reply and Defence to Counterclaim, 1/129-130). In its view due notification had to be "immediate" and "written". In response to that plea, in the Rejoinder and Reply to the Defence to Counterclaim, Bull disputes the need for written notification (paragraphs 7.2 and 7.3, 1/173). In addition, Bull contends that insofar as KFIS might be seeking to rely on one part of Clause 11 of the Agreement (Clause 11.2.2, 2/17) the attempt to exclude or restrict liability for its own default brings the matter within the provisions of the Unfair Contract Terms Act 1977 ("UCTA") and further contends that the clause is unreasonable.

ISSUES

23. At a Case Management Conference on 28^th November 1999, H.H. Judge Bowsher Q.C. ordered the trial of preliminary issues commencing on 27^th March 2000. The precise scope/wording of the issues was dealt with when the Case Management Conference re-convened on 17^th December 1999 (1/3 to 1/5). The Issues to be decided as between KFIS and Bull were set out in two Schedules. Schedule 1 contained what might be described as straightforward contractual issues. Schedule 2 set out other issues which were to be tried at or immediately after the trial of the Schedule 1 issues (and also the Schedule 3 issues which were to be decided between Bull and Graham in the Part 20 proceedings) as part of Bull's application to strike out parts of KFIS's claim. The Schedule 1 issues were reduced as a result of a letter dated 8^th March 2000 (1/8 and 1/9) by which Bull's solicitors stated that certain of the issues would not be pursued and limited the extent of the argument in relation to the UCTA. The issues remaining for decision under Schedule 1 of the Order dated 17^th December 1999 are -

1. [Issue 3] - whether on a true construction of the Agreement, Clause 35 of the Agreement applied to Bull's obligation to notify under Clause 11.

2. [Issue 6] - whether Clause 11.2.2 is subject to the requirement of reasonableness under the UCTA. For the purposes of the trial of the preliminary issue only Bull confirmed that it would not be arguing that section 3 of the UCTA applied and, in order to determine whether clause 11.2.2 is subject to the requirement of reasonableness under section 7 of the UCTA, it was to be assumed that the Agreement was subject to implied terms whereby KFIS was required to co-operate with Bull; to take proper steps to identify what it required during the course of the development of the software and properly to communicate such requirements to Bull; and, to perform its obligations, including the making of decisions, within a reasonable time.

3. [Issue 5.1] - whether on a true construction of Clause 19 of the Agreement, proof of wilful or deliberate malicious acts under Sub-Clause 19.6.2 would permit KFIS to claim the indirect or consequential loss and damage excluded by Sub-Clause 19.4 or conversely, is Clause 19.4 unaffected by Sub-Clause 19.6.2 ?

4. [Issue 5.2] - whether on a true construction of Clause 19 of the Agreement, KFIS must prove malice under Sub-Clause 19.6.2 ? If so, what meaning is to be ascribed to the words "wilful or deliberate malicious act or omission" ?

I have set out the issues in that order because issues 3 and 6 both concern the contractual notification provisions whilst issues 5.1 and 5.2. both concern the extent to which damages for breach of contract might be recoverable by KFIS from Bull. I should perhaps record at this point that, when it comes to addressing these issues, I am not concerned in any way with the factual merits of either claim or counterclaim. I have summarised the parties' respective pleaded positions simply and solely to enable the context of the legal debate to be understood.

24. I now turn to Bull's application to strike out paragraphs 17 and 18 of the Particulars of Claim and the Schedule 2 issues. The issues stated in Schedule 2 of the Order dated 17^th December 1999 are -

1. Whether the events set out in the table at paragraph 11 of the Particulars of Claim (assuming them to be true) are capable of supporting the inferences alleged:

1.1 At sub-paragraph 11.3 of the Particulars of Claim, that [Bull] well knew that it would not meet the deadline well before the deadline itself ?

1.2 At sub-paragraph 18.2.2 of the Particulars of Claim, that [Bull] deliberately and maliciously chose not to devote sufficient resources to comply with its obligations for economic or financial reasons of its own ?

1.3 At sub-paragraph 18.2.3 of the Particulars of Claim, that [Bull] decided not to notify [KFIS] of delays or perceived delays immediately but delayed giving such notification until the promised date for performance was imminent or had passed and therefore deliberately and maliciously breached clause 11.1.3 of the Agreement ?

Further or alternatively:

1.4 Whether the inferences referred to above should be struck out because they are "double inferences" ?

1.5 Whether the facts and matters relied upon by [KFIS] properly support the allegation of malice?

Whether the withdrawal of the Supplier Personnel and/or the removal of the router from the [KFIS's] premises and the failure to return them as alleged at sub-paragraphs 18.2.4 and 18.2.5 of the Particulars of Claim (assuming such allegations to be true) are capable of amounting to a wilful or deliberate malicious act or omission (as defined under clause 19.6.2 of the Agreement) entitling [KFIS] to claim unlimited direct and indirect damages ?

25. The third of the matters which I have to decide between KFIS and Bull was raised in an Application Notice dated 22^nd March 2000. By this Notice, Bull applied for an Order requiring KFIS to elect whether to pursue its claim on an "expectation loss" basis or on a "reliance loss" basis. Bull submitted that this Order should be made because it was not in the interests of justice that KFIS be allowed to pursue both types of loss and damage to trial. In Bull's submission, this election should be made within 14 days of the determination of the Preliminary Issues ordered on 17^th December 1999.

ISSUE 3 - whether on a true construction of the Agreement Clause 35 of the Agreement applied to Bull's obligation to notify under Clause 11.

26. It is trite law that Clauses 11 and 35 must be read in context in order that the intention of the parties (objectively ascertained from the words they have used) can be discovered. It is, I believe, also trite law that when construing any commercial contract it is generally best to avoid placing too great an emphasis on an individual word or words used in a particular clause or clauses when endeavouring to discover the intention of the parties as disclosed by the whole of their agreement. That said, the immediate object of this enquiry is the meaning to be attributed to the words "immediately notify KFIS" in Sub-Clauses 11.1.2 and 11.1.3 and it is perhaps convenient at this point to set out both Clause 11 and Clause 35 before summarising the competing submissions. Clause 11 provided -

11.1 [Bull] undertakes to

11.1.1 perform its obligations hereunder in an open manner and in accordance with the methodologies and approach described in the ITT and Response to the ITT and the Project Plan so as to enable its obligations hereunder to be performed by an alternative supplier if this Agreement is terminated;

11.1.2 upon becoming aware of any delays or perceived delays in the implementation of the Project immediately notify KFIS;

11.1.3 upon becoming aware of any failure of KFIS to complete an agreed project task, or provide [Bull] with any information, materials and resources which have been agreed between the parties pursuant to Clause 10.1 immediately notify KFIS.

11.2 [Bull] acknowledges that:

11.2.1 subject to the performance of the Specification Phase and the provisions of Clause 10.1.1. it has received from KFIS sufficient information to enable it to perform its obligations hereunder;

11.2.2 it will not be able to rely on any default of KFIS in fulfilling its obligations hereunder as a reason for the late implementation of the System or the Project (including but not limited to, the System's failure to pass the Acceptance Tests) or to excuse [its] non performance of its obligations under this Agreement unless it has complied with the provisions of Clause 11.1.2 and 11.1.3

11.3 Both parties acknowledge, that, provided [Bull] has complied with its obligations hereunder, and unless the parties otherwise agree, any delay by KFIS in performing its obligations hereunder shall extend the Project Plan by an amount equal to the delay caused by KFIS. Further, if such delay results in [Bull] incurring additional costs and both parties shall agree (such agreement not to be unreasonably withheld or delayed) that such costs have been mitigated and are fair and reasonable, then KFIS shall meet such costs providing they do not exceed Ł1,000 per man days delay.

[emphasis added]

And Clause 35 provided -

35.1 Any notice given under this Agreement must be given in writing and sent or delivered by hand, post, or facsimile to the other party at the address stated in the Agreement (or any other address notified for this purpose by that party) provided that any:

35.1.1 notice delivered by hand shall be deemed to have been given when deposited at the appropriate address;

35.1.2 notice sent by post shall be deemed to have been given forty-eight (48) hours after a first class registered letter is posted to the appropriate address; and

35.1.3 notice sent by facsimile shall be deemed to have been given on transmission to the correct number, provided (unless otherwise agreed by the parties) that notices sent by facsimile shall also be confirmed immediately by notice in writing in accordance with the provisions of 35.1.1 or 35.1.2.

The addresses stated in the Agreement were the parties' registered offices. In the case of KFIS this was 17 Corstorphine Road, Edinburgh EH12 6DD. In the case of Bull it was Computer House, Great West Road, Brentford, Middlesex TW8 9DH. I am not aware that any other address was notified by either party at any stage but, even if it was, the Agreement must be construed at the date when it was agreed and signed.

27. On behalf of KFIS, Mr Barnes Q.C. submits that it is obviously essential that contractually significant communications are differentiated from what he called "the ordinary discussions surrounding project development and implementation". He relies on the wording of Clause 35; its generality i.e. it applies to "any notice"; its mandatory terms i.e. "must be given in writing"; and the provisions for hard copy confirmation after facsimile transmission. The obvious purpose of the clause is, he submits, to promote certainty and the avoidance of misunderstandings. Under Clause 11, Bull undertook to "...immediately notify KFIS" upon its becoming aware of any delays in implementation or any failures on the part of KFIS in completing agreed tasks or providing information, materials or resources: relying on dictionary definitions Mr Barnes submitted that to notify someone of something means nothing more nor less than to give that person notice of it - Clause 11 (and other clauses) provided when notification was to be given or when something was to be notified but Clause 35 deals generally with the manner in which communication was to be made.

28. On behalf of Bull, Mr Storey Q.C. submits that, on consideration of the Agreement, it is apparent that the parties deliberately used different words in different clauses. In his submission dictionary definitions were of no assistance in this case. A distinction was made between "notices" (which were required to be in writing) and "notifications" (which, save in exceptional cases where there was a specific provision to the contrary, did not have to be in writing). Clause 35 of the Agreement applied only to "notices"; there was no justification for construing the words "any notice" in that clause as if it equated to or included "any notification". Mr Storey drew attention to a number of different parts of the Agreement to show that the parties drew a distinction between "a (mere) notification" and "a (written) notice".

29. In my judgment, Clause 35 does not apply to the obligations to notify which are contained in Clauses 11.1.2 and 11.1.3. In their contract the parties have distinguished between those instances where "a notice" is required (where Clause 35 will apply) and other cases where something is required to be "notified" without the form in which that is to be done being prescribed. Whilst I agree with Mr Barnes' general point (viz. that in the course of carrying out a contract of this type it is essential that contractually significant communications are differentiated from ordinary discussions surrounding project development and implementation - and I note that I am not asked to consider either the type(s) or the level(s) of communication which would be required to satisfy sub-clauses 11.1.2 and 11.1.3) that does not lead me to the conclusion that these parties intended that each and every matter of which either was required to notify the other as the contract progressed had to be put into the form of a written notice and be delivered by hand to, be sent by first class post to, or faxed to (with a confirmatory hard copy also being sent to) the respective registered offices. These parties, I believe, intended that Clause 35 written notices had to be given only in exceptional circumstances where dissatisfaction with Bull's achievement was to be notified together with details of the (alleged) failures - see Clauses 3.5, 6.4 and 22.1.1.

