Before starting the Judgment I should like to pay tribute to the Counsel and Solicitors in this case. A sensible attitude to preparation and presentation under the old rules enabled a complex case with over 30,000 documents estimated to last 28 days to be completed (including final submissions) in 16 days. I should like to pay a special tribute to the digest of documents largely prepared by Mr Phillips, Junior Counsel for SWW, which was used extensively and gratefully by both sides and by me.

This is an action by South West Water Services Ltd ("SWW") against International Computers Ltd ("ICL") which was started by a Writ and Statement of Claim issued on 11 April 1997. The Statement of Claim, which underwent a number of amendments, claimed in essence that ICL agreed, pursuant to a Turnkey agreement and a Project Management Agreement made between the parties on or about 15 September 1994, to deliver a computer system complying with the Statement of Requirements or displaying the required level of functionality to SWW not later than 31 October 1995 (later varied by agreement between the parties to 31 January 1996 for final acceptance at the end of March 1996) but failed to deliver the computer system as agreed or at all. The parties are agreed that the agreements were further varied at a meeting on 28 November 1995 but do not agree on the terms of the variation. SWW has claimed that on 4 March 1996 it was entitled to terminate the contract when ICL was unable to give an assurance that it would deliver the computer system in time for the 1997 or even the 1998 billing round. It claims substantial damages which (if necessary) will be the subject of a further hearing. SWW claims not only for the breach of contract but also for misrepresentation in that it alleges that SWW would never have entered into the contracts with ICL if it had not been assured that ICL had entered into back to back agreements with its sub-contractor Custima International. SWW claims that if it succeeds in misrepresentation it is not subject to any restrictions on damages which ICL may succeed in establishing under the terms of the contracts.

ICL's case at the end of the hearing is in essence that it agrees that it entered into the Turnkey Agreement and the Project Management Agreement on or about 15 September 1994. It also agrees that it did not in fact deliver a computer system complying with SWW's User Requirements Specification (URS) or displaying the required level of functionality. It also agrees that initially it was under an obligation to deliver the system by no later than 31 October 1995. It says that it was induced to enter into the contracts because SWW misrepresented the level of fit between the base CUSTIMA product and SWW's requirements which led ICL substantially to underestimate the amount of work and time which it would take to deliver the system. ICL says that the contracts were in any event varied at the meeting between the parties on 28th November 1995 and that it is not in breach of the contracts as varied. ICL no longer claims that SWW repudiated the varied contracts but says that under the terms of the new agreement, provision was made for either party to give notice that it did not want to take the project further at two defined stages in the new project timetable and that this could be done without penalty to either side. It says that SWW gave such notice on 4 March 1996. Finally it contends that if SWW is entitled to recover any damages those damages are limited under the terms of the Contracts. I shall deal in detail with the various legal issues after I have dealt with the facts.

The setting of price limits for water and sewerage charges of water companies is regulated by statute. Increase in prices is limited by a formula RPI+K (as set out in the licence) where the Retail Price Index represents inflation and K is a company specific number which limits the permitted annual increase in annual charges above the rate of inflation. The K Factor could be a minus figure although for the period 1995 – 1996 to 1999 – 2000 SWW's figure was 1.1. This was to be contrasted with 5.5 for the previous period from 1989 and 8.8 for the market plan for the later period. In assessing the K Factor in his 1994 Report, the Regulator emphasised that price increases over the next 10 years would be limited to what was necessary to meet statutory environmental obligations.

The report said that the companies had scope to reduce the operating cost of providing existing services by some 14% in real terms by 2004/5.

In discussing efficiency the Report concluded that the scope for lower costs as a result of increased efficiency would result from the ability of the relatively less efficient companies to catch up with the more efficient and from the ability of all companies, including those deemed more efficient, to improve as technology and management practices developed.

In 1994 SWW was around average for its Water Service and one of the two least efficient companies for sewerage.

An important aspect of efficiency is the level of customer service. This includes response to billing contacts, replies to written complaints, issuing bills for metered customers and speed of response to telephone contacts. The industry knew that there would be a further review in 1999 at which the limits of charges for the following 5 years would be set. It also knew, and I find, that the latest date on which changes bringing efficiency savings could be taken into account by OFWAT for the 1999 review was early 1997.

It is clear from the evidence of a number of SWW witnesses, and I find, that SWW was very aware of the need for greater efficiency in order to achieve a satisfactory level of profitability for the Company. In his written evidence, Mr Fraser, then the Managing Director of SWW, said that in 1994 he anticipated that OFWAT would drastically reduce SWW's K Factor in its 1994 review.

In oral evidence (D8/12) (References to the daily transcript are by day and page number), he said that the original K Factor was of the order of a 6½% increase and after the event it became virtually zero. In order to achieve the necessary savings, he anticipated that the 46 individuals employed on the existing IT system would no longer be needed once the ICL project had been completed. He also said that if the system had been introduced as planned the company would have been much more efficient and therefore would not have needed a greater K Factor. On the other hand if the savings were not made, the regulator would fix prices as if the savings which he thought ought to have been made, had in fact been made.

Mr Fraser said in his statement, and I accept, that in 1994 he took the decision that SWW should invest in a new customer information system (CIS) which would be customer based rather than property based. This would result in a significant improvement of service in an area where many people had second homes. It would enable the customer service department to communicate with the customer direct for the sending out of bills (rather than sending them to their home address in the SWW area) and enable SWW to deal quickly and effectively with customer queries. No doubt it was also hoped that substantial progress would be demonstrated to OFWAT by the time of the 1994 review although it was not anticipated that the new system would be completed by then.

The contract was awarded to DIGITAL Equipment Corporation (DIGITAL). Unfortunately it was not successful. The report of the Finance Director, Mr Douglas, to the SWW Board Meeting on 3 February 1994 made it clear that Digital was unable to complete the project on time and required an extension of time of 13½ months. This would have moved the date for live running of the new system from October 1995 to late 1996 at the earliest. As a result the contract was cancelled on 6 January 1994 and SWW's deposit of £700,000 was refunded on 18 January 1994.

The Finance Director's report also had a positive side. Work at SWW had already begun on a new User Requirement Specification (URS) which was to be completed by 31 January 1994. It had as its three goals:

a) Reduction of business risk;

b) Improved business efficiency;

c) Improved customer service.

Mr Douglas suggested that SWW now had an opportunity to update and re-appraise the URS and take account of new and improved technology.

Creative Computer Systems Ltd (CCSL), (later renamed as CCS and then CI), which was 30% owned by ICL, supplied to end users program products that could be used on or with ICL products (and those of other computer companies). On 20 May 1992 CCSL and ICL entered into a collaboration agreement under which CCSL would develop software to be marketed by ICL. Under the agreement CCSL would make all reasonable endeavours to ensure that the performance of the software on ICL products was appropriate to meet the requirements of end users as defined in the specification. CCSL would also make available the necessary support for the software and ongoing maintenance service. CCSL had developed a billing package for water companies known as Custima which it owned and supplied to the water industry. Close collaboration between CCSL and ICL was clearly essential if any project for SWW involving ICL hardware and Custima Software was to be successful.

ICL saw a SWW User Requirement Specification (URS) before Digital's contract had formally come to an end. On 29 December 1993 John Butler of ICL, a salesman in Mr Stocks' department, wrote to Mr Capal, Managing Director of CCSL, saying "please find enclosed a copy of the South West Water User Requirement Specification. I have read it and I think I can provide a very high level of fit. The concept of their customer information system matches pretty well the principles of CUSTIMA so although they want the demo tailoring to the URS I don't think the standard demo will need changing very much".

Mr Stocks, Senior Account Manager of ICL, was asked about this letter but was unable to give any satisfactory evidence about it. He was asked specifically whether the information about fit was derived from Mr Gallienne, who was in charge of the project for SWW but he was unable to give any reliable answer. Mr Butler did not give evidence.

