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England and Wales High Court (Technology and Construction Court) Decisions
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Sam Business Systems Ltd v Hedley and Company [2002] EWHC 2733 (TCC) (19 December 2002)
URL: http://www.bailii.org/ew/cases/EWHC/TCC/2002/2733.html
Cite as:
[2003] 1 All ER (Comm) 465,
[2002] EWHC 2733 (TCC),
[2003] Masons CLR 11
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| | Neutral Citation Number: [2002] EWHC 2733 (TCC) |
| | Case number: HT No. 01 175 |
IN THE HIGH COURT OF JUSTICE
TECHNOLOGY AND CONSTRUCTION COURT
| | Technology and Construction Court St Dunstans House
|
| | 19 December 2002 |
B e f o r e :
HIS HONOUR JUDGE BOWSHER Q.C.
____________________
SAM BUSINESS SYSTEMS LIMITED
Claimants
and
HEDLEY AND COMPANY (sued as a firm)
Defendants
____________________
Peter Susman Q.C. and Terry Bergin with him for the plaintiffs (Stanley Jacobs Solicitors)
Richard Mawrey Q.C. and Geraint Webb with him for the defendants (Rawsthorns Solicitors)
Dates of Trial: 14, 15, 16, 17, 21, 22, 23, 24, 28, 29, 30, October, 6 November, 2002
____________________
HTML VERSION OF JUDGMENT
____________________
Crown Copyright ©
I direct that no further note or transcript be made of this judgment
Introduction
- The claimants are suppliers of computer software. The defendants are stockbrokers.
- This action concerns the supply of software to the defendants for use in their business. The claimants claim money alleged to be due to them for that supply. The defendants counterclaim substantial damages for alleged defects in what was supplied. Because both claim and counterclaim hinge on those alleged defects, it has been agreed that the defendants should open the action.
- I shall refer to the claimants as SAM and to the defendants as Hedley's.
- Hedley's is a small firm of Lancashire stockbrokers practising in Blackburn, Preston and Southport. At the relevant time there were three partners, Anthony Hedley, Timothy Scott and Nicholas Baldwin. It handled the business of individual and corporate clients both in general stockbroking and in financial products such as PEPs and ISAs. At the time of the contract with SAM, Hedley's had some 10,000 clients on its books of whom some 2,000 could fairly be described as "active". Some transactions between the parties have been carried out by Pendle Investments Limited, Hedley's service company. The parties agree that Pendle should be treated as Hedley's agent and in this judgment I shall refer to anything done by Pendle as done by Hedley's.
- Hedley's used to handle their stockbroking business with a system known as ANTAR. Hedley's did not have an IT department or specialist IT employees. The staff used their old ANTAR system competently but they did not know how to use a mouse.
- Rather late in the day, in mid 1999, Hedley's formed the belief that ANTAR was not Year 2000 compliant (i.e. that it would not work once dates were inserted into it for 1 January 2000 onwards). As it turned out, that belief may have been unduly alarmist but both parties have proceeded on the assumption that it was correct. In any event, there were good reasons for Hedleys to change their system. ANTAR was an old DOS based, or "Green screen", system operated by keyboard strokes and not a mouse operated Windows based application. Moreover, the suppliers had a very small customer base and seemed to be unlikely to be able to update the system. It is important that when Hedleys contacted SAM in 1999 they both assumed that it was essential that Hedleys should have a new computer system working before 1 January, 2000. However, although ANTAR employed rather old fashioned technology, it was relatively sophisticated and would perform many functions, such as the application of Stamp Duty and Corporate actions automatically. Hedley's complain that these functions were not done as well by the system provided by SAM.
- Sometimes, particularly when an avowed aim of the Board of a company is to produce savings by redundancies, the introduction of a computer system is resisted by the staff. There was no such resistance in this case. Hedley's and its staff wanted the system to work.
- SAM is a small software company whose only product is its software known as InterSet. InterSet is a ready-made package of software modules made by SAM for stockbrokers and others (such as Banks) dealing in stocks and shares in administering their "back-office" systems. Those systems include processing and settling transactions in buying and selling shares, accounting for clients' money, and communicating with CREST, the UK computerised settlement system for the securities industry. Buying InterSet is not as simple as going into a shop and buying a shrink wrapped package, but it is not a bespoke system. The customer can make choices between certain modules and certain services, but it is sold as a developed system.
- SAM claim £310,509.84 plus interest for balances alleged to be due for licence fee, post-installation maintenance and other services after a voluntary reduction of about £91,000. Hedley's have already paid SAM £184,605.32. In pre-sales representations, SAM told Hedley's that the system would cost no more than £180,000 and that there was a "money back guarantee in the event that a system proves unacceptable for the customer's purposes".
- Hedley's counterclaim damages now, after some changes, set at £789,658.44 plus interest including all sums paid to SAM, increased cost of working, write-offs, fines and additional charges, mitigation costs, and loss of profits.
History
- On 7 and 9 July, 1999, SAM responded to an enquiry by sending two letters to Hedley's. On 7 September, 1999. SAM gave a demonstration of InterSet. On 18 October, 1999, Hedley's signed a Licence Agreement and a Maintenance Agreement. Over the weekend of 18 and 19 December, 1999, InterSet was commissioned at the Blackburn office of Hedley's for "Go-Live" on 20 December, 1999.
- Immediately after Go-Live, serious problems were apparent, many of which were fixed, some speedily. Hedley's continued to use InterSet but problems continued to arise. In January 2001, Hedley's decided to cease using InterSet and instead to "outsource" their back office to Pershings. Hedley's did not tell SAM of that decision until 8 February, 2001. On 21 May, Hedley's went live with Pershings. On 1 June, 2001, the Claim Form was issued starting this action. On 30 July, 2001 Hedley's Defence and Counterclaim was served, later amended.
- By paragraph 37 of the Defence and Counterclaim, Hedley's pleaded:
"By reason of the misrepresentations and the breaches of the licence and maintenance agreements, Hedley's were entitled to rescind the two agreements alternatively to reject the system alternatively to treat the agreements as having been repudiated by SAM. In or about June, 2001, Hedley's duly rescinded the agreements and/or rejected the system and/or accepted SAM's repudiation of the agreements. Alternatively by this defence, Hedley's rescind the agreements and/or reject the system and/or accept SAM's repudiation of the agreements."
It is notable that by their Defence, Hedley's do not identify a specific letter or conversation by which rescission, rejection, or acceptance of repudiation was effected. In the light of the dates I have mentioned in the previous paragraph of this judgment, the reference in paragraph 37 to June 2001 must be a mistake.
- At the trial, and in closing submissions, counsel for Hedley's identified a fax message dated 8 February, 2001 as the act by which Hedley's rejected InterSet.
- I have set out a very selective narrative from the history by way of introduction to show the unusual nature of the claim by Hedley's for return of everything paid to SAM after using InterSet for 16 or 17 months. To do justice to the cases of both parties, it is necessary to consider the history in greater detail and I shall return to the narrative later. First, I must consider the contracts between the parties.
The Contracts
- Hedley's rely on representations made before contract by SAM. Hedley's submit that those representations were incorporated into the contract.
- Hedley's expected and were encouraged by SAM to expect that what they were getting was a product at least as sophisticated as the now obsolescent ANTAR.
- On 7 July, 1999, Hedley's, without the advice of a consultant, approached SAM. The same day, Mr. Whitehouse of SAM sent to Hedley's a brochure describing InterSet and making great claims for it.
- The brochure included the following:
"InterSet has been designed from the outset to be the complete Book Entry Transfer settlement system for CREST, for the CGO [the Central Gilts Office settlement system] and for international usage. It is already in use at two of the UK's four high street banks."
Counsel for Hedley's comments that InterSet may well have worked for High Street banks; the problem was that it may not have been geared for small firms with no IT department. The evidence was that it was in use at only one stockbroking firm.
- The point has frequently been made during the trial that InterSet works well elsewhere (and I have received evidence from stockbrokers, Hoodless Brennan to that effect) and accordingly it is said, if it did not work for Hedley's there must be something wrong with Hedley's method of working. That line of argument has prompted me to ask, (a) if it is a tried and tested system, why when supplied to Hedley's did it have admitted bugs? (b) what is the difference between a bug and a defect? Mr. Peter Susman Q.C. concealed any annoyance he may have felt when I returned to these questions more than once and he promised to answer them in his closing submissions but witnesses were not asked by him to deal with the questions, which I regard as questions of fact. In his closing speech, Mr. Susman Q.C. relied on some dicta of Staughton L.J. in Saphena Computing Limited v. Allied Collection Agencies Limited [1995] FSR 616 at 652. However, in that case, the court was dealing with an undeveloped system which was sold with bugs "warts and all". Staughton L.J. referred to expert evidence that in a bespoke system bugs were inevitable. However, in another case of a bespoke system, St. Albans City v. International Computers Limited [1996] 4 All ER 481 Nourse L.J. said at page 487, "Parties who agree respectively to supply and acquire a system recognizing that it is still in the course of development cannot be taken, merely by virtue of that recognition, to intend that the supplier shall be at liberty to supply software which cannot perform the function expected of it at the stage of development at which it is supplied". By contrast, InterSet was sold as a developed system allegedly already working well in other places. This is a much stronger case than St. Albans against toleration of bugs. I am in no doubt that if a software system is sold as a tried and tested system it should not have any bugs in it and if there are any bugs they should be regarded as defects. Of course, if the defects are speedily remedied without charge, it may be that there will be no consequential damage.
- The brochure continued by praising what was called "straight through processing" or STP. This was a claim that information coming into the office would go to the level where the account was to be found and would settle the account without human intervention:
"The idea of STP is to greatly improve the level of automation in office procedures by ensuring that correctly initiated transactions require no human intervention to be successfully processed through to completion."
"These accounts are maintained as an integral part of the STP process, and can be reported on at will, but in summary and detailed levels. It is possible to produce daily a full balance sheet, according to user defined reporting rules, in which all customers, counterparties, stocks, currencies, depositories, open deals, stock borrowing liabilities, collateral, bank accounts, corporate actions et cetera are detailed. With these types of report, it is simple to spot trends which expose inefficiencies in the business, such that senior managerial effort can be efficiently directed."
"So in InterSet, STP is not merely enabled for some transactions, but carefully implemented to ensure that the settlement environment is efficient as a whole,whether or not the ideal of STP is achieved for individual transactions ... dramatically reduces overall settlement costs."
"... every movement of stock or money is rigorously accounted for, leaving a complete and audited record of how stock and cash assets are being moved around, as well as why, when and by whom. All these accounts are maintained locally"
- I agree with the submission made by counsel for Hedley's that what was being presented to Hedleys was a system with a very high degree of automation, a system that was going to be operable by ordinary people, and not technically qualified people.
- Mr. Tustain of SAM then sent a letter to Hedley's on 9 July, 1999 containing the following representations:
"I attach an analysis of the likely costings of running your back office with our software."
"As you will see, this suggests a cost per bargain in the £8-£9 range, including all your staffing, and allowing a 30 per cent per annum cost for any capital investment. I have attached a copy of the five year trading summary I mentioned.
"InterSet is highly automated. You can quite literally get to the point where you enter the trade and forget it, as long as your typists are accurate. At the point of entry, the system immediately updates the client portfolio, enters cash (multi-currency) into client's account, maintains full control of stock and money outstanding both with clients and the market, sends instructions off to CREST for matching, monitors your transactions' statuses, records their settlement, reconciles your CREST stock and cash accounts, transfers proceeds to and from customers' deposit accounts (at settlement). Even contracts and statements are produced automatically in unattended executions. You can also send them via fax, SWIFT or e-mail, or directly from your computer.
"A suite of reports is executed unattended overnight, primarily to allow you to identify problem transactions in the back office. These are both compliance and exceptions based reports, and will focus your attention to old debtors, late settlements, exceptional CREST statuses, unmatched transactions, large exposures, et cetera. The system includes a very detailed balance sheet which can be produced daily and will provide a full and easily audited statement of your business.
"All these overnight reports, and many others, can also be executed at any time during the day, and they will be bang up to date because the whole system is based around a modern and on-line data base being continually updated by CREST."
Implementation usually takes about 12 weeks. All output is laser printed."
