IT law

Assessing damages Horace Holman Group Ltd v Sherwood International Group Ltd (Lawtel 7 November 2001)The failure of a new computerised accounting system can have extensive financial consequences for the operation of any business.

The recent decision of Judge Bowsher QC in Horace Holman Group Ltd v Sherwood International Group Ltd provides practitioners with a helpful analysis both of the type of damages potentially available, and of the evidence needed to quantify those damages.

BackgroundHorace Holman Group is a firm of insurance brokers.

In 1992, the group decided to purchase an integrated computer system.

It needed to increase its efficiency in the three central areas of its operations - the quoting of premium rates to broke policies; the receipt, allocation and deduction of commission from premium payments, and the payment of claims under policies.

Horace Holman also required the integrated system to comply with the accounting requirements of Lloyd's of London.

The defendant to these proceedings was Sherwood International Group, a specialist in software and systems for the insurance industry.

Horace Holman selected Sherwood's SYMBAL software system.

SYMBAL comprised an accounts module and a contracts and claims module.

Under the contract, the accounts module should have been operational by April 1994 with the other module going live by November 1994.

By November 1995, no part of the system was working.

Horace Holman terminated the contract.

It eventually purchased a replacement accounting package called GPM.

That system went live in January 1998.

At a preliminary issues hearing, Sherwood attempted to exclude or limit its liability for Horace Holman's operational losses by relying on terms of the contract.

That attempt failed because those terms fell foul of the Unfair Contract Terms Act 1997.

The purpose of the hearing before Judge Bowsher was to assess damages.

Horace Holman's overall damages claim was based on the delay it suffered in receiving the financial benefits which SYMBAL should have brought in 1994, but which it only enjoyed with the successful roll-out of GPM in January 1998.

The following aspects of the judgment should be of particular interest to practitioners.

Heads of damageThe cost of upgrading employees' PCs - the claimant pleaded that its PCs required upgrading to access GPM and that those upgrading costs were recoverable.

Judge Bowsher rejected that claim for lack of evidence.

There was no evidence of the purchase date of Horace Holman's new PCs.Indeed, the purchase dates which Horace Holman pleaded did not match the dates for the implementation of GPM.

Nor was there any evidence of the purchase price paid.

There was no causal link between the need to update PCs and Sherwood's breach of contract.Lost opportunity to make audit savings - Horace Holman claimed that an operational accounting system would have reduced the amount it needed to spend on accountants' fees by approximately 66,000.

Judge Bowsher considered it difficult to assess and this claim.

This was because there had been a reduction in the level of audit fees for the relevant period in any event.

In addition, Horace Holman's accountancy spend would also have been reduced by the disposal of one of its group companies.

Judge Bowsher then found that the poor state of Horace Holman's accounts required extra work by the accountants.

He took their extra fees into account in quantifying the loss.

Judge Bowsher awarded 10,000 under this claim.Lost opportunity to make redundancies - Horace Holman's counsel contended that if SYMBAL had operated properly then staff could have been made redundant long before they were actually made redundant.

It followed that Horace Holman lost the chance to make extensive salary savings.

It initially claimed more than 2.2 million for that lost opportunity.Judge Bowsher rejected the defendant's expert's claim that he should assess the number of employees in the Horace Holman group as a whole at the time the redundancies were eventually made.

Sherwood contended that the financial savings resulting from those redundancies might have been offset by the employment of other employees elsewhere in the group, then the claim should be rejected.

Judge Bowsher was unimpressed.

No evidence had been adduced to support that contention.

It could only have succeeded if Sherwood could show that Horace Holman took on new employees at the time of the redundancies as a result of the installation of the GPM system.

It could not.Sherwood then argued that the redundancies were not caused by the installation of GPM following its breach of contract.

In fact, it was a reduction in business volumes that had forced Horace Holman to make staff redundant.

That argument failed.

Judge Bowsher found that business volumes were diminishing because of lower insurance policy premium rates.

To remain competitive, Horace Holman needed to turn over the same amount of business while reducing its operating costs.

It could only do this by making employees redundant once it was in a position to replace their function with the GPM system.Judge Bowsher then considered Horace Holman's claims in respect of salary payments to individuals in the broking, claims and accounts departments, and in one of its subsidiary companies.

Horace Holman argued that it would not have had to pay those salaries beyond the date of implementation of SYMBAL if that system had worked.

He accepted most of those claims and awarded some 1.9 million in respect of them.

However, he did reject claims relating to five employees in the broking department.

That was because Horace Holman had not adduced sufficient evidence.

Wasted management time - Horace Holman did not present any documentary evidence of time recorded in trying to implement SYMBAL, merely the reconstructions from memory of the various witnesses who had taken part in that attempt.

Nevertheless, Judge Bowsher was prepared to consider such evidence as there was.

Sherwood contended that Horace Holman was not entitled to recover for the time spent on SYMBAL by those employees who would not otherwise have been producing profit for the company.

Their salary was a fixed cost payable by Horace Holman in any event.Horace Holman countered that any wasted time represented time which could otherwise have been put to its benefit.

Judge Bowsher accepted Horace Holman's argument.

He was not prepared to distinguish between the wasted time spent on SYMBAL by income and by non-income producing employees.

Horace Holman had lost the chance to make profit for those periods when its back office staff were attempting to sort out SYMBAL instead of supplying the brokers with the information which they needed to earn income.Judge Bowsher then awarded Horace Holman 77,000 in respect of interest it had lost on premium payments, which it was making to insurers before it had even received those payments from the policy holders.

Once GPM was installed, Horace Holman was able to implement proper cash management systems so as to obtain interest on premium receipts.Points arisingThe wide-ranging ambit of the recovery in this case highlights the importance of retaining contemporaneous documentary evidence of losses following the failure of computer systems.

While the lack of such evidence is not necessarily fatal, it can certainly restrict the extent of any recovery.

Furthermore, claims for time wasted in attempting to implement failing systems might no longer be restricted to those who would otherwise be earning income.By Jonathan Cohen, Duane Morris, London