In January 1994 there was a meeting between SWW, ICL and CCSL for the purpose of evaluating the level of fit of SWW's URS to the Custima billing system. The evaluation was described by Mr Hirst of SWW as a "quick and dirty evaluation". The answers were as follows:

Fit 66%, Partial Fit 14%, No fit 20%. The total complete and partial fit was 78%. It was emphasised that this was a non weighted analysis. The percentage figures relating to billing were as follows – Annual Billing was expressed to be 71% Fit and 29% No Fit and Bill Comments was 50% Fit and 50% No fit. For reasons which were never adequately explained to me, partial fit was equated with high level fit. I would not have expected partial fit requiring customised software to be equated with high level fit unless the object was to obtain an optimistic result.

In my view the problem started here. Although SWW never agreed with ICL or CCSL any specification other than in conformity with the URS, ICL proceeded on the basis that in the end it would be able to persuade SWW that it did not need to provide what was specified in the URS. In this it was abetted by CCSL which always regarded the URS as unrealistic and at no stage was able or prepared to commit the level of resources necessary to implement the URS in full. CCSL made this clear to ICL at a very early stage. ICL did not listen to CCSL. ICL thought that CCSL was merely being obstructive.

A review took place on 21 January 1994 at which Mr Gallienne, Mr Radmore (Customer Accounts Manager of SWW) and Mr Hirst (Business Analyst) were present for SWW. Mr Butler and Mr Norman Thomas (Client Sales Manager) were present for ICL and Mr Capal for CCSL. The timetable proposed was that the URS would be completed by 31 January 1994 (in fact completed by 4 February 1994), the contract would be awarded by mid April 1994 and the project would go live by October 1995.

Five companies were invited to tender – ICL, ACT and Praxis were based on CUSTIMA, Severn Water and ACT/STS were based on CAST 3.

The invitations to tender were sent out by letter dated 22 February 1994 in these terms:-

"You are invited to submit a fixed price tender for the supply of applications software together with the necessary hardware configuration, systems software, systems integration and appropriate services to meet the enclosed User Requirements Specification headed "CIS System for South West Water Services Ltd"".

The invitation to tender made it clear that the target date for the system to go live was 31 October 1995. The document also made it clear that the requirements of the URS must be satisfied but did say that if the base product would fulfil SWW's requirements, albeit by a different method than that stated in the URS, then that should be specified. To this end, and in order no doubt to avoid confusion, SWW required each paragraph or group of paragraphs to be responded to showing either category A, where the base product provided the functionality required in the URS, or B where the base product did not provide the functionality, how the base product was to be modified to meet the URS requirements. A further category C enabled tenderers to say how the base product could satisfy the URS requirements albeit by a different method to that stated in the URS.

By a letter dated 16 March 1994 Mr Gallienne confirmed that the date of receipt of all tenders had been extended to 5 April 1994 and enclosed SWW's draft Terms and Conditions of contract. The draft contract had remedies for breach of system warranty under which there was provision for remedying the breach and, in default, the company was required to reimburse SWW all sums paid under the contract from the date of execution of the contract up to and including the date of termination (Clause 4.2.1) and to indemnify SWW in respect of all its costs and expenses and damages directly incurred as a result of the breach but not loss of profit, goodwill or any type of special, indirect or consequential loss (Clause 4.2.2). CCSL's prices, provided for ICL's tender, made it clear that Bespoke Software Enhancement would be charged at a special rate of £285 per man day i.e. on a time and materials basis.

The figure of 1065 man days was communicated by ICL to Mr Gallienne on 28 March 1994 with a note saying that ICL believed that the number of man days could be reduced further. ICL's tender document of March 1994 makes it clear that it understood the distinction between what it considered was necessary to achieve SWW's required level of functionality and what was necessary to satisfy the precise requirements of the URS. Under the heading "Bespoke Requirements" the ICL proposal said as follows:

"It is estimated that to satisfy the exact requirements of the URS that 554 man weeks of work would be involved. ICL does not believe that this is either necessary or feasible within the stated timescales. ICL therefore recommends that enhancement work is undertaken over a phased period until June 1995."

These figures were translated into the formal tender of ICL of 1 April 1994 which reproduced the 1065 man days estimate and said that "ICL and CCSL have estimated that a total of 11 man years of effort would be required to fully satisfy the requirements of the URS as given by South West Water Services Ltd. This equates with 554 man weeks." 554 man weeks equates to 2770 man days.

The proposal gave a fixed price for Phase 1 which included project/risk management, billing, business process study, customer contact and customer correspondence. The cost for Phase 2 was stated to be dependent on the outcome of a business process study. Full CIS implementation was planned for June 1996. The proposal also included an offer that ICL would manage all aspects of the project with the assistance of a joint project team.

Under "Terms and Conditions" ICL noted that ICL and SWW had entered into a number of contracts over the years, including the recent Turnkey Project Contract for its subsidiary company Haul Waste Ltd in 1993. It also noted the terms and conditions which SWW had supplied and said that it would wish to use the terms previously agreed for Haul Waste as a basis and include additional Clauses such as those relating to software licensing conditions. The proposal included the conformance matrix which ICL said had been completed by its subcontractor CCSL. This showed totals of 72.3% total compliance and 5.9% partial compliance based on ICL's proposed solutions rather than SWW's URS.

On 14 April 1994 Mr Gallienne and others from SWW met with representatives of ICL including Mr Thomas and Mr Loughran (Sales Executive) at Buckerell Lodge Hotel near Exeter. The noter of the meeting makes it clear that ICL and SWW were aware that ICL's response did not in fact respond to the URS as requested. ICL explained that to deliver what was in the URS would require 4000 man days development of base Custima (up from the 2770 man days in the tender). Within the bid they assumed a reduced level of modification was needed and only included the 1065 man days arrived at by CCSL.

By a letter dated 18 April 1994 Mr Capal of CCSL, now called Creative Computer Systems (CCS) wrote to Mr Stocks to emphasise "it is imperative that ICL enters into no commitment whatsoever with SWW that commits CCS to anything without prior approval from CCS. The fact that this was not the case with Mid Kent Water has caused many problems …". This sensible warning was not heeded by ICL who thought that Mr Capal was merely being difficult.

On 21 and 26 April 1994 ICL made updated proposals in what was described as a clarification document. In the 26 April 1994 proposal ICL made it clear that ICL's Project Management for the project would be responsible for the delivery of contracted products and services to schedules agreed with SWW, but that SWW should appoint a Project Manager to be the primary contact between SWW and ICL. It recommended that the enhancements required by ICL should be the subject of a detailed evaluation and discussions between SWW, ICL and CCS.

It appears from an ACT letter dated 8 July 1994 that ACT was told by SWW on 29 April 1994 that it was the preferred supplier and was invited to participate in the subsequent evaluation process. Other documents seem to indicate that SWW's evaluation was not in fact yet complete.

Mr Gallienne met with Mr Thomas and Mr Stocks on 4 May 1994. In a letter to Mr Gallienne setting out the main points which emerged from the meeting, Mr Thomas acknowledged that "the billing component of CIS is absolutely vital to the success of the whole project." It is not clear from this meeting that ICL had been told that it was out of the running in the bidding process.

The meeting with ICL were part of SWW's evaluation of each of the tenders. In a report by the Finance Director, Mr Douglas, for the SWW Board Meeting on 12 May 1994, he made it clear that two proposals had already been rejected and it was necessary to reduce the number of tenders to two – one of the Custima tenders and the Severn Trent proposal. He said that ACT was the preferred Custima supplier and was the contractor with which SWW should evaluate Custima. He said that the timetable and the resources did not allow for more than one evaluation.

It is clear from Mr Thomas' hand written note of 12 May 1994 that ICL was very anxious to obtain the contract and no doubt was very disappointed when it was told that it had been eliminated.

In evidence Mr Thomas thought, after being taken through a number of documents, that it was at this time that he heard that ICL was out of the running and he was not taking the rejection lying down.