- By that letter, SAM represented firstly that InterSet was fully automated, and secondly, that it produced reports both for Hedley's internal purposes and for compliance with the requirements of the Regulator. Reports for Hedley's internal purposes included debt collecting. The Regulator or the FSA are the terms used throughout the trial to refer to the regulatory body charged with overseeing the conduct of financial services including stockbrokers. The Financial Services Authority (FSA) was the overall regulatory authority. The FSA required frequent periodic reports about the state of all stockbrokers' businesses and if not satisfied they had the power to impose fines or ultimately to close the business.
- At the meeting at the Blackburn office of Hedley's on 7 September, 1999 oral representations were made that were recorded in minutes of that meeting made by Mr. Paul Tustain of SAM. All three of the partners of Hedley's attended that meeting together with Miss Roberts who was in charge of the administration of Hedley's office. SAM sought to portray Miss Roberts as an IT Manager and Project Manager, but it is quite clear that she was in charge of administration of the whole business and had no special IT skills. She was appointed not long before the contract with SAM and it is not surprising that she had to answer, "I don't know", to many of the questions put to her. I found her an honest and truthful witness doing her best to help the court. As was pleaded on behalf of SAM in their Amended Reply and Defence to Amended Counterclaim, "Sue Roberts had very little experience of the ANTAR system or of Hedley's use of that system".
- After recording that the day was particularly useful in explaining to SAM further details of Hedley's operation, the minutes state:
"Having considered the issues raised SAM is absolutely confident that there are no major technological or functional obstacles to implementing InterSet at [Hedley's] to manage their back office. However, bearing in mind the tightness of timescales it would be necessary to move quickly forward to be able to meet the Y2K deadline. If agreements were not in place by mid October it would start to become impractical to port the business before the new year."
That part of the minutes is important in that it was shown that, having seen everything they wanted to see at Hedley's, SAM was confident that firstly, there was no obstacle to implementing InterSet at Hedley's, and secondly that provided contracts were signed by mid-October (which they were) the implementation could be completed within the timescale required. SAM now say that they were not asked to make a survey, which is true. But they had the opportunity to see whatever they wanted to see. If they had thought that they did not know whether there were major or any technological or functional obstacles to implementing InterSet at Hedley's to manage their back office they should not have said the contrary. It would have been open to them to require a survey, for which they might have demanded payment.
- After detailing various improvements to be obtained from InterSet, including improved reporting, the minutes state:
"…SAM have indicated that the likely costs for the overall project are in the region of £120,000 to £200,000. This is expected to include hardware, licenses installation, data upload from CREST, minor customisations and some data transfer utilities. Events subsequent to the presentation suggest a downwards revision of the top end cost to £180,000. This investment is subject to the terms of SAM's money back guarantee in the event that a system proves unacceptable for the customer's purposes."
- The written agreements other than this document did not specify the total cost of the system. However, the parties worked on the supposition that the total cost was to be £180,000 of which £116,000 was to be the licence fee paid to SAM and about £19,000 for hardware paid to hardware suppliers. The hardware included laser printers of a type recommended by SAM. A complaint about a failure to print reports was at first sought to be explained by alleging that Hedley's had not bought appropriate printers, but it became clear that Hedley's had bought precisely what was recommended by SAM.
- In those Minutes, other facilities were discussed in detail with emphasis on "full automation", in particular with regard to "drill down", reports and "corporate actions".
- Drill down was required because some accounts were like a family tree. A head account might be in the name of John Smith and under that name might be John Smith's trading account, his family account and PEPs and ISAs. Drilling down was the process whereby information would come in to the head account and be drilled down into the sub-accounts. The minutes stated:
"The drill down facilities were used, starting from an on-line valuation, and showing how each balance, position et cetera is supported by underlying accounting, all of which is available on-line and updated throughout the day - for both stock and money -as the customers' deals are recorded."
- It was said that there were about 20 standard InterSet reports.
- Corporate actions are such things as company takeovers or 2 for 1 share issues that require revision of a stockbroker's records and accounts without any instructions having been given by the client.
- The minutes record:
"Corporate actions were discussed. All the enterable CREST transaction types (e.g. transfer to escrow, unmatched stock event, free delivery, free payment) are fully supported by InterSet. Additionally, all the centre generated transaction types (eg unmatched stock events, transfers from escrow, claims) are processed with full automation by InterSet. InterSet's pro rata distribution tool was explained, detailing how it distributes funds to entitled dated holders of an underlying security, and how this is appropriate to dividend distribution under a large pool of nominees."
- ANTAR had done all these things for Hedley's and Hedley's were led to believe that InterSet would be at least as good as ANTAR.
- There was a further matter discussed and recorded as follows:
"The remaining element: reporting re inadequate customer documentation can easily be accommodated within the allowances which we make for custom reports during implementation."
Hedley's had got into trouble with the Regulator in the previous year for failing to get all the required agreements with clients completed and signed. This item clearly relates to that problem. Despite suggestions to the contrary made on behalf of SAM, Hedley's had no other difficulties with the Regulator before taking up InterSet. This representation recorded in the minutes was indicating that InterSet would prevent a repetition of such trouble.
- Hedley's case, which I accept, is that SAM was indicating that SAM had examined the workings of ANTAR at Hedley's and were satisfied that they could successfully transfer from the old system to InterSet.
- In a letter dated 4 October, 1999, quoting various costings, Mr. Tustain on behalf of SAM wrote:
"We offer a standard money back guarantee on licence if we fail to be acceptable, but this has never occurred."
Hedley's are claiming their money back, but the starting point for considering their entitlement to make that claim must be the contract that they later entered into.
- SAM and Hedley's entered into two written agreements, the Licence agreement and the Maintenance agreement. They were signed by SAM on 12 October and by Hedley's on 18 October, 1999.
- The Licence agreement gave Hedley's a licence to use the software. Attached to the Licence were "Acceptance Criteria".
- The term of the licence was perpetual until terminated by written notice by either party. Neither party relies on termination by written notice under this clause.
- The consideration was, as has been previously indicated, £116,000 payable as to £58,000 on signature of the agreement, £29,000 on installation, and £29,000 on completion. It is clear is that SAM was responsible for installation and installation had to include migration of information from ANTAR onto the new system. The agreement defined "completion" as the earlier of Acceptance and 30 days after SAM had informed the client in writing that the software had been installed unless within that 30 day period the client informed SAM of instances where the software failed the Acceptance Criteria. Within that definition completion never occurred.
- SAM has made much of the tightness of the timescale for the installation of InterSet, but the Licence agreement, drawn up by SAM, provided for delivery well within that timescale:
"Delivery and installation of the Application Software shall take place within the later of 30 days after suitable computing environments have been made available to SAM by client and 30 days from signature of this agreement."
- Clause 2.10 of the Licence Agreement set out a detailed machinery for Hedley's to make acceptance tests and if not satisfied to reject the software with SAM having the right to demand arbitration if not satisfied that rejection was justified. That machinery was not operated, but it is necessary to consider the terms of this clause together with clause 2.11.
- Clause 2.10 included the following:
"30 days from delivery of the application software by SAM, acceptance tests will be completed by the client in order to test the application software ...Client will advise SAM of any instances where the application software fails to achieve the stated acceptance criteria. Such advice shall be in writing ...Any individual software component reissued by SAM... may be subjected to retesting by client for a further 30 days ...If, having followed these procedures, and within 90 days from the original date of delivery, there remain acceptance criteria correctly notified by client according to the procedures outlined above but not achieved by the application software, client shall be entitled to initiate procedures for rejecting the application software. In the event that SAM consider the rejection of the application software to be unreasonable, SAM shall have the right to request client to enter into arbitration via an independent third party, and client shall not unreasonably refuse this request.
In the absence of a valid written advice from client, detailing unacceptable behaviour of the application software, and referencing a particular acceptance criterion not attained, the application software will be deemed accepted."
Clause 2.11 included the following:
"In the event of the application software not being accepted according to the obligations and procedures outlined in sections 2.9 and 2.10, client shall have the right at its entire discretion to rescind this agreement and to be repaid all sums which have previously been paid to SAM in respect of the licence under this agreement. This shall be the sole and exclusive remedy available to client in the event of the application software not being accepted."
- The Licence agreement also included an entire agreement clause in clause 3.6 and exclusion of liability and limitation of liability clauses in clauses 3.2 and 3.3.
- This case has been fought mainly on the contested facts as to whether InterSet worked or not and, to the extent that it did not work, whose fault it was. I have had limited help about the construction of these terms. In closing submissions, Mr. Susman Q.C. said that his reliance on the contractual limitation clauses remained a fall-back position but he relied on the evidence of Mr. Tustain to show that the clauses were reasonable under the provisions of the Unfair Contract Terms Act, 1977. It is common ground that both the licence agreement and the maintenance agreement are on SAM's "written terms of agreement" and that therefore section 3 of the Unfair Contract Terms Act applies to their exemption and limitation clauses. Mr. Susman Q.C. also said that he reserved the "entire contract" point for a higher court if necessary. When asked for an explanation of that, he said that he would if necessary seek to persuade the Court of Appeal that its decision in Watford Electronics Limited v. Sanderson CFL Limited [2001] 1 All ER (Comm) 696 was made per incuriam, and if unsuccessful in that endeavour would seek to persuade the House of Lords that it was wrong. Mr. Mawrey Q.C. for Hedley's agreed with the submission that the decision in Watford Electronics Limited v. Sanderson CFL Limited was wrongly decided. In answer to my question, Mr. Susman said:
"We place no confidence at all in persuading your Lordship that the entire contract point in the case would enable us to succeed on the exclusion clause if we otherwise would not, or on the point that we made in opening that the acceptance criteria is an exclusive way of rejecting. If we did not otherwise succeed on it, and the reason for that is the decision of the Court of Appeal in the Watford Electronic case which we feel precludes us from advancing that argument to your Lordship, what we want to reserve is the possible argument that Watford Electronic was wrongly decided."
- I find it difficult to understand that statement by Mr. Susman Q.C. The Court of Appeal in Watford Electronics Limited v. Sanderson CFL Limited was considering the reasonableness of exclusion clauses in a computer contract and in doing so considered what was labelled an Entire Agreement clause in the following terms:
" Entire Agreement. The parties agree that these terms and conditions (together with any other terms and conditions expressly incorporated in the Contract) represent the entire agreement between the parties relating to the sale and purchase of the Equipment and that no statement or representations made by either party have been relied upon by the other in agreeing to enter into the Contract."
Commenting that that clause was in two parts, the Court of Appeal held that the second part was an effective and binding acknowledgement by the parties "that no statement or representations made by either party have been relied upon by the other in agreeing to enter into the Contract." The contract in the present case was very different. There were two contracts, the Licence agreement and the Maintenance agreement, but only the Licence agreement related to "the sale and purchase of the Equipment" so the Licence agreement could be the entire agreement relating to sale and purchase notwithstanding the existence of the Maintenance agreement. In clause 3.6 there was an "entire agreement" clause, but it was in different terms from the clause in Watford Electronics Limited v. Sanderson CFL Limited.
- Unlike the agreement in Watford Electronics Limited v. Sanderson CFL Limited, the Licence agreement in this case did not include an agreement "that no statement or representations made by either party have been relied upon by the other in agreeing to enter into the Contract."
- However, there was an Entire Agreement clause that did refer to representations in the following terms:
"This agreement constitutes the entire understanding between the parties relating to the subject matter of this agreement and, save as may be expressly either referenced to or referenced herein, supercedes all prior representations, writings negotiations or understandings with respect hereto but nothing in this section 3.6 shall exclude liability for any fraudulent misrepresentation."
Clause 3.6 did not include an acknowledgment of non-reliance such as was considered by Chadwick L.J. in Grimstead (EA) & Son Limited v. McGarrigan [1999] CA Transcript 1733 and Watford Electronics Limited v. Sanderson CFL Limited at paragraphs 38 onwards and so there was no evidential estoppel of the sort put forward by Chadwick L.J. in those cases.
- Moreover, I find that the "entire agreement clause", was waived by SAM. On 20 June, 2000, Hedley's wrote to SAM raising some questions about an invoice for the costs of implementation. The letter said that there was a "Must have list", a "Should have list" and a "Wish list" for the software system. The letter stated that it was only for the "Wish list that there should be extra charges. That letter made it plain that the view of Hedley's was that complete implementation had not yet occurred, a view that was not disputed, and I shall return to that, but that is not the present point. In reply, Mr. Whitehouse on behalf of SAM wrote on 5 July, 2000 first of all emphasising that the invoice related to the licence agreement and then saying:
"You refer to the production of the three lists, which I agree is certainly a good idea, and will help us focus on what you require for your business. However, I am sure you understand that we simply cannot use such a list as the basis of our contractual relationship. This, and the cost of delivering it, is covered by the acceptance criteria, by conversations and letters between yourself and Paul Tustain, prior to signature of the contract."