30. In most instances, where the Agreement required notification by one party to the other, no specific mode of notification or place to which notification was to be made was prescribed. As a matter of normal practice and/or convenience notification in written form to the project team (or an oral notification promptly confirmed in writing or by way of inclusion in the minutes of a meeting of responsible representatives of the project teams) might be anticipated but it was not something specifically required. The provisions of Clauses 3 and 6 (to which Mr Storey specifically referred in his submissions) provide convenient illustrations of this basic point -

30.1 By Clause 3.1 Bull undertook to write develop and deliver to KFIS the Specification which, as I have said, was to supersede earlier technical documents and to be the basis upon which the Project was then to move forward. The clause stated that on delivery of this Specification Bull was to "notify" KFIS that the Specification was ready for sign off. By Clause 3.3, upon receipt of that "notification" KFIS was to carry out such investigations as it required to ascertain whether the Specification was capable of implementing the System described in the ITT/Response to ITT and agreed user requirements. IF KFIS believed it was so capable then by Clause 3.4 it was to "notify" Bull within 10 business days. If, on the other hand, KFIS believed it was not so capable then, within the same period, by Clause 3.5 it was required to give Bull "notice... specifying the defects in the Specification". Bull could react thereto by remedying the defects and resubmitting the Specification or by "informing" KFIS of the reasons why it did not accept the alleged defects. Did KFIS and Bull use the emboldened words interchangeably intending that at each stage in the process a Clause 35 notice had to be sent ? Or, did KFIS and Bull intend a Clause 35 notice had to be sent only in the circumstances contemplated in Clause 3.5 ? In my judgment, Mr Storey's submission that what can fairly be regarded as routine notifications which were part of a process by which matters could go ahead smoothly are to be differentiated from the expression of dissatisfaction for which Clause 3.5 made provision is correct. To my mind, there are quite obvious commercial reasons why an allegation that Bull had failed to achieve what the Agreement had required should be dealt with by a different and rather more formal procedure - a procedure which could be expected to ensure that the matter would come to the immediate attention of very senior persons within the company.

30.2 Turning to Clause 6, this deals with the Acceptance Testing requirements after delivery, installation and implementation. By Clause 6.1, Bull was to "notify" KFIS that the System or part of the System was ready for Acceptance Testing. By Clause 6.2, upon receipt of that "notification" KFIS, with such assistance from Bull as might be needed, was to carry out the required tests. By Clause 6.3, upon the successful completion of each Acceptance Test KFIS was to "notify" Bull. But, by Clause 6.4, in the event of any failure of any Acceptance Test, KFIS was to give Bull "... notice thereof specifying the failure" and provision was then made for matters to be remedied before re-submission of the System for Acceptance Testing. Again, the two questions which arise are, did KFIS and Bull use the emboldened words interchangeably intending that at each stage in the process a Clause 35 notice had to be sent ? Or did KFIS and Bull intend that a Clause 35 notice had to be sent only in the circumstances contemplated in Clause 6.4 ? For what are essentially the same reasons as those given above when considering the Clause 3 regime, I answer the second question affirmatively. In doing so I have taken into account the requirements for the "Acceptance Test Procedure" which were contained in Schedule 8 to the Agreement (2/90-91). In the Schedule the question of notification of successful completion of the Acceptance Tests was specifically addressed. What was there required was notification in writing signed by the KFIS Project Director, such notice not to be unreasonably withheld or delayed. To my mind, there are quite obvious commercial reasons why the parties (but particularly KFIS) should wish to stipulate who was to decide upon the acceptability of the System and who was to notify satisfaction to Bull after Acceptance Tests had been carried out. There was an obvious need for final decisions to be made by senior management and for the decision to be appropriately notified. However, nothing in Schedule 8 alters or detracts from the basic scheme set out in Clause 6 whereby an allegation that what had been supplied by Bull had, on testing, been found to have failed was to be dealt with by the different, more formal procedure envisaged by Clause 35 whereby, as I have said before, the matter could be expected to come to the immediate attention of very senior management within Bull.

In the course of argument my attention was drawn to the many instances in the Agreement where the parties have expressly provided that a certain consent/ request/agreement was to be "written" or given "in writing" and to the many instances where some matter was to be requested or agreed or was to be "notified" or the subject of "notification" without there being any express provision as to the form of such request, agreement or notification. Given the many different aspects of the Agreement dealt with in these instances I do not believe that any general or overall conclusion can be drawn which assists in answering Issue 3. In the course of perusing the Agreement I have noted and considered each of the instances but I draw specific attention to only three of them.

31.1 First, Clause 12 which made provision for the management of the Project -

12.1 Both parties shall appoint a Project Director in respect of the performance of their obligations under this Agreement. [Bull's] Project Director shall be assigned with responsibility for:

12.1.1 implementation of the System and the Project;

12.1.2 managing the performance of [Bull's] obligation hereunder on a day to day basis; and

12.1.3 carrying out the Project Director Responsibilities.......

12.2 The Project Directors shall meet together not less than once per week (or such other period as may be agreed) at such location as the parties may agree to discuss the implementation and progress of the Project and the performance of [Bull's] obligations hereunder. Both parties shall give immediate attention to any matter raised by the other relating to the performance of its obligations under this Agreement.

12.3 [Bull's] Project Director shall prepare an up to date report in a format to be agreed with KFIS on [Bull's] performance of its obligations under this Agreement ("Project Status Report") for each week, in time for the report to be circulated and read by KFIS's Project Director (and any other persons reasonably specified by KFIS from time to time) before the next project management meeting.

12.4 The minutes of all project management meetings shall be prepared by KFIS and all minutes shall be distributed following each meeting, and shall, when agreed, be signed by the Project Director for each party to indicate that party's acceptance of those minutes.

These provisions are, in my view, consistent with the parties envisaging significant matters being notified by means other than the service of Clause 35 notices.

31.2 Secondly, Clause 14.5 which is part of the regime devised for the personnel that Bull was to utilise for the project. It provided -

14.5 [Bull] shall ensure that [its] Personnel and the personnel of the Approved Contractors shall, when working at the premises of KFIS or any members of the Kwik-Fit Group or in performance of [Bull's] obligations hereunder:

14.5.1 make all reasonable efforts to cause as little interference with and inconvenience to the business of KFIS or the Kwik-Fit Group as is possible;

14.5.2 at all times comply with the safety, security and all other directions, rules and regulations applicable to such premises, provided that KFIS shall have provided copies of such regulations to [Bull] or given [Bull] prior written (or where not reasonably possible oral) notification of such regulations; and

14.5.3 at all times use their reasonable endeavours to promote the interests of KFIS in respect of the Project.

Mr Storey relied on the wording of Sub-Clause 14.5.2 which expressly contemplates that in general written notification of applicable regulations would be given; oral notification was to be permissible as an exception to the general rule. In Mr Storey's submission the fact that the parties expressly provided for written notification in this particular instance (and also in Clause 6.3 when that was read together with Schedule 8 - see above) supported his submission that in other cases where the words notify or notification were left unqualified there was no requirement as to the mode of communication. Although to my mind this is not a particularly strong point, the wording used here is certainly consistent with the view that Clause 35 was not intended to have the wide ranging, general application for which Mr Barnes was contending.

31.3 Thirdly, I draw attention to Clause 20.6 which provided for what was to happen during the warranty period in these terms -

"20.6 If, during the Warranty Period, there is a breach of any of the warranties set out in Clause 20.1 and 20.3 then [Bull] shall remedy such breach as soon as possible in accordance with the Maintenance and Support Services. Notwithstanding the foregoing, if during the Warranty Period there is a breach of any of the Warranties which results in either or all of the Customer Care, Renewals or New Business business applications Suffering an "A" or "B" Priority Problem...... [Bull] shall forthwith remedy such breach in accordance with the Maintenance and Support Services and in any event by no later than five (5) Business Days from the date [Bull] receives notification of such breach from KFIS. If

20.6.1 the breach results in an "A" Priority Problem which affects all three such business applications and has not been remedied within five (5) Business Days from the date of notification of such breach; or

20.6.2 the breach results in either an "A" or "B" Priority Problem which affects any one or more of the three such business applications which has not been remedied within ten (10) Business Days from the date of such notification

then, KFIS may terminate this Agreement forthwith....."

As is obvious, the second part of this clause was intended to become operative in cases of serious operational problems becoming apparent. Prompt remedial action was required within five or ten business days of receipt of notification of breach. This is a situation which might be thought somewhat similar to those contemplated by Clauses 3.5 and 6.4 where a Clause 35 notice might have been thought appropriate. As a matter of common-sense commercial reality, the notification required at this (late) stage was actual notification to a senior representative of Bull who was actively involved in the maintenance and support operations. In the normal course, so serious a matter would almost certainly be communicated in writing or be the subject of some fairly prompt written confirmation but, for whatever reason they may have had, receipt of such information in the form of a written notice addressed to Bull at its registered office, was not something for which the parties expressly stipulated.

ISSUE 6 - whether Clause 11.2.2 is subject to the requirement of reasonableness under the UCTA

32. I have set the text of Clause 11 as part of my consideration of Issue 3 paragraph 26 above. The issue which I am asked to decide is a narrow one. I am asked to decide the applicability of the UCTA, and in particular Section 7 of that Act. If the UCTA is applicable the issue of reasonableness is to be dealt with at a later stage in these proceedings. Bull contends that Clause 11.2.2 is subject to the requirement of reasonableness under section 7 of the UCTA whilst KFIS contends that it is not.

33. Bull has alleged that the Agreement was subject to implied terms whereby KFIS was required to co-operate with Bull; to take proper steps to identify what it (KFIS) required during the course of the development of the software and properly to communicate such requirements to Bull; and, to perform its obligations, including the making of decisions, within a reasonable time. For present purposes the Court is asked to assume that the Agreement was subject to those implied terms and I proceed on that basis.

34. Section 7 of the UCTA applies to contracts where possession or ownership of goods passes under a contract which is not governed by the law of sale of goods or hire-purchase and it is common ground that the Agreement is such a contract - being a contract to which the Supply of Goods and Services Act 1982 applies. Section 6 of the UCTA applies to Sale of Goods and Hire-Purchase contracts. Section 6 prevents exclusion of the implied statutory undertakings as to title and it prevents (in the case of consumer transactions) or limits (in other cases) the seller's ability to exclude or restrict liability in respect of the well known statutory implied undertakings in respect of sample, description, quality or fitness for purpose. It has no wider application. Section 7 is differently worded. Bull contends that Section 7 must be recognised as having a much more wide-ranging effect than Section 6. On the other hand KFIS contends that, properly construed, Section 7 covers the same ground in respect of miscellaneous other contracts where possession or ownership passes as in Section 6. In other words, KFIS contends that Section 7 affects only contract clauses which exclude or limit liability for breach of obligations implied by law in respect of title, sample, description, quality or fitness for purpose. It is common ground that there is no authority in which this issue has been either considered or decided.

35. Sections 6 and 7 of the UCTA (as amended) provide as follows -

"6 Sale and hire-purchase

(1) Liability for breach of the obligations arising from -

(a) section 12 of the Sale of Goods Act 1979 (seller's implied undertakings as to title, etc);

(b) section 8 of the Supply of Goods (Implied Terms) Act 1973 (the corresponding thing in relation to hire-purchase),

cannot be excluded or restricted by reference to any contract term.