The detailed evaluation entitled "Bespoke Estimates for South West Water Requirements" was produced on 26 May 1994 after detailed work by SWW with ACT and CCSL. This showed a 44.7% fit for Custima and ACT and a 45.7% fit for the Severn Trent alternative. In evidence (D 7/23) Mr Hirst explained that the figure represented the percentage fit with the URS after weighting had been applied to the result of the evaluation. Translated into man days this showed that the ACT estimate (after consultation with CSS) was 2585 man days and that the total after the evaluation exercise was 5265 man days or 1053 man weeks. The covering letter from Mr Cater to Mr Stead of ACT in relation to ACT's bid said that "the figure is deceptively large for the reasons we know well: we have been obliged to cost in significant amounts of work which the client is unlikely to commission when we get to the contract stage." It is not at all clear that SWW was told by ACT of the detailed evaluation of fit. There are no documents which show that SWW did know. Mr Gallienne said that he did not know the figures which ACT and CI told him they wanted to remain confidential to them (D4/42). CCSL, with whom ICL would need to collaborate, clearly did know the level of fit. The technical evaluation of the proposals on 27 May 1994 made it clear that ACT was SWW's preferred option.

On 1 June 1994 ICL put forward a third revised proposal. In Paragraph 3.3 Enhancements it said "ICL understand South West Water Services Ltd's requirement to enhance the CUSTIMA product to meet its User Requirement Specification. ICL wish to work closely with South West Water and CCSL to deliver these enhancements according to an agreed specification. ICL seeks to assist in the development of the product by jointly resourcing this task". Most significant are the notes 1 and 4 on page 12 which read as follows "1 ICL understands that reporting enhancements will be undertaken by South West Water staff and have been evaluated as part of the Bespoke exercise … 4 based on information provided ICL understands that some 2000 man days are required for CUSTIMA enhancements. The cost for this will be submitted separately subject to confirmation of a commercial offer." It is not pleaded that the 2000 man days came from SWW although Mr Thomas said in his evidence that it did.

Mr Gallienne said in his evidence that the figure of 2000 man days did not come from SWW. He said in cross-examination (D14/17) that he assumed that ICL obtained the figure from CCS. Mr Gallienne said that SWW always took the view that ICL were the experts in terms of the development and implementation of the system. Mr Thomas' evidence was unsatisfactory in this and other respects. He said in evidence (D 10/24) that ICL had been stood down in mid April and were not asked to come back for 6 to 8 weeks. He was questioned about this and agreed that this answer was not correct. He suggested also that it was Mr Gallienne who told ICL to bid for 2000 man days. When he was pressed to say when he was given this figure he was unable to do so.

The proposal was sent under a covering letter from Mr Butler dated 3 June 1994. Mr Thomas said that he would have had some involvement with the letter. It is headed "ICL Best and Final Offer". It said "ICL understands that up to 2000 man days are budgeted for enhancements. This commercial offer equates to 528 man days that will be contributed by ICL." The letter concluded "this offer is subject to ICL's statement on Terms and Conditions as detailed in the Management Summary." In relation to Terms and Conditions in paragraph 6.2 of the Management Summary, ICL said that it noted SWW's draft Terms and Conditions and would wish to discuss these in more detail at the time of the contract.

At the SWW Board Meeting on 9 June 1994 the Board rejected the alternative Severn Trent approach and authorised Mr Fraser, the then Managing Director of SWW, to make the final decision. The meeting had had the benefit of an evaluation of the competing bids on 8 June 1994 prepared by Mr Douglas. Mr Douglas said that each of the shortlisted solutions would meet the functional requirements of the system either as indicated in the URS or, where alternative acceptable methods were already in place in the packages, these had been accepted. He said that CUSTIMA and Cast (Severn Trent alternative) achieved a very similar level of material fit of 50%. Agreed modifications lifted the level of fit to 90% which was the level set by Mr Fraser as being acceptable.

The report expressed concern at the quality of ICL staff and at their ability to focus on SWW's requirements. It listed ICL's experience in the water industry, its long term relationship with SWW and the fact that it was part owner of CCS as being among its strengths.

The SWW Board also had the results of a one hour presentation by ICL, STS and ACT to SWW's IT steering group on 8 June 1994.

On Friday 10 June 1994, Mr Ramsay, Director of Major Accounts of ICL, wrote to Mr Hill, Group Director of Finance of SWW (Doc 11533) to say that as part of the contract negotiation ICL would like to explore how ICL and SWW could assist each other in marketing the developed system in the UK and abroad and how each party could benefit from selling the product. On 13 June 1994 Mr Hill passed the letter to Mr Fraser (Doc 11546) who spoke to Mr Thomas of ICL.

Mr Thomas wrote to Mr Fraser on 15 June 1994 to clarify the points which they had discussed. The letter referred to the offer of ICL to share the rewards of selling the product to other customers. He set out ICL's special expertise to undertake the project. He made it clear that ICL and CCS had discussed future enhancements to Custima and agreed that ICL should take over total responsibility for Custima development. He also emphasised under Part 3 "specifically for South West Water, ICL is prepared to take the total risk and give you a fixed price contract for enhancements to be delivered in agreed timescales." Mr Thomas said in relation to price that:

"Your Project Team's first assessment of the Custima job to requirements was 73%. That is a very high percentage fit on which many other clients have given the go ahead to implement. Further enhancements to Custima can be developed in parallel with South West Water gaining the benefits of a new system being implemented earlier while minimising the risks." Mr Thomas ended the letter by saying that this Customer Information System (CIS) was as vital to ICL as it was to SWW. There was no reference in this letter to 2000 man days. It is surprising if the cost limit referable to 2000 man days had been imposed by SWW that Mr Thomas did not refer to this in his careful and comprehensive letter. It is of course, even more surprising, if this limit had been imposed by SWW, that ICL did not formally complain about it to SWW later when they knew that the correct figure was in the region of 3500 man days.

On 21 June 1994 Mr Ferguson of Kilkerran Business Consultants gave Mr Fraser an independent evaluation which was favourable to ICL. It produced two alternative approaches from which it was clear that the detail of the project had not been finally settled by SWW. On 22 June 1994 Mr Gallienne produced a briefing note from Mr Fraser and Mr Hill for their meeting with ICL on 24 June 1994. The note commented on the ICL bid and made the point that if it was to be accepted it would be necessary to carry out a separate joint evaluation which would jeopardise the October 1995 completion date. Mr Gallienne was clearly not enthusiastic about ICL's bid. In his draft agenda for the meeting he posed some searching questions. This does not support the suggestion that he wanted ICL's bid to succeed or that he proposed 2000 man days in order to help ICL to tender a fixed price which would be accepted. The Agenda note for the meeting has as its third point (after timetable and fixed price contract) the clarification of ICL's control over Custima development. The written evidence from SWW is that at the meeting at which Mr Stocks and Mr Thomas (and perhaps Mr Ramsay) were present for ICL, SWW sought and received assurances that ICL would enter into a back to back agreement with CCS.

After the meeting on 24 June 1994, Mr Thomas wrote on 25 June 1994 setting out what ICL was prepared to offer by way of co-operation and stressing that "a combination of ICL as the prime contractor, CCSL as the billing supplier and South West Water as the end user consultancy provider would form a very strong key in the customer systems market place." Under point 4a he confirmed that ICL was proposing a fixed price contract to deliver the activities contained in its tender response.

ICL included in the price 10 complex GUI screens to cover the customer service front end into Custima and a further 40 GUI screens in front of Custima (paragraph 4b). Mr Gallienne said in his evidence (D 4/29) that he had a discussion with Mr Stocks at about this time. He said that it was impossible to know how many screens would be required so they agreed that a budget of 50 would be included by ICL and if the number was different they would accommodate it by the change control mechanism set up under the contract. This they did in change control number 3 on 27 September 1994.

Mr Thomas in the letter of 25 June 1994 made further concessions on price. Again there was no reference in this letter to 2000 man days.