Mr. Whitehouse plainly treated the conversations and letters between Hedley's and Mr. Tustain as incorporated into the contract, as Mr. Mawrey Q.C. submits they were.
- Mr. Mawrey also submits that there were implied terms of the Licence agreement. In his opening written submissions he wrote:
"Subject to the validity of SAM's purported exemption clauses, it cannot be disputed that the licence agreement would be subject to implied terms to the effect that:
a) InterSet would be constructed and installed at Hedleys' premises with all proper and professional care and skill;
b) InterSet would be reasonably fit for the purposes for which Hedleys required it;
c) InterSet would be of satisfactory quality;
d) InterSet would properly and efficiently perform all the required functions;
e) InterSet would perform all such functions in such a way as to enable Hedleys to fulfil its professional obligations to its clients and its statutory duties as required by the FSA;
f) SAM would efficiently carry out the migration and processing of the ANTAR data."
- That submission was not disputed. It was supported by reference to sections 4 and 13 of the Supply of Goods and Services Act, 1982 and to the judgment of Sir Ian Glidewell in St. Alban's DC v. International Computers Limited [1996] 4 AER 481 at 492-4. I accept that submission. I have to decide whether those implied terms have been effectively excluded by the exclusion clauses in the contract. Those clauses include clauses 2.10, 2.11, 3.2 and 3.3.
- Those clauses present two questions:
(a) What is the proper construction of the clauses?
(b) On that construction are the clauses fair and reasonable within the meaning of the Unfair Contract Terms Act, 1977.
I know of no ground on which it might be argued that Watford Electronics Limited v. Sanderson CFL Limited was decided per incuriam. As to the first question, that decision gives me little help because it relates to a contract in different terms. I shall return to that later. As to the second question, that decision gives some guidance as to the approach to be followed but in no way decides the question before me. In his closing speech, Mr. Susman abandoned a submission made in opening and in my view did so for no good reason. I will therefore consider that submission.
- In his written opening, Mr. Susman Q.C. submitted:
"Hedleys never invoked the Licence Agreement's straightforward and exclusive regime governing any rejection of InterSet by Hedleys, which was to the following effect:
Schedule 2 to the Licence Agreement comprised a very detailed and comprehensive set of "Acceptance Criteria" [1.194-309], countersigned by each party [1.195];
the Licence Agreement provided that Hedleys should give written notice of alleged failures to meet the Acceptance Criteria, which would give SAM time to remedy the alleged failings: clause 2.10 [1.189]; and if SAM did not remedy the alleged failures, Hedleys could reject and recover all sums previously paid to SAM: clause 2.11 [1.189];
this regime was exclusive, since there was no other promise of performance by SAM: clause 3.2 [1.190]; and the provisions of the Licence Agreement constituted (in relation to its terms) the entire agreement between SAM and Hedleys: clause 3.6 [1.191]."
- I do not see that that submission is in any way affected by the decision of the Court of Appeal in Watford Electronics Limited v. Sanderson CFL Limited. It does not, of course, follow that the submission is well founded.
- It is correct that the Licence agreement does provide a detailed machinery of notices based on the Acceptance Criteria and if Hedley's had initiated that machinery and received an inadequate response they would have been entitled to reject the system and get their money back. They did not initiate the machinery. Does that mean that because they did not initiate the machinery they have no remedy for any defects in the software? As I understand Mr. Susman's opening, he was submitting that the answer to that question is, Yes. Clause 2.11 concludes with the words, "This [i.e. money back] shall be the sole and exclusive remedy available to client in the event of the application software not being accepted". I interpret those words as referring to the only remedy available to the client on the software not being accepted under the machinery of clauses 2.10 and 2.11. I do not read those words as restricting any remedy if the software is rejected for any reason outside that machinery, if that is possible.
- The Licence agreement did however make a sweeping exclusion of warranties. By clause 3.2, SAM warranted that SAM had the right to licence the use of the application software and that use of the application software "will not infringe any patent, copyright, design, trade or service mark or any intellectual property rights of any third party (whether British or foreign)". The clause then continued:
"Except as set out in the preceding paragraphs of this section 3.2, there are no warranties, either expressed or implied, by this agreement. These include, but are not limited to, implied warranties of merchantability or fitness for a particular purpose, and all such warranties are expressly disclaimed to the extent permissible by law."
- By clause 3.3, the licence agreement continued:
"Except as provided in clauses 3.2 and 3.3, SAM will not be responsible for any direct, incidental or consequential damages such as, but not limited to, loss of profits resulting from the use of the software, even if SAM have been advised of the possibility of such damage.
Except as provided in clauses 3.2 and 3.3, any liability to which SAM might otherwise become subject shall, in aggregate, be limited to the licence fee paid."
- By clause 3.2 SAM sought to exclude liability for every form of liability likely as a matter of practice to arise (except for misrepresentation), but as the final words "to the extent permitted by law" indicate, there was a lingering doubt that there was something that might not have been excluded, so by clause 3.3 remedies in damages were excluded. That exclusion excluded not only loss of profits and "incidental or consequential damage" but also direct damage. If that were not enough, liability was limited in aggregate to the amount of the licence fee paid. The exclusion of liability in damages was expressed to relate to damages "resulting from the use of the software". That exclusion was not limited to breaches of warranty. It included damages resulting from the use of the software because it failed to come up to representation. So although I have found that the entire agreement clause was waived, subject to the issue of reasonableness of Clause 3.3, there is no liability on SAM for misrepresentation. In Watford Electronics Limited v. Sanderson CFL Limited at page 710 paragraph 41, Chadwick L.J. said:
"Where both parties have acknowledged, in the document itself, that they have not relied on any pre-contract representation, it would be bizarre (unless compelled to do so by the words which they have used) to attribute to them an intention to exclude a liability which they must have thought could never arise".
That comment was made about a document in different terms from the document before me. Looking at the document before me, it is so obviously a "belt and braces" collection of overlapping exclusions and limitations of liability that in that contract (and I emphasise, in that contract and no other) I find nothing strange about one clause excluding liability already excluded by another clause. For example, having excluded liability for every conceivable form of damage, (with the exception of infringement of intellectual property rights) the contract then goes on to limit the amount of the damages payable (except in the case of infringement of intellectual property rights). The absence of a "non-reliance" term distinguishes this case from Watford Electronics Limited v. Sanderson CFL Limited the authority of which is unquestioned as far as I am concerned, but that is not the only distinction, as I hope I have made clear. The totality of the relevant terms in that case and this differ widely.
- By their Defence to Counterclaim, SAM, with some reservations, admits making most of the statements to which I have referred but states "no admissions are made as to whether the words used constitute representations" though when dealing with the summary of the alleged representations there is an express denial that the matters relied on constitute representations as a matter of law.
- By paragraph 52 of the Defence to Counterclaim, SAM contends that clause 3.2 is reasonable within the meaning of the Unfair Contract Terms Act 1977. Nothing is said there about clause 3.3 but I will take it that the same case is made about that clause. As to clause 3.6 it is said in the pleading that the terms of the Unfair Contract Terms Act do not apply to that term, but if they do then that term also is reasonable.
- I take the view that the terms of the Unfair Contract Terms Act do apply to clause 3.6. That clause was one of SAM's written terms of business and so section 3 of the 1977 Act applied to it. The clause did not include words to provide an evidential estoppel of the sort found in Watford Electronics Limited v. Sanderson CFL Limited, but by that contract term, SAM did, in the words of section 3(2)(b) "claim to be entitled to render a contractual performance substantially different from that which was reasonably expected of him". What was reasonably expected was what was represented in the pre-contract representations. As I have already indicated, SAM itself as well as Hedley's relied on those representations as showing what was reasonably expected and as there are no words providing an evidential estoppel against putting forward such reliance the decision in Watford Electronics Limited v. Sanderson CFL Limited does not prevent consideration of what performance was reasonably expected of SAM by reference to pre-contract representations.
- As was made plain by Chadwick L.J. in Watford Electronics Limited v. Sanderson CFL Limited at page 16 paragraph 50, the reasonableness of each term to which the 1977 Act applies must be considered separately even to the extent of looking to see whether each clause contains one term or more than one, "although, of course, in considering whether that requirement is satisfied in relation to each term, the existence of the other term in the contract is relevant". I shall endeavour to bear in mind and apply the subtle distinction between that approach and the approach of His Honour Judge Thornton Q.C. under appeal in that case where he seems to have viewed the requirement of reasonableness as applying to the clauses affected by the Act as a package together. As I understand it, the effect of that decision of the Court of Appeal is that, by way of example, I might find that the virtually total exclusion of liability for breach of warranties is unreasonable but at the same time find that the limitation of the amount of liability to getting one's money back is reasonable. Or I might find that because of the ability to get one's money back under the Acceptance Criteria machinery, the exclusion of other liability including the liability in tort or under the 1967 Act for pre-contractual statements is reasonable.
- As to reasonableness, Mr. Mawrey Q.C. has throughout taken the stance that the burden of proving reasonableness is on SAM, as it is, and has not called evidence of unreasonableness. Mr. Mawrey did establish in cross-examination that SAM is not insured against claims such as are made in this case. As to that one has to bear in mind section 11(4) of the Unfair Contract Terms Act:
"Where by reference to a contract term … a person seeks to restrict liability to a specified sum of money and the question arises … whether the term … satisfies the requirement of reasonableness, regard shall be had in particular (but without prejudice to subsection (2) above in the case of contract terms) to
(a) the resources which he could expect to be available to him for the purpose of meeting the liability should it arise; and
(b) how far it was open to him to cover himself by insurance."
- That section of the statute requires consideration of insurance in relation to the circumstances of the person who seeks to restrict liability to a certain sum of money, that is, in this case, SAM, by the second part of clause 3.3. But the question is not whether he did or did not obtain insurance. It is established that he did not. The statute requires consideration of the two questions set out in (a) and (b) of section 11(4) neither of which were examined in this case. The fact that SAM did not obtain insurance is entirely neutral. Either they did not try, or it was difficult, or prohibitively expensive, or impossible. It is not unlikely that they did not try to obtain insurance because they considered that having regard to the terms of the contract it was an unnecessary expense to do so. We do not know. Notwithstanding some unsupported assertions by Mr. Mawrey Q.C., there is no evidence before me as to how far it was open to SAM to cover itself by insurance with or without exclusion clauses in the contract. Mr. Mawrey Q.C. put to Mr. Whitehouse that it was reasonable for a company in the position of Hedley's to assume that SAM was insured, to which the answer was that if they had asked we would have told them that we were not. There is no evidence that Hedley's did assume that SAM was insured, but if they did make that assumption, what difference would it make? SAM would only be insured against the risks that they undertook, which included the exclusion and limitation of liability clauses. The real questions are the extent to which SAM could have obtained insurance without those clauses or some of them and at what cost, as to which I have no evidence.
- In Photo Production Limited v. Securicor Limited [1980] AC 827at 851, Lord Diplock said:
"It is generally more economical for the person by whom the loss will be directly sustained to do so [insure] rather than that it should be covered by the other party by liability insurance."
But Lord Diplock made that comment in relation to a "misfortune risk" – "something which reasonable diligence of neither party to the contract can prevent". It was in any event a statement of fact derived from his great experience rather than a statement of law.
There is no reason why Hedley's should have insured against SAM failing to perform their contract, or to put it more neutrally, failing to do what was expected of them, and they did not.
The absence of insurance on either side does not help resolve the question of reasonableness in this case because there is no evidence about ability to obtain insurance or its cost.
- In Salvage Association v. CAP Financial Services [1995]Fleet Street Reports 654 at 676, His Honour Judge Thayne Forbes Q.C. said:
"Generally speaking where a party well able to look after itself enters into a commercial contract, and with full knowledge of all relevant circumstances willingly accepts the terms of the contract which provide for apportionment of the financial risks in the transaction, I think that it is very likely that those terms will be held to be fair and reasonable."
That statement was approved by Peter Gibson L.J. in Watford Electronics Limited v. Sanderson CFL Limited at paragraph 63. On its face, the statement of Judge Thayne Forbes makes obvious good sense even without the approval of the Court of Appeal, but the statement contains within itself a number of conditions and it remains to be considered on the facts of each case whether those conditions are satisfied. In the circumstances of this case, was Hedley's "well able to look after itself". In 1999 there was a considerable amount of panic about Year 2000 compliance and Hedley's, having already been in some trouble with the Regulator were under pressure from the Regulator to ensure that their computer system was Year 2000 compliant. There was no one at Hedley's who knew about computers whereas computers were SAM's business.