(2) As against a person dealing as consumer, liability for breach of the obligations arising from -

(a) section 13, 14 or 15 of the 1979 Act (seller's implied undertakings as to conformity of goods with description or sample, or as to their quality or fitness for a particular purpose);

(b) section 9, 10 or 11 of the 1973 Act (the corresponding things in relation to hire-purchase),

cannot be excluded or restricted by reference to any contract term.

(3) As against a person dealing otherwise than as consumer, the liability specified in subsection (2) above can be excluded or restricted by reference to a contract term, but only in so far as the term satisfies the requirement of reasonableness.

(4) The liabilities referred to in this section are not only the business liabilities defined by section 1(3), but include those arising under any contract of sale of goods or hire-purchase agreement.

7 Miscellaneous contracts under which goods pass

(1) Where the possession or ownership of goods passes under or in pursuance of a contract not governed by the law of sale of goods or hire-purchase, subsections (2) to (4) below apply as regards the effect (if any) to be given to contract terms excluding or restricting liability for breach of obligation arising by implication of law from the nature of the contract.

(2) As against a person dealing as consumer, liability in respect of the goods' correspondence with description or sample, or their quality or fitness for any particular purpose, cannot be excluded or restricted by reference to any such term.

(3) As against a person dealing otherwise than as consumer, that liability can be excluded or restricted by reference to such a term, but only in so far as the term satisfies the requirement of reasonableness.

(3A) Liability for breach of the obligations arising under section 2 of the Supply of Goods and Services Act 1982 (implied terms about title etc in certain contracts for the transfer of the property in goods) cannot be excluded or restricted by references to any such term.

(4) Liability in respect of -

(a) the right to transfer ownership of the goods, or give possession; or

(b) the assurance of quiet possession to a person taking goods in pursuance of the contract,

cannot [(in a case to which subsection (3A) above does not apply)] be excluded or restricted by reference to any such term except in so far as the term satisfies the requirement of reasonableness......."

(emphasis added in Section 7(1)).

36. Mr Storey's submissions (on behalf of Bull) in respect of the matters which remained in contention so far as this issue was concerned, were these. When regard is had to the extended definition provided by Section 13(1)(a) of the UCTA (viz. making liability or its enforcement subject to restrictive or onerous conditions), Sub-clause 11.2.2 was obviously a clause which excluded or restricted KFIS's liability for breach of "obligations arising by implication of law from the nature of the contract"; the obligations in question being the three implied terms which arose by implication of law from the nature of the contract (Chitty on Contracts, 28^th Edition, Volume 1, paragraph 13-003 and the cases there cited). The words "that liability" in Section 7(3) of the UCTA refer back to the final part of Section 7(1) which contemplates any and all liability for breach of obligations arising by implication of law. Accordingly, Sub-clause 11.2.2 was subject to the requirement of reasonableness.

37. Mr Barnes' submissions (on behalf of KFIS) were these. Section 7 (like Section 6) was intended to prevent a seller/supplier such as Bull excluding or restricting its liabilities in respect of what might be called the usual or basic implied terms, now codified in respect of contracts such as the Agreement in the 1982 Act. The expression "that liability" in Section 7(3) refers back to the liability which was dealt with in Section 7(2). This could be seen as a matter of language and be tested by reference to the common sense of the result which meant that the regime for "Miscellaneous contracts under which goods pass" was in line with that for Sale of Goods and Hire-Purchase.

38. In Mr Barnes' submission the difference in the wording between Section 6 and Section 7 was due to the fact that there was no statutory codification of the terms implied by law in these contracts before 1982. The words "obligation arising by implication of law from the nature of the contract" in Section 7(1) were intended to refer to the obligations that the common law systematically implied into such contracts by analogy with the Sale of Goods Act. In further support of the conclusion for which he was contending, Mr Barnes submitted that it would be odd and contrary to the intention of the Law Commission (Second Report on Exemption Clauses - No 69 at pages 10 to 12) and Parliament (Hansard, House of Lords Volume 383 at 1104 and 1132 and Volume 384 at 459) if the scope of statutory controls was wider under Section 7(3) in the Miscellaneous contracts under which goods pass than under Section 6(3) in cases of sales of goods and hire-purchase and if the scope of statutory controls was wider under section 7(3) in non-consumer Miscellaneous Contract cases than it was under Section 7(2) in consumer cases. Mr Barnes' final submission in this regard was that the editors/authors of the leading textbooks expressed views which supported him (Chitty on Contracts, 28^th Edition, Volume 1, paragraph 14-076 and Benjamin's Sale of Goods, 5^th Edition at paragraph 13-074).

39. In my judgment, Clause 11.2.2 is not subject to the requirement of reasonableness under Section 7(3) of the UCTA. I accept Mr Barnes' principal submissions on this issue. I do not consider the difficulties of construction so great that it is necessary to consider either the views of the Law Commission or the legislative history. The summaries of the effect of Section 7 at paragraph 14-076 of Chitty and paragraph 13-074 of Benjamin do not grapple with the difficulty of construction arising from the very general wording used in the final part of Section 7(1). I fail to see how those words can be read as referring only to those terms arising by implication of law which had (at the time the Act was passed) been codified so far as contracts of sale of goods and hire-purchase were concerned but which had yet to be codified in the case of other similar types of contract such as the Agreement. If that was what the draftsman/Parliament subjectively intended then, I would respectfully suggest, it is not what was said. However, that said, Section 7(1) sets the scene in which Sections 7(2) to 7(4) are to apply. Sections 7(3A) and 7(4) deal with matters of title/possession by prohibiting or restricting exclusion clauses. Section 7(2) deals with exclusion clauses which purport to exclude or restrict only those implied terms which are detailed in that Section. In my judgment, it is fairly clear that when, in Section 7(3), the draftsman used the expression "that liability" he was intending to cover the same territory as he had previously addressed in Section 7(2) in the limited context of consumer transactions. Consistently with the scheme found elsewhere in the UCTA, the draftsman intended to provide limited protection rather than total prohibition of exclusions in non-consumer cases. Any other (and wider) construction of Section 7(3) produces the absurd results which, as Mr Barnes submitted, fail to satisfy any common sense criterion. They cannot have been, and in my judgment, they were not what was intended

ISSUE 5.1 - whether on a true construction of Clause 19 of the Agreement, proof of wilful or deliberate malicious acts under Sub-Clause 19.6.2 would permit KFIS to claim the indirect or consequential loss and damage excluded by Sub-Clause 19.4 or, conversely, is Clause 19.4 unaffected by Sub-Clause 19.6.2 ?

40. This issue concerns the relationship between Clauses 19.4 and 19.6 of the Agreement. Is KFIS entitled to claim indirect or consequential losses or damages if it can bring itself within Sub-Clause 19.6.2 or does Clause 19.4 effectively bar any and all such claims ? The two basic principles which I identified at the outset of my consideration of Issue 3 (see paragraph 26 above) are equally applicable in this context. It is convenient to begin by setting out Clause 19 of the Agreement. It provides -

19.1 This Clause 19 prevails over all other clauses and sets out the entire liability of the parties to each other, howsoever arising and whether in contract, tort or otherwise.

19.2 Nothing in this Agreement shall limit either party's liability for death or personal injury caused by its negligence.

19.3 [Bull's] total liability for damage to tangible property caused by breach of the Agreement or act or omission of [Bull], its employees or the Approved Contractors or the employees of the Approved Contractors shall not exceed 150% of the Fixed Price.

19.4 Neither party shall (but without prejudice to Clause 19.2) be liable to the other party for indirect or consequential loss or damage howsoever arising including but not limited to loss of profits, revenue, goodwill, business, contracts or anticipated savings.

19.5 Except as provided in Clause 19.2, 19.3 and 19.6 [Bull's] total aggregate liability hereunder for Direct Loss suffered by KFIS and arising out of the breach of contract, act or omission of [Bull] its employees or the Approved Contractors or any of their employees shall not exceed an amount equal to 150% of the total payments to be made by KFIS to [Bull] under this Agreement whether such liability arises in contract, tort, misrepresentation, breach of duty or otherwise. For the purposes of this Agreement, Direct Losses shall include but not be limited to:

19.5.1 restitution of all moneys paid by KFIS to [Bull] pursuant to this Agreement;

19.5.2 the reasonable and mitigated additional cost of locating and implementing an alternative solution to the System;

19.5.3 costs and expenses directly incurred by KFIS in contemplation of and pursuant to this Agreement to the extent that such costs and expenses are wasted if an alternative solution to the System is implemented by KFIS by a third party supplier;

19.5.4 subject to KFIS performing its obligation under 10.1.7, the reasonable costs of reconstituting lost or corrupted data; and

19.5.5 the cost of procuring a customer research facility to provide customer research for the Kwik-Fit Group in the same manner as such service is provided by KFIS to the Kwik-Fit Group on the data.

19.6 [Bull's] limitations of liability set out in this Clause shall not apply to:

19.6.1 the indemnity set out in Clause 21.1;

19.6.2 any damage or liability incurred by KFIS due to the wilful or deliberate malicious act or omission by [Bull] or its employees (acting in the course of their employment), contractors or agents.

(emphasis added)

41. Mr Barnes' submissions (on behalf of KFIS) on this issue were these. Clauses 19.3, 19.4 and 19.5 each operates to restrict the extent of one or both parties' potential liability in damages to the other. The opening words of Clause 19.6 viz. "[Bull's] limitations of liability set out in this Clause ..." refer to each of Clauses 19.3, 19.4 and 19.5. Clause 19.4 is a clause which limits Bull's liability by excluding a certain category of damages. He referred to the speech of Lord Bridge of Harwich in Geo. Mitchell Ltd. v. Finney Lock Seeds Ltd. [1983] 2 A.C. 803 at pages 813H to 814A where a seed merchant's standard conditions restricted liability, at its option, to replacement of the defective seed or refund of payments made by the buyer. The clause considered in that case was described by Lord Bridge as one which, when read as a whole, "unambiguously limits" the seller's liability. Mr Barnes submitted that there could be no justification for reading the general expression "limitations of liability" in the opening words of Clause 19.6 as referring back only to Clause 19.5 and/or to Clauses 19.3 and 19.5. Mr Barnes drew attention to the terms of sub-clause 19.6.1 which removed the Clause 21.1 indemnity from the limitations which would otherwise apply to Bull's liability. By Clause 21.1 Bull agreed to indemnify KFIS against losses, claims, demands etc. arising out of third party claims for breach of intellectual property rights. It was submitted that these were, of their nature, indirect and consequential losses. Accordingly, so it was said, Clause 19.6.1 was intended to prevent Clause 19.4 affecting claims under Clause 21.1 and it followed that the "limitations" referred to in the opening words of Clause 19.6 must necessarily include Clause 19.4.