[PAGE OF TRANSCRIPT MISSING]

conformed with SWW's URS. There had been no discussions between ICL and CCS about CCS entering into a back to back agreement.

On 10 July 1994 Mr Morffew, who had been hired for the job by ICL as its Project Manager, reported on the two day review of the URS which had taken place at South West Water on 29 and 30 June 1994. The purpose of the review as to ascertain (at high level) whether URS items identified by ACT/CCS as requiring Custima enhancements could be developed using ICL's Middleware and to determine the number of man days identified against each modification. The report summarised the number of man days required to satisfy the requirements of the URS in full at 4145 man days for Custima and Middleware and 2389 man days as the final requirement after the deductions set out in the notes. After a further review on 15 July 1994, the figure of 4145 man days remained the same but the final total was revised upwards to 2484 man days – 1543 man days for Custima, 794 man days for Middleware and 147 man days for both. It is clear from the supporting documents that Mr Morffew was present throughout the review and that Mr Thomas was present for a substantial part of it.

In evidence Mr Morffew said (D 14/2) that he had been given a figure of 2000 man days to be attributed to Custima Enhancements and the purpose of the evaluation was to see whether any of the 2000 man days attributable to Custima Enhancements could be carried out in a simpler fashion using ICL Middleware. He said that ICL discounted to 1543 man days to minimise the risk against Custima resources. He went on to say that he was shown unofficially by Mr Gallienne documents which showed that in order to comply fully with the SWW URS about 3500 man days of effort would be required. It is clear from his evidence that the task which he carried out as ICL's Project Manager was to make his own evaluation on behalf of ICL of the number of man days required to complete this project.

In his evidence (D10/5) Mr Stocks said that he only had a vague recollection of what went on but that there was a target figure of 2000 man days which had been put into the tender and the object of the exercise was to reduce the size of the project to try to fit the 2000 man days on which the project had been estimated to the work which actually needed to be done. There is no suggestion in the documents or in the evidence of witnesses that this process was carried further. Mr Stocks' vague recollection is consistent with SWW's contention that ICL did indeed estimate on the basis of 2000 man days but that this estimate was made for their own internal purposes in order to obtain the contract and was not a figure given them by SWW.

It was clear that the project required the closest co-operation between ICL and CCS. On 2 August 1994 Miss Stanley sent what amounted to a letter of intent to CCS saying that ICL wished by exchange of correspondence to establish a conditional contract (to become unconditional upon the signing of the contract between ICL and SWW) for the performance by CCS as ICL's subcontractor of the services set out in the schedule of the draft contract between ICL and SWW upon identical conditions to those intended to be entered into between ICL and SWW. In cross-examination (D 9/14) Miss Stanley agreed that the contract which was in fact entered into with CCS for enhancements to base Custima was on a time and materials basis, see Schedule A, (which set out the basis for prices and charges for enhancements to Custima) whereas the contract with the customer was a fixed price contract. Schedule A did not set out any level of commitment by CCSL to work on the project to mirror that of ICL.

There was a discussion between CCS and ICL which was reported to Mr Gallienne on 8 August 1994. CCS said that they could not provide any staff until September 1994. They would want to be convinced that alternatives to SWW's URS would be viable. Mr Gallienne said that SWW did not intend to get into that situation (it had occurred during the ACT review). ICL assured Mr Gallienne that the situation would not occur and that ICL would manage the CCS staff effectively. They did not have any contractual basis on which to give this assurance. Mr Gallienne stressed in the note SWW's concern that both ICL and CCS would seek to limit the level of functionality which SWW expected.

As a result of continuing discussions, Mr Stocks notified Mr Gallienne of changes to the proposed contract. The first two involved an increase in the number of users having access to the system. This was the subject of the change control no.3 of 27 September 1994 which increased the number of users able to use the GUI customer dialogue interface from 50 to 250 at the front end at a cost of £162,103 together with an annual charge of £19,540. The third related to expenses. Mr Stocks referred to "ICL's standard terms and conditions as included in its proposal."

On 9 September 1994 Mr Capal wrote to Mr Thomas saying bluntly that the project was heading in the wrong direction. He was concerned that CCS had not received a project plan showing how CCS's participation was to fit in with the overall project. He warned that "it does appear that South West Water are still taking the tack of specifying the preferred method of working and expecting Custima to be re-engineered or fronted by an expensive front end that will interface with Custima. That approach will only negate the benefits of choosing a package solution and add needlessly to the cost, risk and duration of the development phase of the project. We should be jointly working to identify how Custima meets their business needs and highlighting the enhancements required for those needs not addressed by Custima. South West Water's implementation team need to be "persuaded" by their top management that they are off course. Can I rely on you to address the issues with the utmost urgency? Currently my view is that the project is already running late and has probably passed the point of no return for meeting their intention to go live in October 1995." This letter was followed up by a letter three days later on 12 September 1994 to Mr Stocks, copied to Mr Thomas and Mr Morffew, in which Mr Capal said that a live date by 31 October 1995 was not practicable even with only 1400 man days of work as required by Mr Morffew. He said that it would appear that CCS would be unable to make any effective start on the work until January 1995. These very sensible warnings do not appear to have been taken up by ICL prior to the signing of the contracts. Indeed ICL went ahead and signed the contracts disregarding the warnings which Mr Capal had given. The warnings were not passed on to SWW.

On 15 September 1994 SWW and ICL signed two contracts - the Turnkey Agreement and the Project Management and Training Agreement. In essence for a fixed price of £3,597,206, ICL agreed to deliver SWW's requirements as set out in the URS for live implementation by SWW by 31 October 1995. ICL accepts that this is the essential nature of the agreement although it contends that it was induced to enter into it by misrepresentations by SWW as to fit and that insofar as ICL has incurred any liability under the agreement it has successfully limited its liability by specific and enforceable provisions in the agreement.

The Turnkey Agreement contained a system warranty as follows "3.1 without prejudice to the warranties given in respect of individual components of the system pursuant to the Project Agreement and subject to the Environmental and Usage Assumptions the company (ICL) warrants that, for a period of ninety days from the date of acceptance the System will conform in all material respects to the statement of requirements..."

The statement of requirements is defined as "the User Requirement Specification issued with the invitation to tender." The second schedule sets out the Project Agreements (insofar as is material):

1. The Project Management and Training Agreement;

4. The CIS Contract, costs schedule in the form attached;

5. Letters from ICL (UK) Ltd to the customer dated 25 June 1994, 1 July 1994 and 6 July 1994 and a letter from the customer to ICL (UK) Ltd dated 30 June 1994.

Under Clause 2(1), the Project Management and Training Agreement provides that "the company (ICL) undertakes to provide such management, organisational and co-ordinating services as may be required to ensure the orderly implementation of the Project set out in the Project Initiation Agreement attached hereto on or before the completion date in accordance with the work schedule set out in the Fourth Schedule."

The Fourth Schedule provides that the work schedule is set out in Appendix B to the Project Initiation Document.

The Project Initiation Document was prepared by Mr Morffew on 2 August 1994. It sets out in paragraph 1.3 that the primary objective is to implement the Customer Information System (CIS) as described in the User Requirements Specification as responded to by the ICL proposal. "CIS is an integrated system that requires the full functionality described within the URS." It made it clear in the same paragraph that ICL agreed to provide the project and quality management services and the necessary business analysis and consultancy services to ensure that a functional requirement specification was produced to replace the existing URS.

ICL was to develop where necessary (no doubt through CCS) and supply applications software that met the functional requirement specification at the appropriate points in the project plan.

Under the heading Constraints (paragraph 1.5) the price of £3,597,206 was agreed. "a final implementation date of 31 October 1995 has been agreed by ICL with the SWW Project Board." This point was further emphasised in paragraph 3.7 "there is no time tolerance allowed at Project Plan level: CIS must be implemented by 31 October 1995." Under Paragraph 3.6 headed "Risks" there is a specific reference to the Custima modification programme as follows: "The effort required in the design and development of modifications to the CUSTIMA Billing package is currently estimated at approximately 2000 man days. A high level evaluation has been carried out which indicates that this may reduce to less than 1500 man days by switching functionality to "Middleware". It may reduce even further if some requirements can be catered for by existing CUSTIMA facilities.

