The recent Court of Appeal in GB Gas Holdings Limited v Accenture (UK) Limited and others has looked at the types of losses that are covered by the term direct loss in the context of a dispute over an IT system.
Accenture contracted with GB Gas Holdings, part of the Centrica Group, to provide a new IT system to support billing and customer services for Centrica. Implementation of the new IT system didn't go smoothly, with Centrica claiming that a number of failings with the system resulted in customer accounts being billed inaccurately and declining customer satisfaction. Centrica sued Accenture because it had, amongst other things, to compensate customers and pay increased gas distribution charges due to incorrect gas consumption data.
One of the central issues before the Court was whether the losses suffered by Centrica came within the scope of the exclusions of liability in the contract. The contract excluded liability for:
- Loss of profits or of contracts arising directly or indirectly;
- Loss of business or of revenues arising directly or indirectly; and
- Any losses or damages to the extent that they were indirect or consequential or punitive.
Direct loss has traditionally been held to be such loss that flows naturally from a breach in a contract. While indirect or consequential loss is loss which does not arise naturally from the breach, but is specific to the contract concerned and the contracting parties must have known that it might arise as a result of a breach.
Accenture argued that the claims for customer compensation, increased gas distribution charges and other charges that Centrica had to pay were consequential loss, and thus explicitly excluded by the terms of the contract.
The Court of Appeal agreed with the view of the High Court which was that, given the system failure and the context of the agreement, customer compensation was a direct loss, as Accenture had accepted that the purpose of the system was to improve customer satisfaction. Regarding the various charges, the Court of Appeal held that these were also direct losses - specifically in relation to the gas distribution charges it held that this was not a loss of revenue but a charge Centrica would not have had to pay but for the IT system failures.
The contract also stated that Accenture would only be liable if it failed to rectify a "fundamental default", which was defined as a fundamental breach of warranty "which causes a severe adverse effect on the British Gas Business". The Court of Appeal found that a fundamental breach of warranty could arise by aggregating a number of smaller individual breaches to produce a "severe adverse effect" for the purposes of constituting a fundamental default.
So what does this mean?
Firstly, it is apparent that compensation payments made by the injured party to customers can in principle be direct loss, even where the size and frequency of such payments are entirely at the discretion of the injured party.
Secondly, it is interesting to see how a string of relatively minor breaches can be aggregated to produce a single fundamental breach. This is especially important in relation to contracts for IT systems – where it can often be the case that a number of minor faults within in a system could result but only when looked at as a whole could they be viewed as causing serious problems across the business.
Lastly, it shows the importance of clear and precise drafting in terms of the liabilities to be included or excluded. If parties wish to exclude certain agreed types of loss, then a list of liabilities to be excluded should be explicitly stated in the contract.