This post is part of the Bristows’ SnippITs series, which pulls together the key practical takeaways from recent court decisions for the tech sector and beyond.
The case of Lumley Baxter v Aviva highlights difficulties customers of technology contracts can face in bringing damages claims linked to the managing and fixing of defects, even where the system is found to be substantially below the required standard.
Despite establishing multiple breaches of an implied fitness-for-purpose obligation, Lumley Baxter recovered only nominal damages after failing to prove that the disruption caused recoverable financial loss.
Key Takeaways
For Customers:
Disruption does not automatically equal loss: evidence that staff spent several hundreds of hours dealing with system failures was insufficient, on its own, to prove a recoverable loss.
Evidence is key: While including deemed direct losses clauses can assist, recovery of losses is still dependent on the loss being suffered. Customers who find their workforce spending significant time resolving system issues should keep a clear audit trail, including: (i) how long each staff member is spending fixing issues rather than doing their day job/how much longer key tasks are taking; (ii) any overtime (and overtime payments); (iii) justification for any new hires; (iv) lost opportunities/leads due to diversion of staff time. All of these records should be kept as contemporaneously as possible, recognising that a customer’s first priority will generally be to work with its supplier to get things fixed and move on rather than preparing a potential claim.
For Suppliers:
Express quality terms: Ensure you draft clear terms governing the quality standards that the software and/or your services must meet (e.g. compliance with good industry practice, as defined in the contract) to avoid the risk of terms being implied. This. coupled with an express exclusion of implied terms, is likely to provide the clearest picture of the standards a supplier is required to meet.
Beware of broadly drafted exclusions: in standard Ts&Cs with little or no negotiation, exclusion clauses that are drafted too broadly (e.g. not allowing customer recompense even for wilful default or for the most obvious kinds of loss that may be suffered) may not withstand the reasonableness test.
Background
Aviva operated an online platform for independent financial advisors, including Lumley Baxter (a three-partner financial advisory firm), who used the platform to purchase and manage various financial products for its clients. In 2017, Aviva decided to upgrade the platform, which involved planned downtime of 6 days. However, once the upgraded platform went live it was beset by problems. The platform issues were widely reported in the financial press and took many months to fix, with significant effort from Lumley Baxter. In the aftermath, Aviva set up a voluntary compensation scheme for financial advisors affected but was unable to reach an agreement with Lumley Baxter.
Lumley Baxter therefore brought a claim for significant loss as a result of the platform issues totalling around £1.2m. In defence, Aviva argued that: (i) the contract included no term that required the platform to be fit for purpose; (ii) the losses were excluded by broad exclusions under the contract; and (iii) Lumley Baxter failed to establish causation and loss.
Rather surprisingly, the case was heard in the county court (it started life as a £200k claim) despite the value of the damages sought, the extensive documentary evidence and the involvement of multiple factual and expert witnesses.
Court’s findings
1. Implied term – fitness for purpose
The contract between the parties (on Aviva’s standard terms) contained no quality requirements for the platform. The court found there was an implied term that the platform would be reasonably fit for purpose, which was necessary for business efficacy of the contract. The court further found that various issues experienced with the platform amounted to breaches of this term.
2. Exclusions failed under UCTA
Aviva relied on a number of exclusion clauses in the contract, including the following:
“We do not accept responsibility and will not be liable for the inaccuracy or incompleteness of information or responses you or your Users receive through the Electronic Services where the accuracy or incompleteness arises out of or in connection with… machine or software malfunction…”
The court found that Aviva had fallen well short of proving that the exclusions satisfied the reasonableness test under UCTA, pointing to the inequality of the parties’ bargaining power, the fact that the platform was standard software wholly controlled by Aviva, that the exclusions were tucked away and not properly labelled and that they were drafted extremely widely such that they would appear to exclude liability even for deliberate or malicious conduct.
As such, the court found there were no valid exclusions applicable to Lumley Baxter’s claim.
3. No Financial Loss
Turning to issues of causation and quantification of Lumley Baxter’s losses, the court found that Lumley Baxter had to first prove on the balance of probabilities that it had sustained actual loss. If actual loss could be established, the court accepted that difficulties in qualifying this loss would not prevent recovery as the court could adopt a broad brush approach to quantification.
Lumley Baxter claimed it had suffered loss in the form of disruption to its business causing loss of revenue. The principal basis Lumley Baxter relied on to establish loss was the additional hours its staff had been required to work dealing with the platform issues. However, the court found that Lumley Baxter had failed to prove that it had suffered actual financial loss caused by Aviva’s breaches:
70% of its revenue came from annual management fees, charged at a fixed % of the total fund value. This revenue was not dependant on staff spending particular time on the account and was not impacted by the diversion of staff.
The remaining 30% of its revenue came from onboarding new clients but it had failed to produce reliable evidence of missed leads, reduced conversation rates, or other lost opportunities over the period of disruption.
Its expert was not able to show that a downturn in initial fee income over the relevant years was likely caused by platform disruption.
It did not pay staff overtime - so had not incurred additional costs for extra staff hours.
It failed to show that an additional staff hire was expenditure caused by the breaches, rather than being part of broader succession planning.
The court found that around 456 hours of staff time was wasted due to Aviva’s breaches (equating to 7 hours per week across 4 people at the height of the issues) and that “plainly, the ordinary running of the business was affected”. However, this level did not amount to significant disruption of Lumley Baxter’s business.
The court refused to follow the principle in Aerospace Publishing Ltd v Thames Water Utilities that would have allowed Lumley Baxter to be compensated for this lost time based on the inference that in a normal case staff time lost to breaches would have been spent generating income at least to the value of the cost of employing those staff. The court held this was not a normal case as lost staff time was not concentrated into a contained period but was spread over more than 2 years. This, combined with the way Lumley Baxter generated most of its revenue through fixed ongoing fees, meant the link between breach-related time and loss of revenue was far from straight-forward.
The court therefore awarded Lumley Baxter nominal damages of £1.
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