It is clear that Mr Morffew was saying that ICL had carried out its own evaluation on which it relied. In its view it estimated the modifications to Custima to take approximately 2000 man days but that it might be possible to reduce this to 1500 man days by using ICL's own product, Middleware, and that this figure might be reduced still further is SWW was to agree that some of the requirements in the URS could be catered for by using existing Custima facilities. The PID (Project Initiation Document) also made it clear that ICL had to manage CCS to ensure that it did not delay the implementation date.

Under Paragraph 5.5 the Project Stages were set out as follows:

1. Project Initiation by 29 July 1994;

2. Analysis and Architecture by 31 October 1994;

3. Design and Environment by 30 December 1994;

4. Integration (Billed, Integrate and Test) by 30 September 1995.

5. Implementation 31 October 1995.

Stage 2 was to include the Business Process Study (subsequently agreed not needed to be completed), the Functional Requirements Specification (which would mirror and replace the URS), sequent Benchmarking and CIS Architecture.

In the Turnkey agreement Clause 17 provided that "this agreement and any documents expressly incorporated hereby constitute the sole and entire binding contract and supersede all other proposals, agreements, statements, representations or warranties made or between the parties relating to the subject matter hereof."

Clause 4 of the Turnkey agreement made provision for remedies for breach of system warranty. The clause included various exclusion clauses which I shall set out and deal with later in this judgment.

On 6 October 1995 Mr Thomas set out in an internal memorandum "key messages in support of ICL." These reflect his recollection of relevant events while the project was still alive and 3 1/2 years before he gave evidence before me. Under the heading "contingency, complexity and change control" he said:

- "Based on its complexity a lot more contingency should have remained in the CIS bid costings.

When asked about these matters (D 11/22 ff) Mr Thomas confirmed what he had said in the memorandum saying that he, Mr Ramsay, and Mr Stocks had been summoned to meet Mr Fraser, Mr Hill and Mr Gallienne during the summer. "It was a take it or leave it session. They were very hard negotiators but of course we took the decision to proceed as it was too good a long term opportunity to walk away from." He agreed that ICL had not conducted a full evaluation of the fit and that the project carried with it risks for ICL. It is noteworthy that in his "key messages" Mr Thomas did not complain either that ICL had relied on and/or been misled by SWW's estimate of fit or their limit of 2000 man days work on adapting base Custima.

Following on from this Paper Mr Collins of ICL wrote an internal Paper for the meeting with SWW on 11/13 October 1995. He confirmed that the contract was won against fierce competition. "In addition to giving a significant discount we also took a risk on the design/performance and amount of development resource required." ... "if 2000 man days of development had been agreed between ICL and SWW no such risk would have existed." He also acknowledged that there was no back to back agreement and that ICL did not properly compare the Billing and Debt Recovery requirements with those supplied within Custima. "In many ways SWW's requirements are completely at variance to the approach taken within Custima. This should have been addressed prior to contract." Again there is no criticism of SWW that it misled ICL as to the level of fit or the number of man days required to be worked under the contract. Mr Collins' note ended with an acknowledgement that "I am personally disappointed that I did not pick up these issues earlier."

On 27 September 1994 it was agreed that the Business Process Study was largely duplicating work which had been done by SWW in the URS and should be discontinued. In his minute of the Meeting Mr Gallienne said that he was sure that the key business processes had been identified and that there was sufficient expertise in the users and SWS project team to define the new processes and to integrate them into the Functional Requirements Specification (FRS).

It was the translation of the URS into the Functional Requirements Specification which occupied the next few months and it became increasingly apparent that SWW was insisting on the letter of the URS while ICL was saying that it could provide substantially what was required in ways which saved money but which departed from SWW's established business practices as set out in the URS.

By November 1994 it was clear that the end date of the project was in danger of slipping as a result of the detailed work on the FRS review. Although the first draft was completed by 31 October 1994 the review process continued into January 1995.

On 28 November 1994 Mr Fraser wrote to his opposite number Mr Ramsay expressing concern about the relationship between ICL and CCS which he described as "untenable". In his reply dated 13 December 1994 Mr Ramsay said that he did not believe this to be the case but he acknowledged that knowledge of Custima within ICL was not as detailed or as widespread as he would have liked.

One serious problem was exposed by Mr Cater of CCS in a letter to the ICL Ledger Department of 6 December 1994 which said as follows: "we have received your Purchase Order PBAD000775 whose wording seems to be a little curious:

The ICL invoice which referred to "CUSTIMA Modifications to SWW specifications - first 25% - 500 man days at ..." made it clear that it envisaged that CCS would carry out 2000 man days of work on the project presumably by October 1995.

The analysis on 9 January 1995 of requirements for Custima Enhancements made by Mr Cater of Custima International (CI), the new name of CCS, made gloomy reading. It amounted to 3450 man days.

On 17 January 1995 Mr Gallienne wrote to Mr Thomas of ICL reminding him that a key resource requirement in the delivery of the project was 2000 man days for Custima modifications and asked how it would be feasible for CI to deliver this amount of time, bearing in mind that in the resource plan which Mr Cater had supplied on 12 January 1995, he had already indicated that CI's available resources would be only in the order of 600 to 1000 man days during the whole of 1995.

On 18 January 1995 at a Project Review meeting at which Mr Gallienne, Mr Thomas and Mr Morffew were present, it was noted by Mr Morffew that the FRS for which approval was then due on 24 February 1995 was broadly in line with the URS "how to relate 3 1/2k to 2k", in other words how ICL (or CI) was to relate the estimated 3500 man days required to provide all the functionality in the URS with the 2000 man days which had been budgeted for by ICL to complete the project.

It is surprising if, as ICL claims, the 2000 man days was included in the bid at the insistence of Mr Gallienne of SWW, Mr Thomas was not complaining at this stage to SWW that ICL had been misled into making the bid on a false basis and now wished to re-negotiate the terms of the project.

On 24 January 1995 Mr Ramsay of ICL wrote to Mr Fraser to tell him that he was moving to other duties and was to be replaced by Mrs Gracie.

On 24 January 1995 approval of the FRS was signed by both parties. It therefore replaced the URS which was issued with the invitation to tender with minor changes. It went on

It is clear that the end date of October 1995 was in practice already impossible to achieve (although SWW was not made aware of this for some months) and that there were delays in CI's review of the FRS. In his letter dated 2 February 1995 Mr Cater was making it clear that in his view the delays in CI's review were caused by ICL. He also made it clear that CI was not committed even to 1000 man days in 1995 and that if CI was to approach this figure ICL would need to start releasing work soon.

On 9 February 1995 Mr Miller produced a report for ICL in the form of an audit on the project. The audit was initiated on 10 January 1995 at which time senior management of ICL was becoming concerned at delays in completing the second phase of the project. A shortened version of the Report was given to SWW in May 1995. In compiling his audit Mr Miller interviewed the key figures from ICL, Mr Gallienne from SWW and Mr Capal and Mr Cater from CI. In relation to the background he said at paragraph 2.1:

"During the bid phase ACT and CI spent considerable time analysing the SWW user requirement specification (URS) and arrived at a figure of 2000 man days to modify Custima to meet CI's view of SWW's business need (NB not to meet the URS, this is significant). For competitive reasons ICL GMC took this same 2000 man days into its bid but this time to meet the full URS."

Mr Thomas said in evidence that this was not correct and did not reflect the agreement which he had with Mr Gallienne. This part of the report was not shown to SWW but the part that was (page 3) said that "the contract was taken, and the project plan was based on a 2000 man days estimate for work which did not meet the customers specification." There is no suggestion here that it was the customer which suggested that the 2000 man days should be put into the contract. (In a letter to CI on 23 May 1995 Mr Morffew said in terms that "ICL estimated and negotiated 2000 man days as part of the contract with South West Water although it was recognised that CI estimated the work at nearer 4000 man days").