- Schedule 2 to the Act provides Guidelines for the application of the reasonableness test. Those guidelines are prescribed by section 11(2) of the Act to sections 6 and 7. Accordingly, the guidelines do not have direct application to this case, but they are usually regarded as of general application to the question of reasonableness: Stewart Gill Limited v. Horatio Meyer & Co Limited [1992] 1 QB 600 at 608 per Stuart Smith L.J.
- Schedule 2 to the Act in paragraphs (a) and (b) requires consideration to be given to whether Hedley's could have got a Year 2000 compliant system without similar exclusion clauses. This is a live issue. I have heard evidence in other cases that it was a standard feature of the computer software industry to supply software only on stringent terms excluding all or virtually all liability. In Watford Electronics Limited v. Sanderson CFL Limited, His Honour Judge Thornton Q.C. heard similar evidence, as was recorded by Chadwick L.J. in paragraph 23 of his judgment in that case. I am not suggesting that evidence in other cases is admissible in the case before me, but I am put on notice of the need for evidence on this topic. Section 11(5) of the Act puts upon SAM the burden of proving that that the terms relied on are reasonable, and reasonableness includes satisfaction of the requirements of Schedule 2 to the Act. I therefore turn to the evidence of Mr. Tustain on which Mr. Susman Q.C. relies for that purpose.
- Mr. Tustain, in paragraph 45 of his written witness statement confirms that it is standard practice for his competitors to exclude warranties of merchantability or fitness for purpose. Having stated that there were competitors (whom he naturally regarded as inferior) he said:
"The Licence Agreement between SAM and Hedley's expressly disclaims implied warranties of merchantability or fitness for a particular purpose to the extent permissible by law. I believe this is normal practice for suppliers of software in the securities markets because there are many different ways of using the facilities of the London Stock Exchange, and a supplier like SAM would not ordinarily know the detail of a firm's individual services." (my emphasis supplied).
Although Mr. Tustain said that "a supplier like SAM would not ordinarily know the detail of a firm's individual services". He did go on to say that "The business of Hedley's which was described to me by Nick Baldwin…appeared to be a broadly typical retail stockbroking business and appeared to be similar to another client of SAM's (Hoodless Brennan) although apparently with more paper based settlement at that time."
- That evidence, together with the rest of Mr. Tustain's written and oral evidence suggests that Hedley's choice was limited. The only way to get the software they needed was by contracting on terms that made rigorous exclusions of liability because those were the terms on which all suppliers were contracting. Moreover, the negotiating positions were not equal. Hedley's had to get a system in a short space of time that was Year 2000 compliant or go out of business. But that was a difficulty of their own making. If they had woken up to the problem earlier, as most people did, they would not have had a problem as to time. On the other hand, SAM no doubt wanted the work to make a profit, but there is no evidence that they would have gone out of business if they did not get the work. However, although the agreements were signed by SAM on 12 October, 1999 and sent to Hedley's, they were not signed and returned until 18 October, 1999. In the interval, as Mr. Tustain said, Hedley's asked no questions about the terms and made no attempt to negotiate any changes to the standard terms of SAM's contract. The only changes they requested were certain additional systems enhancements. If there had been any attempt to negotiate those terms SAM could perfectly easily have said "take it or leave it" as both parties knew, or they might have agreed changes. As we now know from the oral evidence of Mr. Tustain (Day 6 page 29,) he would probably have said, "We cannot expose our business to that degree of risk. We cannot do that business". As to the degree of risk, the counterclaim in this action is high enough, but it has been stressed on behalf of Hedley's that because of alleged defects in the software, Hedley's might have been closed down by the Regulator. If that had happened, the counterclaim for loss of profits, costs of paying off staff, and indemnities against claims from clients could have been enormous. In that event, it is not unlikely that both companies (in the absence of insurance) would have been in liquidation, though I have to say that I have no detailed evidence about the funds available to either party beyond the evidence that they are both small companies. Although it has not been said in so many terms, SAM's attitude seems to be, "We did not have to take on this contract. Having taken it on on our terms, why should the contract be re-written to expose us to a huge risk and possibly put us out of business?" That is a freedom of contract attitude that would have been entirely acceptable in the nineteenth and early twentieth centuries. Can it survive since Parliament intervened at the behest of the Law Commission in 1977?
- Not forgetting my duty to look at each term individually, it is important to look at each in relation to the whole contract. Before contract, SAM says, "We think our system is marvellous and will do everything you need, but if you are not satisfied you can ask for your money back". The contract, signed by Hedley's after they have had a few days to think about it but without any attempt to negotiate on their part, says, "So far as possible we exclude any liability for our system, but if you are not satisfied and you go through the right machinery, you can have your money back". Having regard to the enormous potential liabilities, that seems to me to be a reasonable arrangement in the circumstances existing between the two parties. The big question is, "Not having gone through the contractual arrangements for getting their money back, can Hedley's nonetheless get their money back or recover any other damages?"
- If SAM had not offered what Mr. Tustain on 4 October, 1999 called "a standard money back guarantee on licence", I would have regarded the exclusion of liability and entire agreement clauses as quite unreasonable though I would have regarded the limitation of liability to the amount of money paid under the licence agreement as reasonable. But on the evidence before me and in all the circumstances to which I have referred (which would not necessarily exist with other contracts signed on the same terms) I find that all of the terms to which objection is taken in the contract were reasonable. The parties were of equal bargaining power in terms of their relative size and resources. Hedley's were in a difficult position of their own making because of their lateness in tackling the problem of Year 2000 compliance. The evidence from SAM is that other companies like theirs had similar exclusion clauses, but on the other hand, Hedley's did not even try to negotiate for terms more favourable to them.
- The effect of that finding is that SAM are under no liability to Hedley's for breach of contract or for misrepresentation. However, as this was put as a back stop defence to the counterclaim, and in case I am found to be wrong about it, I will deal with the case on the facts. It is in any event necessary for me to consider the merits of the claim.
- I must consider the terms of the Maintenance agreement.
- Like the Licence agreement, the Maintenance agreement was signed by SAM on 12 October, and by Hedley's on 18 October, 1999.
- The Maintenance agreement included the following terms:
"This agreement shall be effective once it is executed and the licence agreement is executed.
This agreement shall be effective for an initial term of 12 months from the date on which it becomes effective, unless upon a breach by SAM of the licence agreement the licence for the application software is terminated prior to the expiry of the initial term of 12 months, in which case this agreement may be terminated co-terminously with the licence agreement.
Upon expiry of the initial term of 12 months,either party may terminate this agreement by giving the other at least six months prior written notice ...
"Scope of agreement.
SAM will provide the following services:
- diagnosis and correction of reproducible software errors during normal office hours;
- telephone support of the application software to two named operators or their alternates during normal office hours;
- the delivery by remote link of application software maintenance, releases and corrections as they become available for the application software;
- periodic documentation updates as they become available for the application software;
- version control of the application software."
- As to the scope of the agreement, Mr. Mawrey submitted:
"Assume for the moment that the licence agreement is not apt to exclude all warranties or terms, rather, relating to fitness, merchantability, suitability, function and the like; so assume that the supplier is liable for supplying software that does not work and has to be corrected. Our submission is that the scope of the maintenance agreement, diagnosis and correction of reproducible software errors, cannot include software errors that are the result of a breach of contract by the supplier; otherwise, the effect of the two agreements would be that the supplier would be entitled to charge the customer for putting right his own breaches of contract."
- I accept that submission, but I would go further. I have found that the Licence agreement is apt to exclude liability for all warranties etc. But nonetheless, I cannot see that it is right that SAM should be paid for putting right a defect in respect of which they have excluded liability to pay damages. Of course, any product, whether it be a motor car, or a washing machine, or computer software, may, after working well to start with, then develop faults and faults arising in that way, provided they did not exist in a hidden form on delivery, would be the proper subject of a maintenance agreement. But no consumer would or should accept liability to pay for rectification of defects existing in goods on delivery even if there was no contractual liability on the part of the supplier to pay damages arising out of those defects. If a company supplies to a factory a power unit that from the outset does not work, the supplier may be able to sustain a case that he cannot be sued because of his exclusion clauses, but he could not conceivably charge for making it work under a maintenance contract. Exclusion clauses exclude liability for breach of contract: they do not amount to an agreement that performance has been given by providing equipment that is fit to be maintained: nor do they amount to an agreement that the purchaser should pay for any efforts made by the supplier to put right the defects.
The Facts
- In case I am found to be wrong in what I have said so far, I should deal with the facts on the assumption that the exclusion and limitation of liability clauses are found to be unreasonable and unenforceable. I do also have to deal with the facts in order to consider SAM's claim.
- The details of SAM's claim for £310,509.84 plus interest are set out in a schedule to SAM's amended Reply and Defence to the Amended Counterclaim [1.76-77] and evidence is given about the sums in that schedule in the written statement of Mr. David Whitehouse [11.160]. The case of Hedley's in that regard is that all of SAM's charges must have related to remedial rather than maintenance work.
- I have already set out in some detail the history up to the signing of the Licence Agreement and the Maintenance Agreement on 12 and 18 October, 1999. When Hedley's signed and returned those agreements, they sent with them a cheque for £58,000 plus VAT.
- After contract and before 1 January, 2000, SAM had to prepare for and organise two things:
(a) Train Hedley's staff in the use of InterSet;
(b) Transfer all the data from ANTAR to InterSet.
- The first matter arising in 1999 was training. SAM undertook to train Hedley's staff. Miss Orton was the person to do the training. The matter of training is of great importance because one of SAM's principal points is that the system works well elsewhere and if it does not work for Hedley's it is because the staff at Hedley's were not trained for the work or were otherwise incompetent. Miss Orton had once worked as a primary school teacher and then took a psychology degree before going into the computer world. One of the complaints against her was that she treated the staff of Hedley's like primary school children. She gave her evidence in a curiously deadpan manner. Perhaps it was due to nervousness, but if she taught in that manner I can understand that she might have difficulty in communicating computer skills. She for her part complained that Hedley's staff did not have skill in Windows and use of the mouse, but it appeared that she had not enquired of them what was the level of their skills before she tried to teach them a Windows system without teaching them Windows, even though she knew that they had been working a Dos based system. When this was put to Mr. Beardsley, the designer of InterSet, he said that it would be a waste of the skills of Miss Orton for her to set out to teach the staff what could be learned in evening classes. That may be right, but any reasonably good teacher in Miss Orton's position should know at the end of the course whether the students are competent in what she has been trying to teach. On the basis of her evidence and on SAM's case generally, Miss Orton should have reported to Hedley's and to SAM that Hedley's staff were not yet competent to work InterSet and that they needed to go on a short Windows course and then receive further training from her. Nothing like that was said in 1999 or in the whole of the following year, when, if SAM's case is right, one would expect someone from SAM to have said, "Look, all these problems are because your staff are just not doing it right. We must have a training weekend to sort things out". In fact, Miss Orton's training took place on 7-10 December, 1999, so further training could have taken place later in December.
- I find that the training was not adequate, but the staff must have managed to train each other on the job otherwise there would have been direct contemporaneous complaints from SAM about their inadequacy.
- SAM has made a great point that time was tight to get the system working before 1 January, 2000. But I repeat, they did agree to do it, and despite some evidence of Miss Orton, SAM's Project Manager, timesheets show that SAM did not start any serious work in preparing to transfer data from ANTAR to InterSet until 25 November, 1999, 6 weeks after contract.
- SAM arranged that data should be transferred from ANTAR to InterSet over the weekend of 18/19 December, 1999 with "go live" on 20 December, 1999. SAM decided that some data could be transferred electronically but that some would have to be transferred manually. If the transfer was to be done manually in part, and if it were to be done by Hedley's staff, clearly Hedley's had to be told well in advance so that they ensured that adequate staff were at work over the weekend. Miss Orton of SAM says that they were told well in advance. Mrs. Roberts and Mr. Baldwin were firm in their evidence that they were not told until they were in the office at the weekend. This is not the only conflict of evidence about what was said by SAM to Hedley's. On each occasion important information is alleged to have passed without any hint in writing despite the fact that there were many written communications between the parties. On this occasion, there is no suggestion that Miss Orton indicated what had to be transferred manually or how much work would be required in manual transfer or how many staff would be required for how long. Mrs. Roberts and Mr. Baldwin are responsible people, and if they had been told that staff would be required to work at the weekend they would have found out how many staff were required and made sure that they were there. I do not accept that they were told anything about the need for more staff to be in the office on that weekend. They were there and they did their best together with Mr. Al Kaisy and Miss Orton of SAM.