42. Mr Storey's submissions (on behalf of Bull) on this issue were these. Clause 19.4 excludes all liability for indirect or consequential loss or damage on the part of either party. Clause 19.4 is an "exclusion" clause and not a "limitation of liability" clause. Alternatively, if Clause 19.4 is to be regarded as a "limitation of liability" clause it is not a "supplier's" [i.e. Bull's] limitation of liability clause but rather a mutual limitation of liability clause. The expression "[Bull's] limitations of liability set out in this Clause" as used in Clause 19.6 was a reference to the limitations on Bull's liability which were referred to in Clauses 19.3 and 19.5. When looking at Clause 19.4 itself, it was significant that it was expressed to be "without prejudice to Clause 19.2" but not without prejudice to Clause 19.6. When looking at Clause 19.5, it was significant that it cross-referred to Clause 19.6. This made it clear that Clause 19.6 was an exception to Clause 19.5. If Clause 19.6 was intended to provide an exception to Clause 19.4 it would be expected that it (Clause 19.4) would also have begun with suitable, clear exclusionary words. In the result, in Mr Storey's submission, on proof of "wilful or deliberate malicious act or omission by [Bull] or its employees ..... contractors or agents", KFIS would be able to recover direct losses without being subject to the 150% cap stipulated in Clause 19.5, but the Clause 19.4 exclusion on liability for "indirect or consequential loss or damage" would remain. In short clause 19.4 was unaffected by sub-clause 19.6.2.

43. In my judgment Clause 19.4 is unaffected by Sub-clause 19.6.2. I reject Mr Storey's first submission (that Clause 19.4 is an "exclusion clause" rather than a "limitation on liability" clause) but accept the alternative second submission (that Clause 19.4 is not one of "[Bull's] limitations of liability set out in this Clause ....") and, broadly accept the remainder of his submissions. In my view, the scheme stated in the Agreement to limit the amount recoverable in the event of what might fairly be termed "serious problems" being encountered during the project is a rationed one and Clause 19 should be considered in this overall context.

43.1 Clauses 6.5 to 6.7 dealt with the consequences of delay in achieving successful completion of Acceptance Tests. Provision was made for liquidated damages and, if either the Phase One or Phase Two tests were not completed within 60 days of the specified dates with the failure meaning that the whole or part of the System failed to meet essential functionality or performance criteria then KFIS might "as its sole and exclusive remedy for such breach terminate [the] Agreement forthwith". In the event of such a termination the provisions of Clause 22.3 were to apply.

43.2 Clause 20.6 dealt with the consequences on the occurrence of problems which had serious business implications for KFIS during the warranty period. I have set out the text of Clause 20.6 when dealing with Issue 3 at pages 28 to 29 above. This clause provided for notification to and remedying by Bull of breaches of the warranties it had given. If the breaches had serious business implications and Bull did not remedy them within 5 or 10 business days of its receiving notification then KFIS was entitled to terminate the Agreement forthwith and the provisions of Clause 22.3 were to apply.

43.3 Clause 22.1 of the Agreement provided generally for termination by notice in writing in the case of "material breach" or "persistent breaches" which, if capable of remedy, had not been remedied within 20 days after written notice had been given. It also provided for termination in cases of insolvency. Clauses 22.2 to 22.7 then provided as follows -

22.2 Notwithstanding the foregoing, if KFIS terminates this Agreement pursuant to either Clause 6.7 or 20.6 it shall have no further liability or obligation to the Supplier (other than compliance with the licence terms hereunder).

22.3 Upon termination of this Agreement by KFIS pursuant to either Clauses 6.7 or 20.6 and if KFIS elects (subject to Clause 22.4) to return the System to [Bull] then [Bull] shall (as KFIS's sole remedy in respect of such breach giving rise to the termination) forthwith:

22.3.1 in the case of termination pursuant to Clause 6.7 and in addition to the liquidated damages paid pursuant to Clauses 3 and 6 return to KFIS all moneys paid to [Bull] by KFIS hereunder; or

22.3.2 in the case of termination pursuant to Clause 20.6 then

(a) where termination occurs in the first twelve (12) months following the date of the successful completion of the Phase Three Model Office Acceptance Tests return to KFIS all moneys paid to [Bull] by KFIS hereunder; or

(b) where termination occurs in the second twelve (12) months following the date of the successful completion of the Phase Three Model Office Acceptance Tests return to KFIS a sum equal to eighty (80%) of all moneys paid to [Bull] by KFIS hereunder.

22.4 Notwithstanding the foregoing, if upon termination of this Agreement pursuant to either Clauses 6.7 or 20.6 KFIS elects to retain the Hardware, Network, Specification, Work in Progress, the Technical Bespoke Enhancements or Base Packages or any one of them (as the case may be) then KFIS may do so by notifying [Bull] of such intention and the moneys payable to KFIS pursuant to Clause 22.3 shall:

22.4.1 where this Agreement is terminated pursuant to Clause 6.7 or pursuant to Clause 20.6 during the first year of the Warranty Period be reduced by an amount equal to the contract value; or

22.4.2 where this Agreement is terminated pursuant to Clause 20.7 during the second year of the Warranty Period be reduced by an amount equal to eighty (80)% of the contract value

of such Hardware, Network, Base Packages, or Technical Bespoke Enhancements and in the case of the Specification and the Work in Progress by such price as shall be agreed between the Parties, or failing such agreement, as shall be determined by an expert appointed under Clause 25.3

22.5 Upon termination of this Agreement for whatsoever reason and at the request of KFIS [Bull] shall provide the Suppliers Personnel for ninety (90) Business Days at [Bull's] time and material rates as set out in the Payment Plan to work on the orderly and smooth transition of the Project and implementation of the System to KFIS or KFIS's choice of alternative supplier.

22.6 For the avoidance of doubt termination of this Agreement howsoever arising shall not terminate the licence granted pursuant to Clause 5 unless KFIS elects to return the System to [Bull] or if termination is due to a breach of the licence terms by KFIS.

22.7 If KFIS terminates this Agreement pursuant to Clauses 6.7 or 20.6 then where KFIS selects an alternative solution to the System which utilises the same Oracle database software to be supplied hereunder, it shall licence such software upon Oracle's standard licence terms from [Bull] for the same price that [Bull] has acquired such software from Oracle.

(emphasis added)

And, it can be seen that in the event of termination by KFIS under either Clause 6.7 or Clause 20.6 the amount recoverable was limited to liquidated damages (if applicable) and all or part of the monies paid by KFIS to Bull under the Agreement. All the monies would be recoverable in the event of a Clause 6.7 termination if KFIS elected to return the System but, if KFIS wished to retain some part or parts of the System then the amount recoverable was subject to what would seem to be fair and sensible adjustment. In the event of a Clause 20.6 termination the parties went further and differentiated between the first and second years of the warranty period in order to recognise the value which KFIS would have received once it had come into operation and had been operated for a year or more.

43.4 The other clause which, in my view, also needs to be considered is Clause 21. By this clause Bull undertook to indemnify KFIS against all loss, claims, demands and expenses in which KFIS might become involved if claims were made that use of the System constituted an infringement of some third party's intellectual property rights. By Clause 21.2 Bull agreed that in the event that the System (or part of it) was held to constitute an infringement of such rights it would use reasonable endeavours and proceed at its own expense to -

21.2.1 procure for KFIS the right to continue using the System or infringing part thereof; or

21.2.2 modify the System or infringing part thereof so that it is non-infringing; or

21.2.3 substitute for the infringing or infringing part thereof other software (whether licensed from [Bull] or a third party) possessing materially the same Functionality Criteria, Performance Criteria and compatibility as the infringing part thereof

provided that [Bull's] total liability under this Clause 21.2 shall not exceed an amount equal to all moneys payable hereunder less depreciation at the rate of 20% thereof per year on a straight line basis from the date of this Agreement.

Here again, in my view the scheme made business sense. Bull accepted an obligation to indemnify KFIS in respect of all the losses it might suffer and all expenses in which it might become involved if a third party claimed that the use of the System supplied by Bull to KFIS infringed its rights. The amount of the "losses" which might be recovered by KFIS from Bull was not limited in any way in that clause. The second matter dealt with was Bull's obligation to take steps to remedy the position in the event that infringement was proved. The parties agreed that Bull might be required to expend up to the full amount it had received from KFIS but there was to be recognition of the value which KFIS would have received if the System had been operated for a time.

44. Having set out what seem to me to be the main other provisions of the Agreement which fall to be considered together with Clause 19, it seems clear that Clause 19.1 is, to say the least, "unhappily phrased". What the parties meant was, Clause 19 was to apply to whatever damages claims might be made. Clause 19 obviously did not set out "the entire liability of the parties to each other" and, in addition to the provisions which I have already mentioned above I have also noted that by Clause 36.4 there was to be no limitation on either party's liability for fraudulent misrepresentation. Mutual exclusion of liability for all "indirect or consequential loss or damage" provided for in Clause 19.4 was consistent with the philosophy of the limitations on the sums which were to be recoverable under Clause 22.3 (or the Clause 22.4 variant) in the event of termination if it was found that a satisfactory System was not being provided (Clause 6.7) or that what had initially appeared to be a satisfactory System could not be made to perform in the commercial environment (Clause 20.6). In these cases the parties contemplated simply a return of sums paid by KFIS (appropriately discounted for value retained or already received) with no further liability. In the case of termination under Clause 22.1 and/or repudiation of the Agreement by Bull, for some reason which I do not pretend to understand, "direct" losses were to be recoverable with the potential liability, in the normal case being 50% greater than that arising in the case of a Clause 6.7 or Clause 20.6 termination. In the exceptional cases described in Clause 19.6, there was to be no limitation on the "direct" losses which KFIS was to be entitled to recover but nothing said in Clause 19.6 was intended to lift the limitation (or exclusion) stated in Clause 19.4.

45. I should perhaps add that I do not agree with Mr Barnes' submission that the indemnity set out in Clause 21.1 dealt with what were properly to be classified as indirect or consequential losses. The major part if not all of the losses suffered by KFIS in the event that a third party asserted enforceable intellectual property rights in a way which actually interfered with KFIS's business would be likely to be direct losses falling within the first limb of Hadley v. Baxendale (1854) 9 Ex 341. In the event that something so unanticipated occurred that second limb losses could be demonstrated by KFIS then, in my judgment, the combined effect of Clauses 19.1, 19.4 and 20.1 is that liability for any such second limb losses was excluded.

ISSUE 5.2 - whether on a true construction of Clause 19 of the Agreement, KFIS must prove malice under Sub-clause 19.6.2 ? If so, what meaning is to be ascribed to the words "wilful or deliberate malicious act or omission" ?

46. The issue was expressed in the form of the two questions which are set out above because KFIS pleaded its claim on the basis that, in order to bring itself within the Sub-clause 19.6.2 exception thus avoiding the exclusion of all "indirect or consequential loss or damage" under Clause 19.4 and being able to recover unlimited direct losses under Clauses 19.3 and/or 19.5, it was only necessary to demonstrate "wilful acts or omissions". KFIS justified its approach on the basis that the expression "wilful or deliberate malicious act or omission" used in Sub-clause 19.6.2 was to be read or construed disjunctively. In other words, KFIS believed that the Sub-clause envisaged two alternatives, namely a "wilful act or omission" on the one hand and a "deliberate malicious act or omission" on the other albeit each had the same general legal meaning (see further below).

47. Bull's Defence showed that it read or construed Sub-clause 19.6.2 differently. In Bull's view the word "malicious" was an essential second ingredient intended to add something to "wilful" as well as "deliberate". In other words, like KFIS, Bull believed that the Sub-clause envisaged two alternatives but, on its reading or construction, those alternatives were a "wilful malicious act or omission" and a "deliberate malicious act or omission".

48. This difference of view as to the way in which Sub-clause 19.6.2 should be read only matters if, as a second ingredient, "malicious" adds something of significance to the words "wilful" or "deliberate". In Bull's submission it does. "Malicious", is said to mean ill-will or spite towards the other contracting party. In Bull's view, the word refers not to intention but to an improper motive; a wilful malicious act means something done for reasons of personal malice or ill-will; it is a wrongful act done intentionally in order to harm the other party.