The Miller Report noted the gulf between the 3500 man days required and the 1000 man days which CI would struggle to deliver and said that there was a substantial risk of there being insufficient customer development resource available to deliver the essential elements of the project for a Phase 1 acceptance by the end of November 1995.

In relation to contractual issues, the report (page 16) confirmed that the contract was for a fixed price of £3,597,206 and went on "ICL are quite clearly committed to a firm fixed price to deliver the functionality defined in the URS."

The summary of issues and recommendations in the Miller Report sets out a catalogue of serious problems and makes recommendations to deal with them. Under paragraph 7.2 the report concluded "7.22 ICL do not have a back to back agreement with CI which protects them against key risk of costs, timescale and resources."

It suggests that "the Project Support Office may wish to investigate how we arrived at this situation without it apparently being identified during the business approval process."

In an internal memorandum of 6 February 1995 (wrongly dated 6 February 1994), Mr Kidd, Consultant at ICL (who did not give evidence), suggested that an alternative option for ICL would be for ICL to write a bespoke system which did not use Custima. He noted that "the SWW users see Custima as giving them a 50% fit. They are not committed to Custima and see it as ICL's solution". His note makes it clear that ICL had had problems in its relations with CCSL which needed to be solved as a top priority. His note also shows that a senior employee at ICL was told at some stage that SWW's view was that the overall fit was as low as 50%. There is no suggestion in the note that ICL was misled into tendering or concluding the contracts by SWW misrepresenting to ICL that the percentage fit was much higher.

SWW was also concerned with the progress of the project and following a meeting in Bracknell, Mr Gallienne wrote on 13 February 1995 complaining of a clear lack of confidence in ICL. SWW initiated its own outside report on the problems with the project. The Praxis report which they commissioned reached similar conclusions. Under paragraph 3.1.1 entitled "Enhancing Custima" the Report said as follows: "CI have estimated that 3000-3500 days effort is required to implement the changes needed in Custima to meet SWW requirements. CI have also stated that they could provide 600 to 1000 days effort in 1995. Unless action is taken the CIS will not be delivered in the required timescale and there is the risk that the project will fail to meet its business objective ..."

1. "CI should have the same form of contract with ICL as ICL have with SWW i.e. ICL have a fixed price contract with SWW therefore CI should have a fixed price contract with ICL".

There was a recognition in the note of SWW objectives for the Project Board Meeting on 27 February 1995 that there had been slippage because they were discussing a phased completion of the FRS in two stages, November 1995 and March 1996 for full implementation in April 1996. A key objective for SWW at the Project Board Meeting was:

"3 (obtain a commitment from ICL to the provision of man day resources required to deliver the custom modifications required even if it is greater than their budgeted figure of 2000 man days."

This note was reflected in the minutes of the Project Review Board of that date.

Mr Capal put his misgivings in writing to ICL in a letter dated 3 March 1995 in which he said that it was going to be impossible to deliver the requirements of SWW's FRS in the timescale and in the time available. He ended "I know I am being criticised (very unfairly in my opinion) for being negative. In fact I appear to be the only person who is prepared to speak the truth about the project. I was right in October and I am right now." He went on to suggest a way out of the problems:

(On 1 November 1995 ICL did indeed enter to an agreement with CI to purchase the source code for £200,000 on terms which protected CI's property rights.)

On 14 March 1995 Mr Cater wrote to Mr Morffew "the root cause of our collective difficulty is that ICL signed a contract with SWW without having first agreed with our company that our contribution to the total solution was i. technically feasible and ii. deliverable in the time frame agreed with SWW."

The real nature of the relationship between ICL and CI was made clear to SWW at a Checkpoint Review meeting on 15 March 1995. Mr Cater noted under future activities "when Bob Gallienne joined the meeting he pressed us hard on resources. I explained that we had always said a 1000 days in calendar 95 ... Bob then asked what our contract with ICL said we should be doing and I had to tell him that we had no contract. He was very put out at that stage. I said we would not be obstructive but we were faced with the fact that there were limited resources and we could only do what they would allow us to achieve."

In evidence Mr Morffew agreed that about the end of March it was clear that the 1995 date would not be met (D 13/17).

The next milestone was the Project Meeting of 25 April 1995. At that meeting Resource Plan Stage 4 Design and Development was tabled by ICL. It was agreed that the system would be delivered in four releases and two phases. Phase 1 would be over the period 15 September to 15 November 1995 in three phases and Phase 2 would be by 31 January 1996.

The new plan agreed a move to API (Application Program Interface) which had been developed by ICL. This significantly reduced the dependency on CI by ICL in the development of the project. A note by Mr Collins of ICL of 4 May 1995 estimated that CI's resource requirement was thereby reduced from 3500 man days to 1000 man days. (CI was only in fact committed to 520 man days of development work to 30 September 1995. In the event ICL only used 225 man days). This plan, if it had been achieved, would have delivered customer billing in phase 1A and B to be completed by 15 October 1995.

SWW was not made aware of the deteriorating position under the contract. On 8 June 1995 Mr Douglas reported to the SWW Board, on the basis of assurances from ICL, that the project was still on schedule with delivery still projected for October 1995.

Despite the new plan, CI still had concerns over the project. On 21 June 1995 Mr Capal wrote to Mr Gracie to complain that CI had not been given the work which it had been promised by ICL and was suffering a substantial paper loss on the project. Even at this stage, he said that it had only been given 142 man days of work, most of it very recently. Mr Capal said that substantial additional time was needed if the project was to be completed successfully and that "it is vital that the customer is told the truth immediately."

At the Project Review Meeting on 13 July 1995 SWW, in an effort to assist ICL to complete the project on time, offered to provide £650,000 of additional funding as a contribution towards ICL's over run of £2,000,000.

At the Project Review Meeting on 16 August 1995, at which Mr Cater was also present, SWW was made aware of some of the slippage in the timetable. SWW made it clear that it was not acceptable. At the Senior Review meeting which followed on 23 August 1995 Mr Fraser confirmed that a delivery date which allowed main billing in February 1996 was a key requirement for SWW. He explained that there was pressure on SWW to reduce its manpower by 46 in the customer services area by 30 June 1996. The extent of the slippage which was reported to SWW was that SWW's plan to have main billing in place for the February 1996 round was now in jeopardy.

Mr Cater was still trying to impress upon ICL the difficult position as seen from CI's perspective. On 30 August 1995 he wrote to Mr Collins. He told him that the existing timescale was unrealistic. In his view ICL was concealing from SWW the real extent of the slippage in the timetable. The target dates for delivery for CI's Software had already extended to 30 August 1996 and even that date could not be guaranteed.

"Somebody has to tell South West Water that the project cannot be delivered this year; they must start to plan for next year ..." "I am not willing to participate in another meeting with South West Water if we are expected to continue to support the ICL line that the project will be delivered."

In oral evidence (D 12/5) Mr Cater said that in his firm view SWW was being misled by ICL with regard to the progress of the project. Mr Morffew did not agree that SWW was being mislead (D 14/14). I do not accept this. Mr Morffew's evidence was unrealistic and self serving and manifestly incorrect. It is clear to me that Mr Cater was correct. CI's warnings had been treated by ICL as a nuisance. A realistic assessment by ICL to SWW would have made clear to SWW by the end of June 1995 at the latest that it was impossible for ICL to deliver the complete system by early 1996 even under the revised plan which required one year's resources from CI at the level of activity which they had previously said could be made available.

