Ann Wright’s Case notes
Computer calamity
Case: Kingsway Hall Hotel v Red Sky (Hounslow).
Technology and Construction Court May 2010
In 2006 the Kingsway Hall Hotel paid £49,999 plus an annual licence fee of £7,528 for software vendor Red Sky’s Entirety package, which covered bookings, check-in and sales. Kingsway selected the system based on Red Sky’s recommendation.
The contract was based on Red Sky’s standard conditions, clause 10.1 of which excluded all terms relating to performance, quality and fitness for purpose, except as provided in clause 10.2, which said the programs would, in all material respects, provide the functions set out in the operating documents. But these operating documents were not provided before the contract was signed in October 2006.
Problems arose almost immediately. Issues included incorrect room availability and no-show reports, unallocated mini-bar charges and a main server crash. These faults had not been covered in the demonstrations or the training for the system.
Entirety could not cope with group bookings and the servers frequently froze. By mid-January 2007 Kingsway’s MD was forced to employ an additional reservations agent to cope with the deficiencies in the system.
Kingsway gave Red Sky until 31 March to rectify the defects. But on 26 March, relations deteriorated when Red Sky shut down the system for a reboot.
Kingsway’s solicitors wrote to Red Sky on 20 April, saying that Kingsway had lost confidence in Entirety almost from the start due to the problems. These were such that Entirety was unfit for its purpose and Kingsway was entitled to reject it and seek damages.
Kingsway claimed for loss of profit on lost room sales of between £222,000 and £311,000, plus £13,500 for an additional reservations manager, £36,333 for three additional shift leaders and £13,500 for wasted staff costs.
Red Sky said Kingsway had bought an off-the-shelf package after having ample opportunity to investigate it. Also, Kingsway had not given Red Sky any specific purpose or requirement before it had bought, had failed to report many of the problems to Red Sky and its losses were due to inadequate staff training.
The judge held that Red Sky had been aware of Kingsway’s requirements and that its conditions were based on the fact that the customer had all the information and documents to decide themselves as to the suitability of Entirety and not, as in this case, where Red Sky had recommended it.
Further, clause 10.2 only applied where the operating documents had been issued before the contract was signed. Here, Red Sky had not supplied those operating documents.
Under section 14 of the Sale of Goods Act 1979 it could be implied that Entirety would be fit for the purpose of increasing revenue and occupancy levels and allowing quicker check-in and check-out. Entirety did not meet that purpose, nor the standard a reasonable man would consider acceptable.
The court awarded Kingsway £50,000 in lost profits £24,000 in wasted expenditure and £38,000 for extra staff costs.
Analysis
Under section 14 of the Sale of Goods Act 1979, if the buyer has expressly told the seller, or implied the purpose for which they want to use the goods, there is an implication that the goods are fit for that purpose.
These implications can be overridden by including terms in the contract of sale. However, if one of the parties deals as a consumer or on the other’s standard terms of business, Section 3 of the Unfair Contract Terms Act requires that the test of reasonableness be applied.
In deciding reasonableness, consideration is given to the relative strength of the parties, any inducement to agree to the exclusion, whether the customer knew or ought to have known of the term and whether the goods were made to order.