49. It followed, if Bull was correct in respect of each of those points, that KFIS would not be able to succeed on its pleaded case because malice was not alleged. Accordingly, the Application to Strike Out paragraphs 17 and 18 of the Particulars of Claim (or for Summary Judgment to be given in Bull's favour under CPR, Part 24 in respect of the issues arising out of those paragraphs) to which I have already referred at paragraphs 21 and 24 above, was taken out.

50. In response to Bull's arguments and the inter-related attack on its pleadings, KFIS contends that the first point, if it be right, can be met by a simple amendment to paragraph 18.2 of the Particulars of Claim and, as I have already noted at paragraph 21 above, KFIS has applied to make the amendment. So far as the second point is concerned, KFIS contends for a different meaning or effect to be given to the word "malicious" as used in Sub-clause 19.6.2. KFIS submits that, in the context in which it is used, malicious adds nothing of substance to the word "wilful". What KFIS has to prove in order to succeed in establishing a "wilful act or omission" (its construction) or "a wilful malicious act or omission" (Bull's construction) is simply the commission of a breach of contract (or other wrong) by Bull (or one of Bull's employers, contractors or agents) such breach (or other wrong) being committed with knowledge that wrong was being done or recklessly as to whether or not wrong was being done.

51. At the re-convened Case Management Conference on 17^th December 1999, Judge Bowsher ordered that KFIS' application to amend its Particulars of Claim be heard at or immediately after the trial of the preliminary issues. The matter was canvassed before me on the first day of the trial. In my view the most convenient course to take was to deal with the legal argument on the basis of KFIS' pleading being in the form it had proposed after taking into account the legal argument which had been raised by, or which underlay, the Defence.

52. I have set out Clause 19 in full at paragraph 40 above. The present debate concerns Clause 19.6.2 only and for ease of reference I repeat the material words -

19.6 [Bull's] limitations of liability set out in this Clause shall not apply to:

......

19.6.2 any damage or liability incurred by KFIS due to the wilful or deliberate malicious act or omission by [Bull] or its employees (acting in the course of their employment), contractors or agents.

(emphasis added)

53. I will consider each of the two points which have been raised separately. In each case I have already indicated the competing submissions made by the parties. So far as the first point was concerned, when he came to develop his submissions on behalf of KFIS, Mr Barnes had little further to say in support of the disjunctive reading of the words "wilful or deliberate malicious act or omission". This was, as he recognised, a very short point of construction in relation to which very little could be said (either way) in support of the basic submission. In developing his submissions on behalf of Bull, Mr Storey too had little to say in support of the alternative reading for which he contended. His submission was simply that the syntax and the lack of punctuation supported him.

54. I turn to the second point. Here both Mr Barnes and Mr Storey developed their respective basic submissions in some detail. Mr Barnes accepted that in some commercial contracts the word "malicious" might mean spite or ill-will - Nishina Trading Co. Ltd. v. Chiyoda Fire & Marine Insurance Co. Ltd. [1969] 1 Lloyds Rep. 293 per Lord Denning MR at page 298 - but, in his submission, that was not the case here. He submitted that in the Agreement "wilful" and "deliberate malicious" meant the same thing, which was, as I have said, doing something knowing it was wrong or being reckless as to whether or not wrong was being done. As to the meaning of "wilful", Mr Barnes referred to the passage dealing with "wilful default" in Snell's Equity, 30^th Edition at pages 322 to 323 and cited two authorities: In re City Equitable Fire Insurance Co. Ltd. [1925] 1 Ch. 407 at pages 517 (citing Lord Alverstone in Forder v. Great Western Railway Co. who was himself adopting a definition given in an Irish Case) and 524/5 and Circle Freight International Ltd. v. Medfast Gulf Exports Ltd. [1988] 2 Lloyds Rep. 427 at pages 434-5. Mr Barnes submitted that the expression "malicious" was less commonly found in contract than in tort, where its meaning depended on context. Its general meaning was similar to that of wilful as could be seen from observations in Allen v. Flood [1898] AC 1 at pages 93 to 94, 123 and 149 and Gibbs v. Rea [1998] AC 786 at page 797. Mr Barnes accepted that the construction for which he was contending involved a degree of redundancy but, he submitted, there was a degree of redundancy in any construction - the word "deliberate" being otiose because it was encompassed either by "wilful" or by "malicious". An alternative approach which Mr Barnes submitted was this - an act might be "deliberate" in the sense that it was carried out with knowledge that it was being carried out, even if the actor had no knowledge that such carrying out was in any way unlawful. The word "malicious" was added to avoid the limitations on recoverable damages being lifted in such circumstances. In other words "deliberate" was qualified by "malicious" to bring the meaning into line with "wilful".

55. Mr Storey developed his submission on the second point in this way. He referred to dictionary definitions of the words "wilful" and "deliberate" and indicated that, depending on the context, it was possible for those words to mean the same thing or for "wilful" to have additional shades of meaning. It had connotations of blameworthy action, perversity or obstinacy. Mr Storey invited my attention to the entry under "wilfully" at pages 358 to 359 in the 1999 supplement to Words and Phrases, 3^rd Edition. In support of his submission that "malicious" was a second ingredient intended by the draftsman to add something to the concepts "wilful" and "deliberate", Mr Storey invited my attention to the many entries under "malice" at pages 85 to 88 of Words and Phrases, 3^rd Edition and the entry under "wilful and malicious" at pages 2858 to 2859 of Stroud's Judicial Dictionary, 5^th Edition. Alternatively, if "malicious" was not to be given its ordinary meaning (malice in fact) it could instead be given a technical legal meaning (malice in law). That meant an intention to carry out an act that was wrongful in order to damage another or to the detriment of another, or to hurt another. In support of this alternative proposition Mr Storey cited observations made by the members of the Court of Appeal in The Mogul Steamship Co. Ltd. v. McGregor Gow & Co. (1889) 23 QBD 598. The passages relied on were from the judgment of Lord Esher MR at page 609, from the judgment of Bowen LJ at page 612 and from the judgment of Fry LJ at page 625.

56. On this issue I find myself in agreement with the result for which Mr Barnes contended and broadly, but not wholly, in agreement with his submissions. I disagree with the submission that the word "deliberate" should be considered otiose. In my judgment, the expression "wilful or deliberate malicious act or omission" is a composite one. The draftsman used that expression, and the parties must be taken to have intended it, to stress the shade or colour of meaning that the word "wilful" was to have in the context of a (limited) exception to the general limitation on the amount of recoverable direct damage. An act may be "wilful" whenever a person knows what he or she is doing and intends that which is done or omitted. However, it is not "wilful" in the sense of being something done or omitted deliberately and maliciously unless it is done intentionally and with knowledge that something wrongful is being done.

57. In the context of this commercial agreement I do not consider that the observations made in Judgments given in the various tort cases which were cited to the Court are particularly helpful. The views of Romer J and of the Court of Appeal in In re City Equitable Fire Insurance Co. Ltd. [1925] 1 Ch. 407 at pages 434, 516 to 517, 521 and 524 to 525 when dealing with the concept of "wilful default" on the part of company directors, seem to me of much more assistance. Just as the liability of the directors in that case depended on knowledge or recklessness in relation to the commission (or intended commission) of a breach of duty, so here, in my view, Bull might forfeit the protection of the limitations of liability if it (by one of its directors, employees, contractors or agents) knowingly or recklessly acted (or omitted to act) in breach of contract or in breach or some other legal obligation. Proof of carelessness or negligence in the performance of the Agreement would not suffice to lift the limitations but it is not necessary for KFIS to prove motivation in the sense of personal hostility or spite.

THE SCHEDULE 2 ISSUES

58. The genesis of these issues is explained at paragraph 21 of this Judgment. The issues themselves are stated at paragraph 24. They arise out of Bull's application to strike out paragraphs 17 and 18 of the Particulars of Claim under the CPR 3.4(2)(a) and (b) (ie. on the basis that KFIS had no reasonable grounds to bring this part of the claim or that the bringing of this part of the claim was an abuse of process or likely to obstruct the fair disposal of the proceedings) and/or for summary judgment to be given under Part 24 in respect of the issues arising out of those paragraphs (ie. on the basis that KFIS had no reasonable prospect of succeeding on this part of the claim). The application which was supported by the Second Affidavit of Mr P D Quinan sworn on 12^th November 1999 (1/229 to 236) was made on the basis that the conduct of which KFIS complained at paragraph 18.2 of that pleading (1/21 to 23) which, in summary was that -

(1) Bull had failed to meet deadlines for the delivery of software as promised (see the table at page 4 of the Judgment);

Bull had deliberately chosen not to devote sufficient resources to the Project;

(3) Bull had decided not to notify KFIS of delays or perceived delays and thereby committed a deliberate breach of the Agreement; and

(4) Bull had withdrawn personnel and equipment from site and omitted to return personnel to the site in a deliberate and calculated breach of the Agreement,

lacked any allegation that the acts or omissions were "malicious" as well as "wilful".

59. It was, in Bull's submission, a matter for legal argument whether any of the particulars amounted to a "wilful or deliberate malicious act or omission" which would fall within Clause 19.6.2. The case advanced by KFIS was inferential, the Court was invited to determine whether the facts pleaded supported the critical inferences which KFIS sought to draw and whether the requirements of malice had been met. Bull contended that they did not and/or that such contentions had no real prospect of success. There was no reason why the determination of these issues should await trial.

60. The other relief which Bull sought was the striking out of paragraph 17 of the Particulars of Claim in its entirety. In Bull's submission, on the face of the pleadings, all the heads of loss or damage claimed were "indirect" and/or "consequential". If so, Bull contended Clause 19.6.2 of the Agreement did not apply to Clause 19.4. Accordingly, KFIS was not entitled to claim any of these pleaded items.

61. I have already mentioned that, in response to this application, KFIS applied to amend the Particulars of Claim. KFIS's proposed amendment was to add the words "and/or deliberate malicious acts or omissions" in paragraph 18.2 of the Particulars of Claim. This application was opposed. Bull noted that KFIS did not propose to amend its pleaded particulars which, it was said, manifestly did not address the separate ingredient of malice and, accordingly, the application to amend should be dismissed. In the course of oral argument, Mr Storey accepted that if Mr Barnes' submissions as to the meaning of Clause 19.6.2 were accepted then there was no objection to the proposed amendment, albeit in those circumstances it was "otiose". It therefore follows from my decision on Issue 5.2 of the Schedule 1 Issues that the amendment falls to be allowed on this basis.

62. Mr Storey's submissions in relation to the Schedule 2 Issues were these: In paragraphs 10-12 of the Particulars of Claim (1/17-19), KFIS has pleaded breaches of clauses 2.1.3, 2.1.4, 2.1.5, 5, 6 and 11.1.2 of the Agreement. In paragraph 18.2 of the Particulars of Claim taken together with the further information given in Response 49 of 1^st December 1999 (1/21 to 23and 1/270 to 271) KFIS had pleaded that all of those breaches were "wilful acts or omissions within the meaning of clause 19.6". The material obligations allegedly broken were:

(1) to set the parameters and configure the Base Packages in accordance with the Specification and the timetable in Schedule 4;

(2) to write and develop the Bespoke Enhancements in accordance with the Specification and the timetable in Schedule 4;

(3) to deliver install and implement the System in KFIS's existing premises and its proposed new premises in accordance with the timetable in Schedule 4;

(4) to immediately notify KFIS upon becoming aware of any delays or perceived delays in the implementation of the Project: the table at paragraph 11 of the Particulars of Claim (reproduced at page 4 of the Judgment) was a particularisation of this allegation.