On 1 September 1995 Mr John Bartholomew who was a Senior Project Manager at ICL took over from Mr Morffew. He asked Mr Toland, an outside consultant, to conduct an audit of the project. In his written statement Mr Toland said "At this time John Bartholomew and I had effectively done away with all that happened to date. To my mind we were starting the project over again". His findings were described at the ICL workshop on 11/12 September 1995 as "pretty damning". It was noted that "ICL are facing up to the issue that the project cannot be delivered for the 1996 billing year. We seem to have managed to get them to accept that no date earlier than 1997 billing year is in any way feasible." The workshop set out 66 items of issues which contained within them serious complaints of ICL's own management of the project to date. They also included some 5 issues which relate to SWW.

The performance of ICL to this date was described in oral evidence both by Mr Bartholomew and Mr Toland as "a shambles." A note dated 28 September 1995 set out a summary of the areas of problems uncovered by Mr Toland and Mr Bartholomew. They are a damning indictment of ICL's lack of competence both in the substantive development of the project and in management terms. The items of high risk included FRS/SRS incompleteness and poor definition, CI Product Performance, CI ongoing commitment, third party contractual arrangements, very poor quality of development to date and performance of system to date.

The summary of key actions by the new team to date were set out in the 28 September 1995 note and included putting into place the normal tools of efficient management of a project which had been lacking in the previous 12 months since the contract was signed. The report gave a new estimate of October 1996 for acceptance trials by SWW. The proposals for the way forward involved entering into proper contractual arrangements with CI, reworking the SRS with SWW, agreeing a realistic phased delivery of the project with SWW and CI through to October 1996 and adopting an open and realistic management approach with SWW.

At a development review meeting between ICL and SWW on 2 October 1995, Mr Toland said that he intended to review the SRS to provide a clear definition to the developers of SWW's requirements and to enable a better mapping of the data and processing onto base Custima. He proposed to start with customer contact (workflow) work management and to hold a two day workshop in 2 to 3 weeks time. He said he was unwilling to commit to any timescales "other than an overall target of delivering a system to enable live billing on CIS in February's 1997. This is because he is still in the process of sizing the development requirements." "He does not realistically think he will be in a position to deliver a Customer Contact Module to enable the recording of customer contacts to commence in April 1996."

The real position was reported to SWW. On 10 October 1995 Mr Gallienne reported to Mr Fraser that "ICL are unequivocal in their acceptance of their responsibility for the delay, or rebaselining as they prefer to call it, of the project." The letter sets out ICL's formidable shortcomings including ICL's failure to tie their subcontractors CI into a back to back agreement. Mr Gallienne appears to agree with Mr Thomas' view for ICL that even if the delivery date moved to October 196 the ICL project would have been delivered in two years which was at least twice as fast as any other CIS system. Mr Gallienne said that "In terms of cost and delivery timetable our best option still sits with ICL as our external costs are all fixed and we are in a strong leverage position if we stay with the ICL project". He noted that rejection of ICL and subsequent development either internally or externally would substantially increase the timetable.

In Mr Collins of ICL's project paper for the meetings on 11-13 October 1995, to which I have already referred, he demonstrated that ICL recognised the importance of the project to SWW. "The business need for the customer information system (CIS) came from OFWAT's criticism of South West Waters (SWW) customer service record. To resolve this SWW decided to enable their customer service staff to handle all customer contact by providing easy to use menu driven systems."

The meeting between ICL and SWW from 11 to 13 October 1995 identified major errors in the way in which ICL had managed the project in the past. Mr Bartholomew and Mr Toland said that they had two basic options, either to start again or to fix all errors currently in place (see Mr Bagwell's SWW briefing note to Mr Gallienne dated 16 October 1995). It is a measure of ICL's failure that they decided that the first approach was the better in terms of cost and time and risk control. I am satisfied that SWW had received no benefit under the Project Management Agreement. This applied particularly to Billing in respect of which the management fee was to be paid. ICL proposed that there should be nine phases of the project but at that stage there was no detail as to what was to be delivered within the nine stages. The plan was to deliver billing by June 1996 and the remainder of the system by October 1996.

On 16 October 1995 there was a high level meeting between Mr David Berry, then Managing Director, ICL Enterprises, Mrs Gracie and Mr Thomas of ICL and Mr Fraser, Mr Douglas and Mr Gallienne of SWW. ICL now proposed to deliver Customer Contact, Correspondence, Image and Workflow to be operational from 1 April 1996 but said that they could not without further work give a date for Billing and Debt Recovery. SWW made it clear that this was wholly unsatisfactory and that SWW needed a detailed delivery timetable for the complete system with a detailed risk analysis supporting it on which to base a final decision. The meeting agreed a timetable by which the necessary information was to be provided on which a decision as to the way forward could be made. It required the parties to define and agree the scope of Customer Contact, Correspondence, Image and Workflow to be implemented from 1 April 1996 to be agreed by 20 October 1995. ICL was to provide a detailed risk analysis of its approach and a detailed timetable for billing and debt recovery by 10 November 1995. Finally the parties would meet again on 14 November 1995 to agree the way forward.

Mrs Gracie made a manuscript note of the meeting. She wrote "still looking at October '96 or talking major problems". When asked in evidence to confirm the note she said (D 14/44) "absolutely and that was well understood by us all."

On 20 October 1995 Mr Bartholomew produced a summary of the Project with nine cycles starting with Cycle 1, 25 September 1995 and ending with Cycle 9 billing iteration from 26 August 1996 to 6 October 1996 with two break points, the first after Cycle 2, 17 December 1995 when the project schedule was to be subject to formal checkpoint and ratification. The second checkpoint was after Cycle 4 to be completed by 10 March 1996. The work to be achieved was set out up to and including Cycle 4. Thereafter it was to be advised ("tba"). The proposal was sent by Mrs Gracie to Mr Gallienne on 20 October 1996 together with a risk analysis. The risk analysis set out four options. It identified option 4, "close down the project immediately" as the obvious choice although it acknowledged that in this event ICL would have to "take a knock" in this financial year's book which may be unacceptable."

It is noteworthy that ICL did accept that if ICL had terminated the contract at this stage it would have had to pay compensation to SWW.

It regarded the current re-worked option as the best option if ICL wished to continue with the project saying that it provided the best known fit and lowest overall risk (in relative terms) "albeit still High Risk."

At a meeting between Mr Gallienne and Mr Griffin of SWW and Mr Bartholomew on 9 November 1995 it was recorded under paragraph 4 Timescales "ICL are still not in a position to publish a detailed Project Plan but John Bartholomew did commit to the following dates, 4. 10/3/96 (end of Cycle ) - ICL will deliver a full system tested final version of Customer Contact, Workflow and Work Management ready for User Testing. 06/10/96 (end of Cycle 9) - ICL will deliver a fully system tested final version of Billing ready for User Testing."

SWW was also told that ICL had purchased the Custima source code and was planning to carry out a system audit during the week commencing 20 November 1995.

The agenda for the ICL/SWW meeting of 14 November 1995 set out the topics to be covered. Under "summary of overall plan" were Milestones - SRS completion March 1996, Customer Contact/Workflow March 1996 and Billing October 1996.

The outline plan from Mr Bartholomew was faxed at 19.40 on 13 November 1995. It was described as an outline plan to deliver "customer contact/workflow and billing to SWW for 1997." Otherwise the plan, as before, contained nine cycles and ended on 6 October 1996 with billing iteration to be advised.

The meeting took place on 14 November 1995. The key dates, according to Mr Gallienne's note, were SRS end March 1996 together with customer contact and workflow, and billing was to follow on 6 October 1996. Mrs Gracie said in her oral evidence that these were working dates that ICL was hoping to achieve. It was agreed that the target date for a firm proposal from ICL was 28 November 1995.

The parties agree that agreement as to the future conduct of the project was reached at the CIS Project Review Board Meeting held on 28 November 1995. The meeting had before it the reports of the Implementation Manager, Mr Griffin of SWW, the Project manager Mr Gallienne and the ICL Project Director Mr Bartholomew. Mr Griffin set out the timescale as he understood it - Phase 1 to the end of Cycle 4 by 10 March 1996 and Phase 2 consisting of the remainder of the system to be delivered, fully system tested, by 6 October 1996 (the end of Development Cycle 9). He said that the full roll out of Phase 1 would be planned to be completed by the end of July 1996. Phase 2 would be User and Performance tested during October and November 1996 and, provided it was accepted, it would be implemented as a "Big Bang" throughout the company in early December 1996.