- There were errors in the data transferred from ANTAR to InterSet. In a small random sample of 45 accounts, there were 3 or 4 errors, a ratio of 1:15 or 1:11. SAM called no evidence to show that that was not typical of errors throughout the 2,000 accounts transferred. SAM contend that the errors must either have existed in ANTAR before transfer or been created by Hedley's on transfer through having insufficient staff to do the work. As to the former, there is no evidence of errors in ANTAR before transfer. ANTAR worked well. As to the latter, any errors in manual transmission of data (if there were any) were most probably caused by lack of staff over the vital weekend, and that was SAM's fault. It is just as likely that errors arose through deficiencies (SAM would call them bugs) in the software that had to be written to make the transfer. The errors caused difficulties over a fairly long period because it was difficult to trace them all.
- One particular problem with transfer of data was cash balances. SAM say, without any convincing detail, that they told Hedley's that Hedley's must transfer cash balances by hand. Hedley's say that they were not told that, and I believe Hedley's. As a result of the failure to transfer all data onto ANTAR, for a short time after go-live, Hedley's tried to use ANTAR in parallel with InterSet to complete open transactions. The result was that some information was sent by CREST to ANTAR that ought to have been sent to InterSet. This was discovered fairly soon by Mr. Beardsell who said in a meeting, "They are stealing our information". Parallel working then stopped. Again SAM say that they told Hedley's in advance not to use the systems in parallel, but I do not accept that they did. Hedley's wanted the system to work. They would not have disobeyed clear instructions. In any event, this practice was stopped as soon as it was clearly said to be wrong. As late as 18 January, 2000, Miss Orton wrote in terms inconsistent with any express embargo on parallel running. In a lengthy document considering "Outstanding Issues at Hedley's", she wrote:
"…it is important to note that where stock is being moved through CREST using the ANTAR system or the CREST GUI (e.g. deposits and withdrawals) it will be increasingly difficult to reconcile the InterSet stock position with both CREST and ANTAR".
If she or anyone else at SAM had previously told Hedley's not to do parallel running it would have been perfectly simple to have reminded Hedley's of that politely and told them not to do it again under any circumstances.
- It appears that SAM had never before transferred data from a "foreign" system to their own. In the case of the only other stock-broking firm that they supplied, they did make a transfer but it was from an old system of SAM's to a newer SAM system.
- When InterSet went live on 20 December, 1999, it was evident that there was a whole raft of problems. Paul Beardsell, the most technically expert of the SAM team, went on 23 December, 1999 to Hedley's to "sort out the process and modem issues". The words in quotes come from a fax from Miss Orton to Mrs. Roberts in which Miss Orton advised Mrs. Roberts to take certain steps including putting in the remainder of the cash balances. It is quite clear from the fax that Miss Orton expected the tasks she set Mrs. Roberts to produce some strange results because she wrote, "try not to panic when you see the figures and call me. We will get it all resolved ASAP". It is also evident that Miss Orton was not intending to attend at Hedley's herself that day despite the fact that in the fax she recognised that her advice might be needed on matters which, she said, Paul Beardsall knew nothing about. Miss Orton said that she would ensure that new contract and entry forms are installed. Miss Orton recognised that the Trial Balance was not balancing and suggested some steps to sort out "that little problem". On the same day Mrs. Roberts sent a 4 page fax to Miss Orton listing what she called "problem trades", and asking for a telephone call about them.
- On 30 December, 1999, Mrs. Roberts telephoned Miss Orton with a list of problems and she noted the answers given. The first problem was that "the system seizes up occasionally". Miss Orton did not make any suggestion that something might be done to stop this happening. She simply suggested that when it happened the whole system should be shut down and Hedley's should start up again. That was not a satisfactory course to have to take when clients are wanting to get the best price in a moving market.
- On 4 January, 2000, the first Stock Exchange trading day in the year 2000, Mrs. Roberts telephoned Miss Orton and confirmed her telephone call with a fax copied to Paul Beardsell and Paul Tustain. In that fax she listed 22 problems. Each one of those problems was serious but perhaps the most serious were those under the sub-heading "Accounting". Mrs Roberts said that she needed for 20 December and every business day since
Trial Balance
Client Money Requirement (CMR)
Counterparty Risk Requirement (CRR)
Report indicating settled trades to whom money is owed and vice versa.
Those reports were required for the Regulator who wanted to be assured that money owed to clients was actually in the Bank account of Hedley's and in addition that Hedley's had enough money to pay debts due to counterparties on trades that they had made.
In the closing paragraphs, Mrs. Roberts indicated that there might be more problems that she was not aware of. She concluded the fax:
"It should also be noted that at present InterSet are not providing us with a working, useable system and we need an answer as to how and in what timescale these issues are going to be resolved. As stated before we are in a regulated business and these issues are time critical."
If those matters were not put right speedily, Hedley's could be fined or closed down by the Regulator.
- Miss Orton replied to that fax on the same day. She did not say, I have now put everything right. What she said was more in terms that it will be done but without a date set.
- On 19 January, 2000 Miss Orton sent a fax to Mrs. Roberts attaching a three page list of "Outstanding Issues at Hedley". It is clear from that document that SAM had still not implemented a working system. Moreover, in that document Miss Orton wrote, "Hedley can now run a CRR, Trial Balance, Client Money Requirement and a Debtors and Free Money report…" but the evidence of Hedley's shows that that was not correct.
- On 24 January, 2000, Hedley's sent SAM documents showing that they were unable to process certain records. Nonetheless, on 28 January, Hedley's paid the next instalment of £57,096.29.
- On 1 February, 2000, Mr. Baldwin of Hedley's wrote by fax to Miss Orton telling her that he had reported his firm to the SFA and they had said that the highest priority was to protect the clients' assets and for that purpose to perform the CMR calculation. He then went on to describe in detail what was required in the CMR. He also said that he needed a list of all cash held by Hedley's for their clients: he added, "I suspect that the report that is attempting to tell us this is the Free Money Report. If it is the correct report, I need it to add itself up. If it is the correct report can I assume that it is correct or is there still some corrupt data from the implementation". He concluded the letter by saying that he needed a prompt response to be able to send a fax of the calculation to the SFA by noon on the following day. There was no reply to that fax. Miss Orton said that she realised it was a very serious letter but she handed it to either Mr. Beardsall or Mr. Whitehouse to deal with. Her view was that Mr. Baldwin was getting the correct information but he did not like it because he did not have enough cash. That was the line taken by Mr. Beardsall and Mr. Whitehouse also. Why that was not written in a reply at the time was not explained.
- In an interview with the Regulator on 23 August, 2000, Mr. Baldwin was asked about that fax of 1 February, 2000. He was asked why he was having to define the CMR to SAM on 1 February. It was put to him that it was either a system failure or a problem with the knowledge of SAM or Miss Orton. The reply was, "I think I sent this in order to clarify exactly what I meant, so that she personally would know exactly where I was coming from. Irrespective of what her knowledge or of what SAM's knowledge of the client money calculation were, that is what I wanted. I wanted to make that clear at that point". It has been suggested forcibly that that answer was inconsistent with the case now advanced by Hedley's, but I do not see it that way. As I read the transcript of the interview, Mr. Baldwin was simply saying, I was not getting what I wanted and I told Miss Orton what I wanted. It did not matter to him whether it was the system at fault or SAM's knowledge that was at fault. He was not getting what he wanted and desperately needed. To my surprise, when it was put to Mr. Baldwin, "The regulator keeps asking you, 'Are you trying to blame SAM for what happened?' and every time that is raised either you or Mr. Hedley say, 'No', is that fair?" Mr. Baldwin replied, "It is a reasonable comment, Yes". I do not think it was a reasonable comment. In the letter of 1 February, 2000, Mr. Baldwin said that he needed the Free Money Report "to add itself up". He added "If it is the correct report can I assume that it is correct or is there still some corrupt data from the implementation?" Mr. Baldwin is there saying that there is some fault on the part of SAM. Either SAM's programme was faulty or SAM was at fault in implementation. Moreover, in a letter dated 8 December, 2000, KPMG, reporting to the SFA on the inability of Hedley's to calculate its CRR correctly, blamed InterSet and said that Hedley's "indicate that this shortcoming will be addressed by software improvements in 2001". I shall refer in more detail to that letter later. I do not think Mr. Baldwin did himself justice at the end of a tiring cross-examination.
- As a result of the self-reporting on 1 February, on 2 February, 2000, Hedley's were placed under a duty to report daily to the SFA and the SFA appointed KPMG as accountants reporting to the FSA. Later it was agreed that KPMG should be the firm's auditors. A letter from KPMG of 13 July, 2000 to the Regulator records that there were difficulties in doing their work as a result of the unpreparedness of Hedley's and as a result KPMG seconded staff to Hedley's under the direction of Hedley's to make Hedley's ready for the audit by KPMG. The letter records that a shortfall in client money was identified. As I have already indicated, SAM says that lack of client money was the problem. Hedley's say that inadequacy of the reports caused the failure to set aside sufficient client money. If one does not set aside a sufficient reserve for whatever purpose, it may be difficult to find the money at short notice, but Hedley's, with some difficulty perhaps, did find the money with the assistance of a substantial bank loan and made the required reserve. If they had not done so, they would have been closed down.
- Between February 2000 and the meeting with the Regulator in August, 2000, there were numerous complaints from Hedley's to SAM about accounts, including the Trial Balance, not adding up and reports not agreeing with each other and Stamp Duty not resolved. Those complaints, in an abbreviated form, are listed in 6 pages of a Chronology provided by counsel for Hedley's. I have been through that detail but it would make this judgment even longer if I were to rehearse it all here. It is clear that during all that time InterSet was not working satisfactorily.
- Thereafter problems continued. For example, and it is only one example of many, on 25 September, 2000, Mrs. Roberts sent a fax to Miss Orton raising 16 outstanding issues including stamp duty and corporate actions. The reply was not, "You are making unjustified complaints", but was an attempt to make a reasoned response complaint by complaint with proposals to rectify the problems. SAM were trying to get the system right but so far were not succeeding.
- On 19 October, 2000, Mrs. Roberts sent a fax stating that the Trial Balance was out of balance.
- Meanwhile, on 31 August, 2000, Mrs. Roberts had written a most important letter to Mr. Whitehouse. Other than an acknowledgment, there was no response to that letter until 20 October, 2000. With the letter of 31 August, 2000, Mrs. Roberts sent a cheque for £35,000 plus VAT. She said that that was roughly half of what Hedley's believed to be owing and it was sent as a gesture of good faith. As against that payment, there was put forward a counterclaim in the sum of £250,000 said to be an estimate to which should be added some other as yet unquantified sums. The overall tone of the letter was that Hedley's hoped that matters could be sorted out.
- The reply some 6 weeks later from Mr. Whitehouse was in the aggressive and arrogant tone adopted by SAM throughout and at the trial. Mr. Whitehouse wrote, "Frankly, we believe the client money and counterparty risk reports worked properly from day one. It may be worth bearing in mind that they are in use at other sites". The "use at other sites" is a continuing theme. I am no more impressed by it than if I were told by a garage that there were 1,000 other cars of the same type as the one I had bought where there was no complaint of the defect that I was complaining of so why should I be complaining of a defect? We have all heard of Monday cars, so maybe this was a Monday software programme. In any event, the contention that the client money and counterparty risk reports worked properly from day one is inconsistent with the documents. Mr. Whitehouse added, "We believe the obligation to call in the regulators resulted from the lack of capital, qualifying under the regulations, not the incorrect calculation thereof". Mr. Beardsall agreed in cross-examination that that was the first time this allegation had been made in writing but contended that it was not the first time it was said. However, he agreed that he did not say that to the Regulator's investigators although those investigators had been told by Hedley's that InterSet would not calculate CMR and CRR correctly. Mr. Beardsall in cross-examination did not completely support that assertion made by Mr. Whitehouse that CMR and CRR worked from day1. He said that he believed that the CMR and CRR reports worked properly from Day 2 or Day 3.