63. Commenting on each of the breaches alleged in paragraph 18.2 of the Particulars of Claim, Mr Storey contended -

Paragraph 18.2.1

The information conveyed by the table at paragraph 11 of the Particulars of Claim could not support the critical inference of a "wilful" act/omission. Assuming the facts pleaded were correct, merely because Bull had acted in breach of clause 11.1.2 by promising that the software would be completed and the pilot commence on a particular date and failing to meet the promised date, it did not follow that Bull had acted in a "wilful" way.

Paragraph 18.2.2

The third entry on the table (where it was alleged that completion on 11^th September 1998 was promised on that day and that a further promise was then made on 15^th September 1998) could not support the critical reference of a "wilful" act/omission in respect of either capacity or ability to complete or choosing not to devote sufficient resources to complying with its contractual obligations.

Paragraph 18.2.3

Entries in the table could not support this critical inference of a "wilful" act/omission, namely that Bull's breaches of clause 11.1.2 were 'deliberate' and 'wilful' because Bull decided not to notify KFIS of delays/perceived delays and to delay giving notification until the promised date for performance was imminent or had passed.

Paragraph 18.2.4

The allegation that on 23 April 1999 Bull withdrew the Supplier Personnel and removed the router from KFIS's premises could not, without more, support the inference that Bull was guilty of a deliberate and calculated and therefore wilful act.

Paragraph 18.2.5

The allegation that Bull failed to return Supplier Personnel to KFIS's premises between 23 April and 4 May 1999 could not, without more, support the inference that Bull was guilty of a deliberate and calculated and therefore wilful omission.

64, In support of his submissions, Mr Storey referred to the decision of the Court of Appeal in Creditcorp Ltd v. King, unreported 30 July 1992. In that case, the Court was concerned with a plaintiff's appeal against a strike-out order made under RSC O.18. r.19. The test which, Mr Storey submitted, the Court of Appeal there approved was: 'Has the plaintiff demonstrated that he has a properly pleaded and particularised sustainable cause of action [so as to entitle him] to the indulgence of awaiting discovery from defendants before the matter is further particularised ?' In that case, the Plaintiff had provided credit facilities to a company. The company had gone into liquidation. The Plaintiff alleged that certain directors had acted fraudulently. The key factual issue was whether at the relevant time the company was in fact in negotiation to sell the most profitable part of the business. There had been negotiations for such a sale which had come to nothing and "petered out" some nine months earlier. There was no evidential basis for the Plaintiff's allegation that those negotiations had not come to an end (Transcript 11/B) and the primary case was therefore manifestly unsustainable or not logically supportable (Transcript 12/G to 13/G). A secondary case based upon alleged continuing daily representations was dismissed by Steyn LJ as being based on an unsustainable concept of "fraud by fiction" (Transcript 15/E-F). On the facts of that case, I do not find it surprising that the Court of Appeal dismissed the Plaintiff's appeal but the circumstances of this case are obviously very different.

65. Mr Barnes submitted that the key question which had to be addressed in relation to the Schedule 2 issues was whether KFIS had reasonable prospects of success on this part of the claims. Either it did or it did not. If it did, the case could not be one for striking out. If it did not, Bull would be entitled to summary judgment under CPR Part 24. Concentrating his attention on Rule 24.2, Mr Barnes submitted that Bull could only succeed if it could show that KFIS had no reasonable (the word used in the Rule is "real") prospect of success and that there was no other reason for a trial.

66. In his submission, three points arose. The first was what was the meaning of the expression "wilful or deliberate malicious act or omission" in Clause 19.6.2 of the Agreement. Secondly, whether the pleaded allegations in paragraphs 11 and 18 of the Particulars of Claim were capable of amounting to "wilful or deliberate malicious" acts or omissions. For the purposes of the argument, the relevant allegations of primary fact were to be assumed true. The question was whether they were capable of supporting the necessary inferences as to Bull's state of mind. He noted that there had yet to be evidence/disclosure as to the actual state of mind of Bull or those who represented Bull. Thirdly, was there some other reason for a trial ?

67. The first issue has been resolved by my decision on Issue 5.2 of the Schedule 1 issues. Mr Barnes' second issue can therefore be re-stated in this way - whether the presently pleaded/particularised allegations (if true) could allow KFIS to succeed on the basis that Bull (by one of its directors, employees, contractors or agents) acted (or omitted to act) knowingly (or recklessly) in breach of contract. Mr Barnes referred to the background to and the structure of the Agreement. He noted in particular that speed of development was important (Schedule 15 to the Agreement at 2/107); that Bull sold its tender on the basis that it had particular expertise, developed over many years, in the management of systems integration projects for delivery within tight time scales; that its methods provided for continual assessment of the risks to the Project and "programme management", which provided for frequent contact with KFIS "to ensure that not only are the milestones being achieved...". He also noted that Clause 11.1.2 of the Agreement positively required Bull to notify KFIS immediately upon its becoming aware of any delays. Against this background, Mr Barnes submitted that the history of successive promises and disappointments set out in the table, which I have reproduced at paragraph 5 of the Judgment, was striking. The inference was obvious. The position here was analogous to that of a debtor who too often inaccurately informs the chasing creditor that "the cheque is in the post". In this case, if there had been genuine problems Bull should have notified KFIS of them. The fact that Bull resorted to making what Mr Barnes called "empty promises" was not only a clear breach of contract, it led to the inference that Bull was not even trying to complete the Project on time. In Mr Barnes' submission, at the very least, what he described as "this saga" called for investigation and explanation. That was in itself a reason for trial.

68. In my judgment, the only part or parts of the pleaded claim in respect of which KFIS has no real prospects of succeeding are those losses which fall within the limitation (or exclusion) stated in paragraph 19.4 of the Agreement. This must follow from my decision on Issue 5.1 but, in all other respects, I prefer and accept Mr Barnes' submissions on the Schedule 2 issues. It is obvious, and this is not disputed, that KFIS has pleaded a case which would enable recovery of direct losses up to 150% of the total payments falling to be made to Bull in the event that liability is established. In my judgment KFIS has pleaded a sufficiently logical or arguable basis for claiming unlimited direct loss or damage. There is nothing of substance in the "double inferences" point raised at paragraph 1.4 of Schedule 2. The critical facts so far as this aspect of the case are concerned are known to Bull's directors and/or senior personnel and KFIS cannot sensibly be expected to plead in significantly greater detail at this stage of the case. The inferences to be drawn in the absence of explanation or taking into account an unsatisfactory or implausible explanation (if any came to be made) might enable KFIS to succeed at a trial. I do not need to go further at this stage. I do not consider the circumstances here are in any way comparable with those in the Creditcorp case which Mr Storey cited. In that case, there was no plausible, logical or sensible basis for the allegation of fraud. The Plaintiffs in that case were not entitled to proceed to the discovery stage of the litigation. Here a plausible claim is met with a plausible defence and, on the material presently before me, I cannot begin to form a view on the factual merits of either party's case. Accordingly, save in respect of indirect or consequential losses, this is not a case where the pleaded claim cannot succeed. KFIS should be allowed to proceed.

THE DAMAGES/ELECTION ISSUE

69. This Issue arises on Bull's Application Notice dated 22^nd March 2000. The fourth affidavit of Mr P D Quinan in support of the application was sworn on 22^nd March 2000. In addition to explaining how and when this issue had been raised/explored between the parties' legal advisers, he exhibited two schedules which explained the quantum position, as Bull saw it. (Red file 34 and 35) On the basis of these figures, which were partly taken from information provided by KFIS and partly estimates made by Bull/Mr Quinan, it could be seen that KFIS was claiming "reliance losses" of less than Ł1.4m and "expectation losses" of over Ł25.0m These claims were, it was said, mutually exclusive and Mr Quinan justified the application that KFIS be ordered to make an early election by saying-

"If KFIS is allowed to proceed to trial, very substantial amounts of time and money will be incurred defending claims which are mutually exclusive. Although the reliance loss claim will require detailed examination and verification, I consider that the expectation loss claim will involve an enormous amount of work, involving an examination of the market in which KFIS were operating, the position of KFIS in that market and a more detailed look at the profits and savings that KFIS claim. I have extensive experience of retaining expert accountants to deal with this type of financial claim. I believe that the likely cost of retaining an accounting expert in this case will be between Ł200,000 and Ł300,000 plus VAT or more.

It is, I believe, settled law that a claimant must elect between pursuing expectation and reliance losses. I believe that in the interests of justice and in order to save time (including Court time) and costs, it is imperative that such an election is made at an early stage."

70. Mr Storey submitted that KFIS could either seek damages on the contractual basis which would include loss of profits and lost benefit (the so-called "expectation loss") or KFIS could seek damages on the tortious basis in which case it could seek to have the monies paid returned and claim wasted expenditure (the so-called "reliance loss").

These were well recognised alternatives (see e.g. Cullinane v British 'Rema' Manufacturing Co. Ltd [1954] 1 Q.B. 292 at 303; Anglia Television v. Reed [1972] 1 QB 60 at 63 and CCC Films Ltd. v. Impact Quadrant Films Ltd. [1985] 1 QB 16 at 32), KFIS had to elect between them and the only issue was when did that election have to be made. Could it be delayed until the trial or should it be made now ? In Mr Storey's submission, a claimant such as KFIS should be required to make its election "upon a defendant's application where the interests of justice demand that such an election be made". The interests of justice had been formalised in Part 1, Rule 1.1 of the CPR under the banner of "the Overriding Objective". Regard was to be had to saving expense, dealing with the case in ways which were proportionate to the amount of money involved, ensuring it was dealt with expeditiously and fairly and allotting to it an appropriate share of the Court's resources.

71. In Mr Storey's submission there was no good reason why KFIS should not be put to its election now. KFIS had had ample time to establish the relative strengths and weaknesses of both "expectation" and "reliance" losses. It had had ample time to consider whether it could prove its "expectation" losses. KFIS was not dependent on any disclosure of information from Bull so far as the computation of its losses was concerned. Furthermore, when the election came to be made, KFIS would know the Court's decision on the construction issues arising out of Clause 19 of the Agreement. (viz. Issues 5.1 and 5.2).

72. Mr Storey accepted that Bull could not complain if KFIS elected to pursue the "expectation" losses elements of its claim but, he argued, there were compelling reasons why KFIS should not be allowed to run both "expectation" and "reliance" loss claims to trial only to abandon the "expectation loss" claim during the course of the trial. These reasons were-

(1) The resources needed for and the costs of dealing with the expectation loss claim would be very significant. There would be issues relating to the failure to mitigate, issues relating to the replacement computer system and betterment. Experts in computer systems would be required as well as expert accountants. Although disclosure was, in the first instance, limited to documents upon which KFIS relied, it was anticipated that disclosure would be substantial. Significant legal resources would also be needed. Very significant costs might be saved if KFIS was put to its election now.

(2) Neither the Court nor the parties could view the case proportionately unless the election was made. It would be wholly disproportionate for the parties to spend more than the sum at stake (or even half that sum) on costs.