- In the same letter of 20 October, 2000, Mr. Whitehouse dealt at length with implementation difficulties. Mr. Whitehouse accepted that there were difficulties in creating the opening data position in InterSet. He wrote, "I imagine these difficulties resulted in some of the settlement fines, errors and write-offs (£100,000) to which you refer as well as some of the "unquantified costs". He acknowledged that at a recent meeting Hedley's had blamed SAM for those failures, and he then wrote, "Although we would not claim that our performance was utterly faultless, we do believe any short comings were quickly rectified and perhaps counterbalanced by the provision of support from our most senior staff during the period of investigation by reporting accountants." The letter then went on to set out reasons for shifting the blame to Hedley's in the manner rehearsed in this action.
- As to Stamp Duty, the letter of 20 October, 2002 stated "there are many and complex rules related to Stamp Duty" as though that were an excuse for InterSet not dealing with Stamp Duty properly. Of course there are different rates and the default rate would not be appropriate for all transactions, but that does not seem to be the real problem. Mr. Whitehouse also blamed CREST. He said that CREST's stamp duty collection was not in accordance with its documentation and InterSet had been developed in accordance with the CREST documentation. If that was so, it is difficult to see how InterSet could have worked satisfactorily anywhere else as SAM contends it did. Moreover, if that really was the problem, it is difficult to see why SAM had not discovered the problem long before through one of their other customers and rectified it. Hedley's case is that the Stamp duty function worked at first but something was done to cause the Stamp Duty function to cease to function properly, so that Stamp duty was collected but not paid to CREST. Then that problem was fixed in such a way that Stamp duty was collected both on sales and purchases. That case was put to Mr. Beardsall but he did not know the answer. The experts have agreed that they have seen paper evidence that shows that during March 2000 there was on ongoing problem with Stamp Duty not being paid.
- The letter of 20 October, 2002, also set out figures increasing the gross amount of their claim to £419,000 which after taking account of payments made and an "allowance" of £81,362.00 left a balance claimed of £208,372.00.
- On 8 December, 2000, KPMG as auditors of Hedley's reporting to the SFA wrote:
"In our opinion the statements of financial resources set out in the annual reporting statement have been prepared in accordance with SFA's rules to show the actual financial resources and the requirement for financial resources as at 31st July 2000 except:
The firm is unable to demonstrate that its CRR requirement is calculated on counterparty exposures arising from its trading book business in accordance with rule 10-170(1). No reconciliation between the trading book items on the general ledger and the amounts input to its calculation has been undertaken. As a result the firm cannot demonstrate that CRR is being calculated on a full population of applicable balances or that applicable balances are not being double counted. Although steps have been taken to attempt a reconciliation, the current system does not allow this to take place."
Mr. Beardsall accepted that "the current system" that was not allowing reconciliation to take place was InterSet.
The report from KPMG continued:
"Management indicate that this shortcoming will be addressed by software improvements in 2001.
A review of the CRR calculation showed that in some cases the system incorrectly calculates CRR in the following respects:
A. the system calculates cash against document exposure as the full contract, if there is no price feed valuing the stock (which is shown as zero) this has the effect of overstating CRR;
B. from our review, the system calculated CRR on two trades which had settled correctly. This has the effect of overstating CRR; and.
C. For three trades identified in our review, the date from which the days past settlement was calculated could not be ascertained as there was insufficient information in the report to identify the trade in question."
In the light of that report, made a year after go live about a date 7 months after go live, I fail to see how Mr. Whitehouse could have the nerve to state on oath that CRR worked from Day 1 and Mr. Beardsall could claim that CRR worked from Day 2 or 3.
- By a misdated letter that was in fact sent on 10 November, 2000, Hedley's told SAM that they had consulted independent IT consultants. It has been suggested to me on behalf of SAM, without any evidence at all, that those consultants are unscrupulous people who have invented claims in this action. By way of response, if response were needed, it is said quite rightly that complaints existed long before those consultants were instructed. By the letter of 10 November, 2000, Mrs. Roberts, whom I accept as an entirely honest witness, said that the terms of reference of the consultants were:
"*To report on the historic problems arising from the implementation.
*To identify the current outstanding issues with the software.
*To define a completion plan.
*To attend a meeting with yourselves to present and discuss the issues and determine finalisation of the full and satisfactory installation of all the functionality of the system."
That letter is saying, before the consultants have started advising, that there have been problems with InterSet, that problems still exist 11 months after go-live in that installation is not complete, and that Hedley's want to try to get a solution by discussion with SAM with the help of their new consultants. I accept that as a perfectly honest and justifiable statement of Hedley's position at the time.
- I have no evidence to suggest that what happened after 10 November, 2000 was the result of plots by those consultants. I have heard no evidence against those consultants and I would prefer not to have named them for that reason but it is necessary to name them, Contention Management, because of their involvement in the history and in the claim for damages. But on 10 November, 2000, Mrs. Roberts is saying, and I believe her, that there are still current problems with InterSet.
- Mr. Whitehouse responded on 15 November, 2000 by suggesting means to agree a "completion plan". It is plain that he thought that installation was not complete. He also wanted settlement of money alleged to be due.
- On 8 December, 2000, Mrs. Roberts wrote to ask why it was that InterSet had written a Contract note with a settlement date 3 days before the transaction date. That was not an isolated incidence of such errors. SAM brush such things off as isolated incidences, but each such error is capable of losing a customer for Hedley's and every lost customer is a source of further loss by word of mouth. I will not go through all these items individually, but there were many and they continued.
- A meeting was arranged between SAM and Hedley's for 19 December, 2000. The terms of reference for that meeting, which seem to have come from SAM, were the same as the terms of reference given by Mrs. Roberts in her letter of 10 November, 2000 to Contention Management. In response to her letter, Contention Management produced a document headed "Discussion Points" setting out 111 questions for the interrogation of SAM. The tone of those questions was set by the first, "What experience do SAM have in supplying systems to stockbroking firms?" On seeing that, Mr. Tustain of SAM wrote a reasonable letter pointing out that the document did not address the terms of reference, which he repeated. He asked for a list of implementation issues and a list of outstanding software issues. He wrote that the absence of a list of those issues was preventing SAM from defining a completion plan "and turning you into a satisfied customer". I have said that there was no evidence of plots by Contention Management to concoct complaints, but the documents do suggest that their attention was centred more on contention than on resolution of problems. However, for the meeting on 19 December, 2000, Contention Management produced a document headed "Supplementary Points" listing 133 specific points, some of history and some of existing complaints. I will mention only three by way of example:
"Trial balance seems not to balance" to which SAM's answer apparently was "Usually does" plus some words that I cannot decipher.
"Stock reconciliation exception seems to be inconsistent" to which the answer was "We doubt it – works everywhere else".
"Client contracts appear not to summarise correctly" to which the answer was, "Fixed – possibly not on site yet".
Without going through all the matters for discussion, it does appear that there were still at that time good grounds for complaint against SAM.
- Hedley's action after that meeting of 19 December, 2000 was ambivalent. On 4 January, 2000, Mrs. Roberts wrote to Mr. Whitehouse asking for written responses to the points put to SAM and suggesting a further meeting on 1 February, 2001 and concluding, "It is our desire to achieve a speedy resolution to the issues we have raised with you …". But there had also been a meeting called a "Compliance Meeting" set for 5 January, 2001 between Mr. Baldwin of Hedley's, Mr. Rigby of KPMG and two gentlemen from the FSA. For that meeting, Mr. Baldwin wrote a paper for approval by his partners and then to be shown to the FSA. It is likely that Mrs. Roberts was not shown the paper at that stage. In that paper Mr. Baldwin wrote, "The partners are painfully aware of the inadequacies of the SAM software solution and it is the intention to resolve the failings of the system by one of three methods". The three methods were:
(a) To continue with SAM trying to get it right but "there are doubts over the achievability, the system has very little KPMG/FSA credibility and there would be resistance by staff to continue with the system";
(b) To buy a different back-office system;
(c) Outsourcing to Pershing.
The Paper continued, "The current preferred option is to use Pershing. The final decision will be taken following a further meeting with SAM and Contention Management on 1 February, 2001".
- On 5th and 8th January, 2001, Mrs. Roberts complained of contract errors.
- On 12 January, 2001, Mr. Whitehouse replied to Mrs. Roberts' letter of 4 January, 2001. He quite reasonably refused to reply to the "Discussion Points" list but said that a reply was being prepared to some only of the "Supplementary Points". He enclosed a printout of SAM's time charges. There were some oddities about that printout. For example, £6,640 was charged for 13 hours work for "CRR Changes". In cross-examination Mr. Beardsall thought that that might have been 13 days, and certainly in a supporting document, in May 2000, 40 hours were charged for such work. But the bigger question about that charge was that the only explanation that I can see for the work being done at all was that it was done to remedy defects in the CRR system and the work was being done at least as late as May, 2000.
- On 16 January, 2001, Mrs. Roberts replied saying that at the meeting Mr. Whitehouse had agreed to respond to both documents and asking him to revise his position so that stalemate was not created.
- On 21- 23 January, 2001 there was a further visit by FSA to Hedley's.
- On 31 January, 2001, there was a further problem with the Trial Balance. On that day, Hedley's paid a further £4,700 because SAM would by then only deal with problems for cash.
- On 1 February, 2001, Mrs. Roberts sent 5 faxes complaining of serious errors.
- By fax dated 7 February, 2001 from Mr. Tustain to Mr. Baldwin, SAM withdrew all support services relating to implementation, training, consultancy, enhancement, customizations and procurement. SAM also gave 30 days notice to terminate the Maintenance agreement.
- On 8 February, 2001, Mr. Baldwin by fax to Mr. Whitehouse wrote that because SAM was concentrating on its financial claim without regard to the continuing difficulties in SAM's attempts to implement InterSet, Hedley's had decided not to continue with the implementation of InterSet. The point was also made that since implementation was not complete, the Maintenance agreement was not yet in force.
- By fax of 8 February, 2001, Mr. Whitehouse expressed willingness to "resolve the issues outstanding" which I take to include not only the complaints of Hedley's but also SAM's demands for further payments.
- By letter dated 9 February, 2001, Mr. Baldwin confirmed to Mr. Whitehouse that Hedley's were not going ahead with the installation. He also said that he could not understand the invoices that he had received, namely he could not understand what was said to be within and what without the contract.
- On 15 February, 2001, Mrs. Roberts complained to Mr. Whitehouse of three defects. He replied that they were not bugs but that SAM would put them right if paid in advance. On 19 February, Mrs. Roberts paid £2,350 to SAM on account of work to get Hedleys operators working again. She said that it was a recurring problem happening 2 to 3 times a month and she asked that the problem be fixed rather than that the operators be got going only to go wrong again. Between March and July, 2001, Hedley's made about 6 further payments on the same basis.
- On 10 April, 2001, SAM issued an invoice in the sum of £310,509.84, the sum now claimed in this action.
- On 20 April, 2001 the FSA gave notice that they were considering disciplinary action. After an answer from Hedley's, the FSA on 29 June, 2001 said that they were not recommending disciplinary action but gave a warning.
- Meanwhile, on 21 May, 2001, Hedley's went live with Pershings, and on 1 June, 2001, SAM issued their Claim Form.
- To complete the history, I must mention a document produced at my request as Exhibit C2. During the evidence of Mr. Whitehouse, I asked for a copy of a timesheet to which he had referred. That is a timesheet of "maintenance activity" for which no charge was made. That document had not been disclosed until I asked for it. It is a document of 10 pages. I have not counted each item, but there are about 35 items on each of the first 9 pages and 16 on the last page. According to the claimants, the hours worked amount to 785.25. The period of time covered by the document is from 4 January 2000 to 7 February, 2001. The majority of those items appear to be efforts to fix defects. The fact that no charge was made suggests that all items fall into that category. I am not going to go through all of that document, but I will take one example. On 12 January, 2001, there is an entry, "Analysing the problems with Hedley contract report …problem actually with contract form not the report". On 15 January a temporary fix was prepared. On 15, 16 and 17 January over 17 hours are recorded working on this problem. Then on 17 January there is another entry, "Attempting to find the reason for the intermittent bad contracts. Not found yet". On 18 January, 2001, there is an entry, "Attempting to find the reason for the intermittent bad contracts. The reason appears to be conflicting requirements of procedures. Needs deeper understanding of form". There were then further entries for modifications to put the problem right on 19, 23, 24, 25 and 26 January, 2001. More work was done on the same problem on 5, 7, and 9 February, 2001. On 5 February, 2001, changes were made, "To prevent contracts being saved where the values do not add up". Through February, 2001 there was a series of calls to deal with a problem with split deals commission. In mid April, 2001 there was a problem with trial balances. It is quite clear from that document, produced only under pressure during the trial, as well as from all the other evidence to which I have referred, that InterSet as delivered to Hedley's was never in satisfactory working order.