(3) It would be unfair to allow KFIS to elect to abandon the expectation loss basis after significant costs had been incurred. Inevitably there would be argument as to who should pay the costs. Costs would be at the discretion of the Court. Even if the costs were awarded in Bull's favour, Bull would be unlikely to recover the whole of its outlay.

(4) A significant amount of Court time would be wasted in dealing with a claim which was abandoned at trial.

(5) The Court had agreed the timetable for directions on the basis that the mediation was due to take place in May. It was unfair to Bull to allow the mediation to take place without putting KFIS to its election. The mediation process, effectively sponsored by the Court, would be frustrated.

73. Mr Barnes' summary of KFIS's position in response to Bull's application was straightforward and robust. The application was, he submitted, muddled in concept, ill-applied to the facts, and the order sought was so obscure that no Court ought to make it. Furthermore, even if there were some choice to make, this would not be the time for KFIS to make it, or for the Court to order KFIS to make it.

74. In Mr Barnes' submission there was no proper basis for the application. Although Bull asserted that a choice should be made between two distinct measures of damages (contract measure or tort measure) KFIS made no claim in tort. KFIS had claimed damages for breach of contract and it had not claimed on any tortious basis.

75. The expressions "expectation loss" and "reliance loss" were not terms of art and they did not bear the meanings attributed to them by Bull. There were few cases in which either expression had been used but he referred to Shipping Corporation of India v. NSB [1991] 1 Lloyd's Rep 77 at 80-81; Sealace Shipping v. Oceanvoice [1991] 1 Lloyd's Rep. 120 at 122 col 2; Surrey CC v. Bredero [1993] 1 WLR 1361 at 1369; Darlington v. Wiltshier [1995] 1 WLR 68 at 80; Regalian Plc v. L.D.D.C. [1995] 1 WLR 212 at 222; and White v. Jones [1995] 2 AC 207 at 265-269 (which was referred to in argument in Henderson v. Merrett [1995] 2 AC 146, 156-7)

The expressions were not used in either the Cullinane case or the Anglia TV case. Cullinane did no more than establish that in damages, as elsewhere, you "cannot have your cake and eat it" (see [1954] 1 QB 292 at 302 and 307). The two cases establish that a Plaintiff need not seek to prove what the result would have been had the contract been performed. The Plaintiff may instead claim the money he has spent in reliance on or anticipation of such performance. Although some had thought of these as alternative measures of damages, the authorities established these were different ways of getting at the same measure of damages viz. putting the Plaintiff into the same position as if the contract had been performed. That was the measure but Anglia TV entitled the Plaintiff to assume (in effect) that he would have "broken even" on the enterprise leaving it to the Defendant to prove (if he could) that the Plaintiff would have done worse than that. In this context Mr Barnes cited C & P Haulage v. Middleton [1983] 1 WLR 1461, CCC Films Ltd. v. Impact Quadrant Films Ltd. (supra) and Surrey County Council v. Bredero Homes Ltd. [1993] 1 WLR 1361. As Steyn L.J. said in the course of his judgment in that last case:

"An award of compensation for breach of contract serves to protect three separate interests. The starting principle is that the aggrieved party ought to be compensated for loss of his positive or expectation interests. In other words, the object is to put the aggrieved party in the same financial position as if the contract had been fully performed. But the law also protects the negative interest of the aggrieved party. If the aggrieved party is unable to establish the value of a loss of bargain he may seek compensation in respect of his reliance losses. The object of such an award is to compensate the aggrieved party for expenses incurred and losses suffered in reliance on the contract. These two complementary principles share one feature. Both are pure compensatory principles. If the aggrieved party has suffered no loss he is not entitled to be compensated by invoking these principles."

76. Once it was accepted that these were not alternative measures but simply different ways of approaching the same measure it was, in Mr Barnes' submission, not appropriate to speak of an election, in the sense of choosing between inconsistent rights. The Plaintiff might choose to limit the claim to the costs incurred and a decision to do that had to be made at some stage but this was not a true "election". There was no necessary inconsistency between a claim for expenses incurred in reliance on the contract and a claim for loss of profit, provided there was no double counting. In this regard Mr Barnes invited the Court to accept and follow the views of the learned editor(s) of Chitty on Contract, 28^th Edition, Volume 1, paragraph 27-063 at pages 1303 to 4 where it is said:

"Claiming for wasted expenditure in addition to net loss of expected profit. In principle, the claimant should be entitled to claim damages both for his wasted expenditure incurred up to the date of his terminating the contract and also for the net loss of profit which he would have made but for the breach. There can be no valid objection to this, provided the calculations show that there is no overlapping in the Claimant's recovery, viz his net loss of profits is calculated by deducting from his expected gross return both the cost of his performance and reliance expenditure to the date of termination and the cost of the further expenditure which he would have incurred after that date if he had completed his performance. However, the Court of Appeal [in Cullinane] has ruled that the Claimant must choose between claiming for his wasted reliance expenditure and claiming for his loss of expected profits, holding that he is not entitled to recover both. This position is correct if it is interpreted to mean that the Claimant should not recover both his gross return or profits expected under the contract (or from the activity in question) and also the (now wasted) expenditure incurred in reliance on the contract which he had intended to meet from that gross return. But it is submitted that the ruling against a "split" claim cannot be justified if the claimant can show that there is no overlapping between the two claims."

and the similar views expressed in Treitel, 10^th Edition at pages 877 to 879 where the relationship between "loss of bargain" "reliance loss" and "restitution" was discussed. The learned author there states that where more than one type of claim is available the choice between them, if it has to be made, is a matter for the Claimant. After discussing the possible limitations on that choice in different circumstances, the learned author goes on to consider whether different types of claims can be combined and says this -

"Whether claims can be combined. There is sometimes said to be an inconsistency between combining the various types of claim...... An award which seeks to put the claimant into the position in which he would have been if the contract had been performed cannot, on this view, be combined with one which seeks to put him (or both parties) into the position which would have existed, if the contract had not been made. But the courts have not accepted this kind of reasoning and have, in appropriate cases allowed the claims to be combined. In one case Millar's Machinery Co. Ltd v David Way & Son (1935) 40 Com. Cas 204 machinery was bought, paid for and installed. The buyer rejected the machinery because it was not in accordance with the contract; and he recovered the price (restitution), installation expenses (reliance loss) and his net loss of profits resulting from the breach (loss of bargain).

The true principle is not that there is any logical objection to combining the various types of claim, but that the claimant cannot combine them so as to recover more than once for the same loss. Suppose that a buyer has paid in advance for goods which are not delivered. He obviously cannot recover both his payment (restitution) and the full value of the goods at the time fixed for delivery (loss of bargain). The point has been well put by Corbin: "full damages and complete restitution....... will not both be given for the same breach of contract."

The principle against double recovery also applies where a claimant seeks both reliance loss and damages for the loss of his bargain. If the claimant in McRae (1951) 84 C.L.R. 377 had been able to establish the value of the hypothetical tanker, he should clearly not have been entitled to that amount and to the Ł3,285, for he would have had to spend the latter amount to acquire the former. Similarly, in Cullinane v British "Rema" Manufacturing Co. Ltd [supra] the defendants sold a clay pulverising machine, warranting that it could process clay at six tons per hour. The buyer claimed damages for breach of this warranty under two heads: first, the capital cost of the machine and its installation and, secondly, loss of profits. It was held that the buyer could not recover under both of these heads as "a claim for loss of profits could only be founded upon the footing that the capital expenditure had been incurred". To allow the buyer to recover the capital expenditure and also his full profit would give him damages twice over for the same loss. It was however not established that the profits which would have been derived from the machine over the whole of its useful "life" would have exceeded its capital cost. If this had been proved the buyer could, according to a decision of the High Court of Australia have recovered (a) the capital cost of the machinery less its actual value; plus (b) the excess of the estimated profits over the sum calculated under (a) (T.C. Industrial Plant Pty Ltd v Robert's Queenswood Pty Ltd [1964] A.L.R. 1083 at 1089 to 1092). This alone would put the buyer into as good a financial position as if the contract had been performed.

A problem of double recovery again arose in George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1993] AC 803 where a seed merchant sold defective seed to a farmer so that the latter's crop failed. It was said that the damages included "all the costs incurred by the [farmer] in the cultivation of the worthless crop as well as the profit [he] would have expected to make from a successful crop if proper seeds had been supplied." Here "profit" must mean the proceeds of a successful crop less the cost of cultivating such a crop for that cost would have been incurred by the farmer even if the seed had not been defective, so that he would be over-compensated if it were not taken into account in computing the profit."

77. In conclusion, on this particular point, Mr Barnes submitted that it was often the case that expenditure "in reliance" on performance (e.g. extra costs in persevering and attempting to put defects right) was coupled with "expectation" claims (e.g. costs of replacing defective work when earlier attempts to put matters right do not succeed).

78. Turning from those general legal principles to the circumstances of this particular case, Mr Barnes made the following points:

(1) The schedules prepared by Mr Quinan to differentiate the heads of claim were not wholly understood/accepted. KFIS's pleading made it clear that there was no claim for money back, as such. What there was was a claim for damages, one element of which was the money paid by KFIS to Bull. Obviously KFIS could not claim money back and the whole cost of replacement and it did not do so (see in particular the Further Information at 1/260).

(2) The position concerning wasted expenditure had been made clear in correspondence which Mr Quinan had exhibited. The sums claimed were additional costs which KFIS had/would have to incur in order to put itself into the same position as if the contract had been performed. (Mr Barnes was prepared to contemplate that "Lucent" might be an exception to this but for present purposes I do not think it necessary to go into details in that particular respect).

(3) Bull had manifestly not limited its claim to "expenses incurred."

79. So far as the timing of the application was concerned Mr Barnes submitted that this was not a case where a late amendment to switch from one basis of claim to another was foreseeable. It would, in his submission, be wholly unjust to impose any choice on KFIS at this stage in the case. The possible expert accountancy costs to which Bull drew attention were, whilst by no means insignificant, relatively modest in the overall context. The suggestion that an anticipated mediation would be frustrated by the lack of an election between heads of claim (as KFIS had analysed them) was "far fetched".

80. In my judgment this application should be dismissed. I am far from persuaded that the differentiation or analysis of the heads of claim made in Mr Quinan's schedules is sound but, even if it is, I respectfully accept and follow the views expressed in the first two sentences of paragraph 27-063 of Chitty and in the first sentence of the second paragraph of the extract from Treitel (upon which Mr Barnes placed particular reliance) which I have cited above. The approach suggested there is, to say the least, arguable and the present application must therefore fail. In any event, as a matter of sensible case management it seems to me that this application is very premature; the costs contemplated by KFIS are certainly not huge or disproportionate (in the overall context) and I have firmly in mind that under the CPR costs regime partial costs orders can now much more easily be made if that is appropriate where a litigant is only partially successful or succeeds for a much lesser amount than the sum claimed. The ongoing claims may well be limited as a result of my decision on Issue 5.1 but, subject only thereto, in my judgment KFIS is entitled to maintain its pleaded claims.

THE PART 20 CLAIM - THE SCHEDULE 3 ISSUES

81. Apart from mentioning the existence of the Sub-Contract dated 13^th January 1998 at paragraph 2 of the Judgment I have, so far, said nothing of the dispute between Bull and Graham. By that sub-contract Graham agreed to provide software and services for the project which Bull was undertaking for KFIS.

82. In the Part 20 proceedings Bull claims that Graham was obliged to provide software and services which permitted the development of the software required by KFIS within the time allowed under the Agreement. Bull alleges that the software supplied by Graham was inadequate and/or was received late and/or that it could not be used to develop the required System within the contractual timetable. Particulars of the allegation are given in paragraph 7 of the Particulars of Claim (A/17 to 20) but for the purposes of considering the Schedule 3 issues there is no need for me to go into detail. The alleged consequences of the breaches are pleaded at paragraphs 8 to 10 of the Particulars of Claim in this way -

8. The cumulative effect of the above caused or contributed to the delay experienced during the course of the project as appears more particularly in the Defence and Counterclaim served by Bull. In addition, the problems experienced with GTI Designer made it particularly unsuitable for DSDM. Further, such matters increased the cost of the development to Bull:-

8.1 At all material times Graham Technology denied that the performance of GTI Designer was its responsibility. Graham Technology blamed the lack of performance on, amongst other things, Bull's hardware which Bull then upgraded.

8.2 Further costs were incurred in running the development for the extended period caused by the delay.

9. By reason of the matters referred to above, Bull claims against Graham Technology for an indemnity and/or contribution in respect of the liquidated damages and/or damages which KFIS claim against Bull. If and insofar as KFIS succeed in proving the allegations that are made against Bull at paragraph 18 of the Particulars of Claim (which allegations are denied) then to the extent that such losses are attributable to delays caused by Graham Technology, Bull claims to be indemnified in respect thereof.

10. Bull claims damages from Graham Technology in respect of the additional costs that it incurred during the development of the software. Such increased costs will be identified in due course.

83. For the purposes of considering the Schedule 3 Issues, paragraph 9 can be ignored. Details of the unparticularised "additional costs" referred to in paragraph 10 were given in a response to Requests for Further Information (A/35 to 36) and in a letter dated 21^st March 2000 from Bull's solicitors (A/183). What was said in the letter was:

"We set out below the damages our client claims in respect of the additional costs that it incurred during the project due to the delays that were caused by your client, to the deficiencies in your client's software, and to your client's project management. The claim is comprised of the following:-

1. Ł2,287,731.36 (excluding VAT) being the monies actually paid by our client to your client for licenses, maintenance, and GT services, appropriately apportioned and with credit given for any retained value.

2. Ł1,543,826.72 being the claimed resource costs for the period of delay.

We have calculated that the relevant period of delay is from 15.7.98 (the day following the contractual date by which software development should have been completed) through 4.5.99 (the date of termination).

This is calculated by reference to the basic costs per Bull employee (including Bull contractors) multiplied by the actual time that was spent by each employee working on the Premier project. The figure includes salary; compensation and benefits; national insurance and pensions; company cars (excluding petrol); and consumables used on the project. The figures do not take account of opportunity costs or loss of margin.

3. Ł13,935 being the cost of the hardware that our client introduced as a result of your client's unfounded complaints that our client's hardware was responsible for the deficient performance of the software.

On this basis, our client claims a total of Ł3,845,493.00 against your client for the additional costs it incurred during the development of the software."

Paragraph 1 of this letter added a new element to the previously particularised claim. Paragraph 2 supplemented and paragraph 3 repeated matters detailed earlier.

84. At paragraphs 25 and 26 of Graham's Amended Defence and Counterclaim (A/48) the claim made in paragraph 10 of the Particulars of Claim was denied and it was asserted that liability under paragraph 10 was excluded by clause 9.2 of the Sub-Contract (B/10). That clause provided -

"9.2 Neither party shall in any circumstances be liable to the other whether in contract, tort or otherwise for any consequential or indirect loss or damage howsoever arising and of whatsoever nature including (without limitation) loss of profit, loss of contracts, and loss of use suffered or incurred directly or indirectly by the other."

In view of that plea, Issue 1 of the Schedule 3 Issues was framed in these terms -

"Do the losses claimed by Bull in paragraph 10 of Bull's Particulars of Claim constitute consequential or indirect loss within the meaning of clause 9.2 of the sub-contract ?"

I proposed to call that "Issue 3.1".

85. Next, it is convenient to mention Issue 2 and describe its fate. That issue invited consideration of UCTA if the answer to Issue 1 was "yes". Bull wished to contend that clause 9.2 should be struck down as being unreasonable. As a result of an exchange of correspondence on 8^th and 9^th March 2000 (A/180 to 182) it is clear that the parties agreed on the interpretation of clauses 9.2 and 9.3 of the Sub-Contract and that Bull no longer sought to invoke UCTA to strike down Clause 9.2. Accordingly, Issue 2 no longer arises for decision. By their letter dated 9^th March 2000 Graham's solicitors reserved the right to seek a costs order and I will deal with any application that may be made in due course.

86. Issue 1 was framed before the further information to which I have referred above was supplied on 21^st March 2000. During the hearing on 29^th March 2000, it was agreed that a further issue should be added and it was framed in these terms -

Does the loss claimed in paragraph 1 of Bull's solicitors' letter dated 21 March 2000 represent an arguable head of loss ?

I propose to call this "Issue 3.2".

87. On behalf of Graham, Mr Sutcliffe submits that the answer to Issue 3.1 is "Yes" whilst the answer to Issue 3.2 is "No". On behalf of Bull, Mr Storey submits that these answers should be reversed.

88. In Mr Sutcliffe's submission, all three categories of loss identified in the letter of 21^st March 2000 were either misconceived as heads of claim or constituted "consequential or indirect loss". He dealt separately with each of these heads of claim. The claim to recover sums paid by Bull to Graham "appropriately apportioned and with credit being given for any retained value" was, he submitted, misconceived. Bull could not at the same time as seeking to recover loss of bargain damages from KFIS seek to recover as reliance losses the sums paid to Graham. That would amount to an impermissible double recovery. Turning to Bull's delay claim, Mr Sutcliffe submitted that, properly analysed the claim amounted simply to a claim to recover additional costs which Bull had had to incur in performing its contract with KFIS. That claim fell "squarely" within what is commonly understood to represent a claim for "consequential or indirect loss". In support of this submission, Mr Sutcliffe drew attention to the statement in McGregor on Damages, 16^th edition, paragraph 26 at page 20 where it is said -

"... The normal loss is that loss which every plaintiff in a like situation will suffer; the consequential loss is that loss which is special to the circumstances of the particular plaintiff. In contract the normal loss can generally be stated as the market value of the property... or services the plaintiff should have received under the contract, less... the market value of what he does receive... Consequential losses are anything beyond this normal measure, such as profits lost or expense incurred through the breach, and are recoverable if not too remote..."

And he proceeded to note that the learned editor considered that it was -

"illogical and fails to make practical sense to confine consequential loss in contract to loss falling within the second rule in Hadley v. Baxendale".

89. However, I pause at this point to observe, as I did in the course of argument, that the learned editor's view was interesting but impossible to reconcile with a well-established and relatively substantial body of case law. Even if I was persuaded of the "illogicality" (which I am not) I could not possibly contemplate not following the basic principle or rule of construction that clauses in commercial contracts governed by English Law which exclude "consequential or indirect losses" exclude only losses falling within the second limb of Hadley v. Baxendale (supra). Recognising that view was possible even before I made it plain, Mr Sutcliffe's alternative submission was that Bull's delay claim could only be made under that second limb and it was therefore properly categorised as "consequential". All the cases relied on by Bull were, he submitted, distinguishable on the basis that they were concerned with first limb damages. Assuming against Graham that the software it supplied was faulty, Bull's normal measure of loss would be the difference in value between the software in a marketable condition and the value of the faulty software actually supplied. Alternatively, if that loss could not be quantified, Bull might seek to recover its expenses of putting Graham's faulty software right. But this was far removed from the subject matter of Bull's delay claim. Bull did not carry out any work to Graham's software (eg. Bull did not use its own employees to re-write any code); nor did Bull buy any new software. All that was apparently alleged was that as a result of Graham's faulty software, it took Bull longer to write its own software and to fulfil its own obligations under the Agreement and as a result it has incurred additional "resource costs". Those additional resources had reduced the amount of profit Bull expected to make in carrying out the Agreement. This claim was therefore entirely "consequential and indirect."

90. Turning to the third element which he called the hardware claim, Mr Sutcliffe submitted that it was a "curious claim". However it might be categorised, it could not be anything other than a claim to recover consequential or indirect loss. It was no part of the Sub-Contract that Graham should supply any hardware. Bull alleged it had to acquire this additional hardware in order to perform the obligations under the Agreement. The cost could only be a "consequential loss" arising as part of the additional cost to Bull of performing its obligation under the Agreement. Bull claimed that it only bought the additional hardware as a result of "[Graham's] unfounded complaints that Bull's hardware was responsible for the deficient performance of the software". Such a claim was akin to a Hedley Byrne type claim that Graham was somehow liable to Bull for negligent advice. The case was not put in that way but the point made illustrated how far removed Bull's hardware claim was from a claim for normal (as opposed to "consequential or indirect") loss suffered under the Sub-Contract.

91. In Mr Storey's submission, none of the claims described in the letter dated 21^st March 2000 could properly be categorised as a claim for an element of "consequential or indirect" loss. When answering Mr Sutcliffe's contention in relation to the claim to recover the sums paid by his client to Graham, Mr Storey adopted much of the argument which Mr Barnes had advanced against him on the "damages/election" issue (and these are arguments which in deciding that issue, I accepted). In Mr Storey's submission, the delay claim and the hardware claim were plainly and obviously claims falling within the first limb of Hadley v. Baxendale (supra) and were thus outside the exclusion made by Clause 9.2 of the Sub-Contract. The delay claim was to recover Bull's resource costs from the day after the contractual date by which software development should have been completed until the date of termination of the Agreement. The costs claimed were direct costs of the relevant employees and contractors (ie. salary, compensation, benefits, national insurance and pension), their company cars (but not petrol) and consumables used on the project. The costs claimed did not include any loss of profit, opportunity costs or loss of margin. In Mr Storey's submission, this claim for resource costs was no more indirect or consequential than the claim which had been made in Deepak Fertilisers and Petrochemicals Corporation v. ICI Chemicals and Polymers Limited [1999] 1 Lloyd's Rep 387. There a claim for wasted "fixed costs and overheads referable solely to the... plant during the period from the explosion to the resumption of commercial production [was said to have arisen] directly and naturally from the breach of contract" (per Stuart-Smith LJ at paras. 89 and 90 at pages 402 and 403). The hardware claim was to recover costs incurred in buying hardware following unfounded complaints by Graham that Bull's hardware was responsible for the deficient performance of the software. If the liability alleged was proved, this was the "directest of direct damage" falling under the first limb.

92. On this part of the case, without hesitation and without any qualification, I accept Mr Storey's submissions. In my Judgment, subject to liability and proof of the amounts claimed, each of the sums claimed could properly form part of first limb damages recoverable by Bull from Graham. None falls into the second limb category of damages. I see no reason to set out a comprehensive list of the relevant authorities which are generally taken as beginning with Saint Line Limited v. Richardsons, Westgarth & Company Limited [1940] 2 KB 99. The expression used in Clause 9.2 of the Sub-Contract is to be assumed to have been chosen by the draftsman with knowledge of the well settled way in which such expressions have consistently been interpreted by the Courts. I answer Issue 3.1 "No" and Issue 3.2 "Yes".

COLIN REESE Q.C.

23^rd June 2000