- I find that, after lengthy efforts to co-operate with SAM to get InterSet to work, Hedley's acted perfectly reasonably in saying that they were not going to try any further to get InterSet to work. That is different from a finding that Hedley's had a right to reject. I make that finding that Hedley's were reasonable in giving up on InterSet without reference to the evidence of the computer experts. However, I should refer to that evidence that has been obtained at considerable expense. I will then consider the right to reject.
- Expert evidence was given by Mr. Richard Hales on behalf of SAM and by Mr. D.A. Sykes of Rockford Electronics Limited on behalf of Hedley's. Both have considerable technical experience in the use of computers in stockbroking and financial affairs. Mr. Hales was criticised by counsel for Hedley's on the basis that this was the first time that he had given expert evidence. That in itself is not a valid ground for criticism. Every expert witness, like every barrister and every judge, has to have a first case, and some do them well. What was remarkable about Mr. Hales was his aggressive advocacy on behalf of SAM. An unforgettable part of his evidence was his rebuke to cross-examining leading counsel, "You're not paying attention!" I preferred the evidence of Mr. Sykes as more measured and temperate.
- On 12 July, 2002, the experts, Mr. Hales and Mr. Sykes, signed an agreement referring to what has been called a Scott Schedule. It is in fact just a schedule of defects alleged by Hedley's with comments on each from SAM. That schedule was ordered to be prepared by His Honour Judge Havery Q.C. The schedule runs to 34 pages. It is not necessary to consider every item in that schedule. Hedley's do not need to prove every item to make out their case. Nor is it even necessary to consider all the items that were in dispute between the experts when they gave evidence. I will quote some of the items of agreement between the experts. The evidence of Mr. Hales was inconsistent with some of that agreement but I rely on that agreement.
- Items A 4,5,6 refer to pre and post transfer checks with CREST. The experts agreed:
"We agree that the pre-transfer checks on a system such as this would necessarily include a download from Crest of what Crest held for Hedley and then a check to see that that was in a form acceptable to the account structure set up in Interset. For direct transfer from Antar to Interset, we agree that a similar check would be necessary. We agree that SAM appeared to carry out the Crest download but we do not know the extent to which they made their results known to Hedley or to what extent or how quickly they effected any changes or corrections that were necessary. We agree SAM appear to have undertaken some Antar checks and made enquiries of Hedley regarding certain anomalies. We are not sure how this finally resolved itself. We agree that a fax from Catherine Orton to Sue Roberts dated 20/03/2000 appears to confirm that the reconciliation with Crest is nearly complete. We agree that by normal standards this should have been complete within a few days of "go live".
The experts are agreeing that there is a breach of duty in that the reconciliation should have been completed within a few days of "go live", but on 20 March, 2000, Miss Orton on behalf of SAM is acknowledging that the reconciliation is only "nearly complete". When it became complete we do not know.
- A12 was an allegation that when producing client contracts, InterSet frequently failed to add up individual sub-totals correctly and produced wholly inexplicable casting errors. The experts agreed:
"We agree there are examples of client contracts that do not add up individual sub-totals correctly. We agree there are examples of client contracts that produce wholly inexplicable casting errors. We cannot comment or agree on the frequency, we can only say we have seen examples. From the examples it would appear that the incidences we have seen correlate to the dates provided by Sam in their reply to the Scott Schedule."
SAM's answer to the Scott Schedule shows a lamentable history. Hedley's reported a problem in January, 2000. That was fixed. Then a new version of InterSet was provided that reintroduced the problem. Complaints were made in November, 2000 and twice in January 2001. SAM had great difficulty in solving the problem but eventually advised that all the fields should be visited in order so that they added up. Then a temporary fix was provided on 17 January, 2001 and a full fix was later provided. Here was a defect existing a year after go-live. The effect on clients of receiving contract notes that did not add up can only be imagined because there was no evidence about it.
- A13 and 14 complained of client contracts that omitted commission or added it twice or omitted interest or added it twice. The experts agreed that this happened and SAM said that these were features of the complaint in A12.
- A16 complained that InterSet failed to cope when Finstat failed to give the right prices. The experts agreed:
"It appears that during April 2001, there were three instances when the Finstat feed did not operate correctly. In the second of these incidents the Finstat feed did not operate for a week. The third instance appears to have been due to an error when attending to the second instance. From e-mail evidence Sam appear to have accepted responsibility for these. We agree that if the feed did not operate as planned, there would be an effect on the CRR calculation. We agree the CRR liability could increase or decrease as a result of this."
- A21 was what was described by SAM and the experts as a minor bug that was promptly fixed "and therefore not a breach". This occurred on 13 - 16 June, 2000. It was a breach, but because promptly fixed there was probably no damage and certainly none proved.
- Section B dealt with Stamp Duty. The experts agreed at B4, "We have seen paper evidence which we agree shows that during March 2000 there was an ongoing problem with Stamp Duty (SDRT) not being paid".
- Section C dealt with the CMR and CRR reports and with the trial balance. The experts agreed:
"We agree that if no accurate or meaningful CMR or CRR reports were available, Hedley could not carry on their business within the rules laid down by the SFA (now the FSA).
We have seen no evidence other than the example in 39g to support the claim that "Despite fixes by Sam, neither CMR nor CRR became capable of producing accurate results." We cannot therefore agree that 39g is "typical". However the error in 39g caused an inflated CRR due to the decimal place being in error by 2 points in the price of Gilt stock.
We agree that if no accurate or meaningful trial balance reports were available, Hedley could not carry on their business within the rules laid down by the SFA (now the FSA).
We observed several instances of the trial balance being out of balance. We agree that a computer based trial balance should always be in balance. We agree that the user has no means of influencing this. We agree that for certain extended periods of time, the imbalance appeared to be constant. It appears that by journaling the imbalances to a mis-posting account allowed the trial balance report to continue to be used despite the actual imbalance remaining on the system. We agree that the Acceptance Criteria state that "By design the system remains in balance at all times". The Acceptance Criteria also state that a diagnostic trial balance is available which "can identify any imbalance on the system …. and locate the offending transaction". Any more detailed analysis of the reasons for this is more appropriately addressed by a forensic accountant.
The debtor lists we saw did not distinguish between monies in savings accounts such as ISAs and debts owing for stocks not paid for. The system displayed only the net position. This meant that the report could not be used for the purposes of debt collection. However, the data included on the report would depend on the cash account structure set up in Interset, how the cash had been posted within that structure and possibly the range of accounts over which the report had been requested from the system."
Mr. Beardsall did not agree with that agreement about debtor lists.
- The agreements between the experts confirm the view that I had formed from the evidence of the parties.
The right to reject
- In his written opening on behalf of SAM, Mr. Susman Q.C. made these submissions:
"For any effective rejection, Hedley's would need to show that:
they gave timely notice of rejection that was unequivocal: Lakshmijit v. Shearani [1974] AC 605 (PC) per Lord Cross of Chelsea at page 616;
they did so at a time when they had gained no substantial benefit from InterSet: Hong Kong Fir Shipping Co. Ltd. v. Kawaskai Kishen Kaisha Ltd [1962] 2QB 26 (CA) per Diplock L.J. at page 66."
That was the judgment that sent lawyers to their dictionaries to look up the word "synallagmatic".
- I accept as good law the two propositions put forward by Mr. Susman Q.C. though I am not sure that the latter is supported by the learned judgment of Diplock L.J. on which he relies.
- Hedleys have not complied with either of those two propositions.
(a) Hedley's did not give an unequivocal notice of rejection: I refer to paragraphs 10 – 14 and 116 and 124 of this judgment;
(b) Hedley's did not give notice of rejection at a time when they had gained no substantial benefit from InterSet. Hedley's had decided that ANTAR would not work after 1 January, 2000, so they had an enormous benefit from using InterSet thereafter. If they had had no computer system they would have gone out of business. As it was, they had a defective computer system that kept them in business until they decided that enough was enough and they were moving to another system.
- Hedley's are claiming all their money back from SAM plus damages for failures in InterSet. That, if granted, would mean that Hedley's get use of InterSet for 17 months for nothing and also get damages for defects in the system. That cannot be right. If Hedley's had not had InterSet, the firm would have been out of business. It may be that some of the payments to SAM are recoverable and it may be that some claims for damages are recoverable, but I do not see a case for recovery of all moneys paid to SAM without examination of the details. The contract gave Hedley's the opportunity to get their money back if they went through a specified process. If they had gone through that process they would not have had 17 months use of InterSet. They did not go through that process.
The Financial Claims of the parties
The Defendants
- I have already said that the exclusion clauses prevent Hedley's succeeding on their counterclaim. However, in case I am found to be wrong about that, I should say something about the amount of the counterclaim.
- As has been submitted by Mr. Susman Q.C. it is extremely difficult to get to grips with the counterclaim for damages because the sums claimed differ wildly from time to time and the presentation is confusing. I have tried to marry the pleading of the Amended Part 20 Counterclaim with the closing speech on behalf of Hedley's. I will go through the items pleaded.
- Moneys paid to SAM
In closing submissions, counsel for Hedley's submitted,
"If the Court decides that, although SAM was seriously in breach of contract, the point was never reached when Hedleys was entitled to treat the contract as repudiated and to reject InterSet, then different principles apply."
That is what I find. Counsel submits that in those circumstances,
"The measure of damages would not be based on a complete return of the moneys paid under items (a) and (b)." [(a) is £143,504.91 paid towards the licence, hardware and implementation, and (b) is £4,606.00 paid for enhancements or additional work] "Instead, Hedleys would be entitled to the difference between the purchase price and the real value to Hedleys of the defective InterSet product. If, as Hedleys contend, InterSet was causing them to make huge additional expenditure which they did not make with ANTAR and would not make with Pershings, then its real value to Hedleys may be taken as relatively nominal."
Counsel then suggested a method of calculation as follows:
"Thus, though in this situation Hedleys would not be entitled to repayment of all the sums paid under (a) and (b), they would be entitled to repayment of the lion's share of it and the Court would have to make what would admittedly be a rough-and-ready assessment of the real value to Hedleys of having InterSet for 14 months. A possible approach might be to say that a system of this kind might be expected to have a life of five to six years (ANTAR lasted between five and six and would have lasted longer but for Millennium compliance). If it had worked perfectly for this proportion of its "shelf life", it might be appropriate to make a reduction of roughly 80% in the agreed cost. If one then discounted by half to account for the fact that it was not working perfectly but very defectively, the value to Hedleys of InterSet for the 14 months would be roughly 10% of the total cost.
If this method of calculation were adopted, the value of InterSet to Hedleys, taken at 10% of the ceiling of £180,000, would be £18,000 (with VAT £21,150). Deducting the VAT inclusive figure of £21,150 from the total actually paid (also with VAT) in relation to items (a) and (b) - £174,030.32 - Hedleys would recover £152,880.32."
The trouble with that approach is that there is no evidence whatever to support it.
Counsel then continues:
"Even on this scenario, however, the items under item (c) would still be fully recoverable as mitigation costs". The items under item (c) are "Sums paid for ongoing support during the transition to Pershings on a 'cash before delivery' basis - £9,000" or £10,575 inclusive of VAT..
- The claim made under (a) and (b) under the heading of moneys paid to SAM is impossible to calculate. If I buy a defective car, or a defective house, or a defective factory, I may be able to give evidence of the value of that item on the open market and claim as one head of damages the difference between what I paid for it and what is the open market value as, to use counsel's words, "the difference between the purchase price and the real value to Hedley's of the defective InterSet product". But what was provided to Hedley's had no open market value. They could not sell the licence even if there had been a buyer. The crux of that claim lies in the words of counsel: "If, as Hedley's contend, InterSet was causing them to make huge additional expenditure which they did not make with ANTAR and would not make with Pershings, then its real value to Hedley's may be taken as relatively nominal." One has to ask, "Where is the evidence of this huge additional expenditure?" There plainly was additional expenditure. Mrs. Roberts spent time writing many faxes. Underlying each fax there was time spent by others in Hedley's dealing with the problem mentioned in the fax. But I do not know what that time was. This relates to the submission made by Mr. Susman Q.C. that Hedley's should be put to their option either to claim their money back or to claim damages. I never did put Hedley's to that option and Hedley's never accepted the invitation to take the option, but it was quite clear that Mr. Susman Q.C. was submitting from the outset that there was no evidence of what is now called "huge additional expenditure". There has been some reference to previous decisions of mine in which I have taken what has been called a rough and ready approach to evidence of loss, but I decline to take a rough and ready approach to no evidence of loss. I value the claims (a) and (b) at nil.
- As to (c), if it were not for the exclusion clauses, I would have allowed the sum claimed, £10,575 inclusive of VAT, as money spent in mitigation of loss.
- Loss of Profits
This is the next pleaded head of counterclaim but it is not pursued in counsel's closing speech.
- Increased cost of working
This head of counterclaim is now put in sums and under headings wildly differing from what was in the Amended Counterclaim. I will take the headings from counsel's closing speech.
- Temporary Staff
Hedley's now counterclaim £194,270.40 for the cost of temporary staff (having originally claimed £18,619.64). That is the figure calculated as the sum of the amounts paid to temporary staff both before and after the litigation began. I asked Mr. Mawrey Q.C. whether there was any evidence from Hedley's to support those figures and he referred to the witness statement of Mr. Baldwin. Mr. Baldwin's statement mentioned a number of increased working costs, many of which are not pursued. Among those attested to by Mr. Baldwin was temporary staff in the pleaded sum of £18,619.64. Mr. Baldwin's statement continued:
"The Court . . . has given Hedley's [sic] permission to rely on the expert evidence of a forensic accountant for the determination of losses under this head. The values provided above [in the witness statement] are, therefore, an estimate only. Actual losses to be claimed by Hedley's will be determined by that expert. . . . At the date of this statement that expert evidence is to be provided".
The expert, Mr. Oates, has given evidence of money actually expended on temporary staff. The matter is complicated because it is accepted that the period under review was a period of unusually great activity in the stock market. Were these temporary staff taken on because of that flurry of business, or were they taken on because of difficulties with InterSet? Mr. Oates said that he was told that none of the temporary staff were engaged in entering trades, but Mrs. Roberts said that some of them were engaged in entering trades. If they were entering trades they might have been helping to deal with the extra business. Mr. Oates took it as unchallenged, as indeed it was, that the use of temporary staff was minimal before InterSet came on the scene and after Pershing took over. Mr. Hall, the expert for SAM, accepted that in the absence of any comparator for earlier or later years he could not say whether or not increased trading volumes affected the employment of temporary staff: he would like to have done more work on the subject. Mr. Mawrey Q.C. submitted:
"In the absence of any evidence to show that trading volumes did necessitate the employment of temporary staff, the Court is invited to conclude that this item is recoverable in full."
That submission puts the burden of proof the wrong way round. The boot is on the other foot. The burden is on Hedley's to prove the claim. No one has explained to me what these temporary staff were doing if they were not coping with the extraordinary flurry of business. What was it about InterSet that caused temporary staff to be taken on? There is no answer to that question and I would therefore disallow the claim in respect of temporary staff.
- Overtime
A claim for £11,145.76 is now put forward, though it does not appear in the Amended Counterclaim. The same arguments are made on both sides as in relation to temporary staff and for the same reasons I would not allow this claim.
- Accountancy: KPMG and PM & M:
A claim is made for £153,484.24, a reduction from the pleaded figure of £157,583.94. Both accountancy experts agree that invoices supporting the claimed figure have been paid and that normal auditing costs have been stripped out.
PM & M were Hedley's usual auditors and KPMG were put in by the FSA in February, 2000 to act both as auditors and as reporters to the FSA and as helpers to Hedley's to achieve compliance with FSA requirements. Both did some audit work and some work related to FSA requirements.
Mr. Mawrey Q.C. rightly submits that there is here an issue of causation.
SAM suggest that these accountancy costs were incurred partly because of troubles that arose with the Regulator before SAM came on the scene and partly because Hedley's did not have enough money to make the reserves that were required when the true figures were revealed by InterSet.
Hedley's did have trouble with the Regulator before SAM came on the scene. A letter dated 16 December, 1999 from the FSA records a meeting of 15-17 November, 1999 and a Direction of 30 November, 1999. Serious matters were raised, but they were not accountancy matters. They were more in the nature of paper work complaints. For example, customer agreements and custodian agreements had not been completed with customers and so on. To put those matters right, there was no need for accountants to be involved and there is no evidence that accountants were involved in putting them right.
I find that the figure now claimed, £153,484.24, would have been allowable under the counterclaim if not for the exclusion clauses.
- Mr. Crook
Mr. Crook was employed as a consultant when Hedley's lost faith in the ability of SAM to make InterSet work and he advised outsourcing to Pershings. It was suggested on behalf of SAM that a decision of His Honour Judge Toulmin Q.C. in Anglo Group plc v. Winther Brown & Co Ltd (2000) 72 Con L.R. 118 is authority for the proposition that it is not reasonable to employ a consultant for a replacement system when no consultant was employed for the first system. In closing submissions, Mr. Susman Q.C. conceded that Judge Toulmin did not decide that point but he nonetheless pressed the point. It seems to me to be perfectly reasonable if a firm finds itself in a mess to go to a consultant for help in getting out of the mess whether or not they employed a consultant to take the course that got them into the mess. I would allow Mr. Crook's fees of £7,292.40.
- Fines and penalties
Hedley's were fined £7,203.08 by the Inland Revenue for failing to hand over Stamp Duty collected and paid penalties to CREST totalling £17,929.56 for failing to complete transactions on time. The figure for CREST penalties is a figure for increased CREST penalties rather than the gross figure. There was some attempt to suggest that the increase in CREST penalties was due to the increase in business but I do not accept that. As for the Inland Revenue fines, Mr. Beardsall admitted that there were faults in Stamp Duty function and admitted delays in delivering the software to deliver statutory reports to the Revenue. I would have allowed the amounts claimed.
- Client write-offs
Mr. Oates has adjusted this figure downwards in the light of the evidence of the expert called by SAM so that the claim is now £60,199.75.
Customers were dissatisfied and many sums were written off to keep the customers. Commercial concerns do not write of money without good reason. I am satisfied by Mr. Oates' evidence about this revised figure.
- Bank charges and interest
I am satisfied as to this charge for £8,611.00.
- Contention Management
Hedley's brought in Contention Management as computer experts to try to resolve their differences with SAM. There is no evidence that their charges were excessive or that the hours worked were excessive, though counsel for SAM described their hourly rates as exorbitant. Some documents created by Contention Management were not disclosed, and after I had ordered a further and better list of documents during the trial, privilege was claimed for some documents. That claim for privilege supported a case made by SAM that the charges made by Contention Management were at least in part properly to be treated as costs in the action rather than damages.
Having conceded that point, Hedley's claim £71,473.27 for the services of Contention Management. I would allow that.
- Transfer to Pershings
Hedley's claim the cost of migration to Pershings in the sum of £29,414.66. I would allow that.
- Unproductive time.
Hedley's now claim sums that are very modest by comparison with the claims originally pleaded. The claim is for £27,929 for wasted staff time and £16,100 for partners' time.
I have stated the principles that I consider to be appropriate to the assessment of damages of this sort in Horace Holman v. Sherwood International Group (Unreported, 5 November, 2001). As I am only dealing with damages on an alternative basis, I will not repeat what I said there. I would only add that on 7 February, 2002, Dyson LJ refused permission to appeal against that judgment:[2002] EWCA Civ 170.
The claims made are supported by the evidence of Mr. Oates and calculated on a very conservative basis. I would allow those claims.
SAM's Claim
- This action was begun by SAM making a claim for £310,509.84 inclusive of VAT (as set out in an invoice attached to the Claim Form) plus interest. More detail was given in an Amended Reply and Defence to Counterclaim and in a schedule attached to that pleading. Evidence in support of the claim was given by Mr. Whitehouse as Managing Director of SAM. Mr. Whitehouse is a Chartered Accountant.
- The parties are agreed that the basic cost of supplying, installing and implementing InterSet was capped at £180,000 of which £116,000 represented the licence fee and £19,000 represented the hardware, equipment and third party licence costs and £45,000 represented installation costs. The parties agree (by paragraph 38 of the Amended Defence and Counterclaim and paragraph 70 of the Amended Reply and Defence to Counterclaim) that Hedley's have paid £183,893.27. Those payments include two instalments on the Maintenance contract of £6,788.60 each totalling £13,577.20. Subtracting the Maintenance payments from the sums paid, Hedley's have paid £170,216.07 of the agreed £180,000 leaving a balance of £9,783.93. There were some other payments for maintenance made at the end of the relationship when SAM refused to attend except for cash.
- Looking at the Schedule to the Amended Reply and Defence to Counterclaim, the first large item is a claim for £29,000 for the final payment of the licence fee. That sum was payable on completion, and as I have explained in paragraph 40 of this judgment, completion never occurred. That sum is therefore not payable.
- Accordingly, £29,000 should be deducted from the overall sum of £180,000. That deduction swamps the balance of £9,783.93 leaving nothing to be paid on the claim apart from items listed as "Recharge expenses" and "Time and materials". It is not challenged that there were attendances on the occasions for which charges are made. The dispute is as to whether payment should be made for those attendances. SAM have put forward in their favour the fact that they made very many attendances without making a charge, and there were very many indeed. I find it difficult to see any distinction between those attendances for which SAM made a charge and those for which they made no charge.
- It may be that some of the attendances by SAM at Hedley's were due to user error, though I have not been satisfied that there were any such, and if there were any the attendance may well have been due to inadequate training. Some of the attendances are alleged to have been for providing additional functionality, but any additional functionality was wasted because the system overall was unsatisfactory. Some of the attendances for which charges were made were made because the installation was more difficult than SAM had anticipated. Those charges are an unacceptable increase over the agreed £180,000. Some attendances were made to help to satisfy the Regulator represented by KPMG that the Reports could be made satisfactorily. Those attendances were made to remedy defects. The overwhelming majority of the attendances seem to have been made to correct what are called "bugs". Although SAM has sought to say that charges have been made for "on-site help" that help has been provided to remedy defects. SAM, like some others in the computer industry seem to be set in the mindset that when there is a "bug" the customer must pay for putting it right. Bugs in computer programmes are still inevitable, but they are defects and it is the supplier who has the responsibility for putting them right at the supplier's expense. It has also to be remembered that Hedley's had a Maintenance Contract for which they were charged. The evidence to support the claim for the additional charges comes mainly from Mr. Beardsall, Miss Orton and Mr. Whitehouse. I do not accept that those additional charges relate to any matters other than defects for which SAM was responsible or matters that should have been dealt with under the Maintenance Contract. Accordingly, I do not accept that any of the additional charges made by SAM are sustainable.
- Because of inconsistencies between the pleadings, the evidence, and submissions, I found it difficult to put a figure on the claim by SAM. In the draft judgment provided to counsel I put forward a calculation upon which I invited further argument:
Agreed sum for Licence, hardware and installation | £180,000 | |
Less: Last payment on Licence | £29,000 | |
| | £151,000 |
Maintenance | £6,788.60 | |
| £6,788.60 | |
| | £13,578 |
| | £164,578 |
Less paid: | £170,216 | |
Overpaid: | | £5,639 |
- In his closing speech, counsel for Hedley's set the figure of payments at £152,504.91 as opposed to the figure that I had taken from the pleadings. That figure would leave £12,074 to be paid.
- I therefore invited further argument.
- In response to my request for further argument, Mr. Bergin most helpfully detected that the discrepancies in the figures were explained mainly by some figures being inclusive of VAT and others exclusive of VAT. As a result of his explanation, counsel for both parties are agreed that it follows from my findings that on the claim SAM is entitled to £7,467 exclusive of VAT and £8,773,73 inclusive of VAT. I give judgment on the claim for the latter amount and dismiss the Counterclaim.
- I also award interest on the claim in the sum of £1,077.89 being interest at 8% for 12 months.
- I heard substantial arguments on costs. For the reasons given orally and recorded on the tape of the proceedings, I make no order as to costs.
- Permission to appeal was requested by counsel for SAM on three heads:
(a) The effectiveness of the exclusion clauses;
(b) The calculation of Temporary Staff costs;
(c) Costs.
I refuse permission to appeal on each head. I extend the time for applying to the Court of Appeal for Permission to Appeal until 24 January, 2003.