In his position statement for the meeting, Mr Gallienne rehearsed the bones of ICL's implementation plan as he understood it with the two key Cycles 4 and 9. "Cycle 9 which is planned to deliver on 6/10/96 will provide the billing and debt recovery aspects of the system integrated with the cycle for delivery also "fit for purpose"."

Mr Bartholomew's position's statement for the meeting said that the "fitness for purpose" review had been completed. The second two day workshop was scheduled for 30 November 1995 at SWW. Under the heading "Plans" he said that the overall position was as described in detail at the SWW/ICL meeting on 14 November 1995. The outline plan assumptions remain the same. "Latter cycles by definition will therefore be liable to change".

There is an SWW note of a meeting by SWW with Mr Bartholomew on 27 November 1995 (D68/26927) that says that "SWW confidence was at an all time low since the review of 14 November." The note refers to discussions relating payments to cycles which has 25% of the fee entitlement of ICL only on receipt of billing in October 1996 and the final 10% on final acceptance in February 1997.

With these matters in mind I come to the minutes of the meeting held on 28 November 1995. The minutes make it clear that key areas of concern were superseded by the new base line plan. At paragraph 4 SWW's position is set out. Paragraph 4.3 is of crucial importance.

"The implementation plan consists of nine cycles of deliverables. The two key cycles are 4 and 9. Cycle 4 will provide customer contact (etc) interfaced with our existing CAS system "fit for purpose" i.e. unit, system and integration tested by 10 March 1996. Cycle 9 will provide billing and debt recovery aspects of the system integrated with Cycle 4 delivery also "fit for purpose" by 6 October 1996". How this was to be achieved in practice was not made clear. The Project Plan only provided detail to the end of Cycle 4. There was no Project Plan for Billing. ICL never did provide a Project Plan for the second stage of Billing.

It was agreed that ICL would refund £500k to SWW. The payment profile would be as follows:-

  £k

Paid to date 2697

less refund  500

On delivery of customer contact  500

On delivery in October 1996

of balance of full CIS  958

Following February 1997 billing  695

Total contract value (fixed price) 4350

The figure of £4,350,000 incorporated SWW's contribution of £650,000 to ICL's cost over run.

All four of those present at the meeting gave oral evidence about it. Mr Gallienne said (D5/33) that a revised process had been agreed linked to a payment profile which was the culmination of the rebaselining of the project started in September 1995. In re-examination (D 5/79) he made it clear that 6 October 1996 date had particular significance as the final date for the billing functionality "Q. As far as you understood it, were there any circumstances in which that 6 October 1996 date could be slipped? A. Not at that time, no"

Mr Gallienne was asked for his reaction if he had been told that the end date was open ended subject to what the metrics threw up and he replied "we wouldn't have accepted the proposal." Later, (D 6/5) he said that he believed that at the 28 November 1995 meeting the parties agreed to the 6 October 1996 target delivery date subject to some fine tuning as a result of the metrics, not a fundamental shift in the timetable.

In his evidence (D 6/57) Mr Douglas said that 6 October 1996 was the final or the agreed date for final delivery. He said that SWW was of the opinion that ICL had reviewed the project and had given SWW a valid 6 October 1996 end date. Certainly he said that he never expected that SWW was making an open ended agreement. The 6 October 1996 was the date to which SWW was prepared to extend the contract.

In his evidence (D 12/74-5) Mr Bartholomew largely supported Mr Gallienne and Mr Douglas' interpretation of events. He agreed that although he regarded 6 October 1996 as a target date for the completion of the contract, SWW did not agree to accept final delivery of the billing system at any date beyond 6 October 1996. He made it clear that he was well aware of the importance of having the new system in place for the February 1997 billing cycle. He accepted that if, for whatever reason, ICL subsequently discovered that it could not meet the 6 October 1996 delivery date, SWW would be entitled to terminate the contract if that was the option that it wished to pursue. He also made it clear that the purpose of the check point was not to review whether or not the contract should be terminated but how it should be delivered.

Mrs Gracie said (D 14/74 ff) that 6 October 1996 was the final target date and that it was ICL's best intent to deliver by that date. She also said that ICL did not intend that SWW should agree to any later date. She agreed (D 14/75) that she knew at the meeting that delivery beyond 6 October 1996 would frustrate the whole purpose of the contract from SWW's point of view.

SWW's case is that on 28 November 1995 it agreed not to terminate the contract then and there if ICL could offer final delivery by 6 October 1996, which was understood by ICL to be a date in time for the February 1997 billing. Although the two check points were primarily to be used to clarify the detail of the next stage of the work, they were also ratification points. SWW was not obliged to agree to any extension of time although there might be subsequent negotiations. Insofar as there was tolerance the parties had in mind plus or minus three months provided that the February 1997 billing date could be kept by SWW. SWW rejects the contention that at the meeting it agreed to an open ended contract subject to two reviews.

ICL contends that there was substantial mutual advantage in continuing with the project after November 1995 and that this was recognised by both sides. ICL says that the dates (including 6 October 1996) represented initial estimates of a very provisional kind of when the two milestones in the project, the delivery of customer contact – workflow part of the system at the end of Cycle 4 and the billing part of the system at the end of Cycle 9 would occur. In ICL's view the parties agreed that these dates should be regarded as "targets" for the completion of those cycles which the parties hoped to achieve but that ICL made no contractual commitment that they would be achieved. ICL's position changed considerably in the course of the hearing but its final position is that on 28 November 1995 SWW and ICL agreed in good faith to a process which would be subject to ratification at two check points at which SWW could refuse to ratify any future revised dates. The final contention of ICL after a number of changes is encapsulated at paragraph 109 of ICL's final submissions as follows:

I am satisfied that the completion of the contract in time for the February 1997 billing remained a term of the revised agreement. The crucial importance of this to SWW was known to all those present at the meeting. The Outline Project Plan was headed "Customer Contract/Workflow & Billing to SWW for 1997". It is clear that up to the time of the meeting, SWW had insisted in discussions based at the latest on the timescales of Phase 1 to the end of Cycle 4 by 10 March 1996 and Phase 2 the remainder of the system fully tested by 6 October 1996. I am satisfied that at that meeting whilst retaining those dates SWW agreed that ICL would not be in breach provided it delivered the remainder of the system in time for the 1997 billing season. This might allow one or two months slippage on 6 October 1996 date but no more. It would have been fundamentally inconsistent with the documents and the evidence of witnesses (apart perhaps from Mrs Gracie) to conclude that SWW was prepared to abandon not only the date which was the last date on which they could achieve the savings required for the next OFWAT review, the very reason for the contract, but also their rights under the contract in exchange for the hope that the contract might be completed at some future unspecified date but with no possibility of recovering the money which they had already paid to ICL. I regard this interpretation as implausible.

The position changed dramatically within a few days. As a result of the workshops starting on 30 November 1995, Mr Bartholomew issued an internal ICL "storm warning" on 5 December 1995. He made it clear that "the target for SWW undertaking Billing on the new CIS will not be achieved i.e. Feb 97. The next viable slot will be Nov 97." The best revised completion date was April 1997 and the worst revised date was August 1997.

Mr Gallienne was informed and in his recommendations for the way forward written between 15 and 18 December 1995 he said:

At the subsequent meeting between ICL and SWW on 14 December 1995, SWW management in a note which Mr Bartholomew described (D 13/1) as "broadly correct" stated that the date of August 1997 was not acceptable and that SWW had no confidence that ICL would even achieve this date. As a result the parties agreed that work would commence on delivering the most beneficial CIS billing functionality quicker. In the Minutes of the Meeting it is clear that the parties agreed to look into the possibility of a hybrid system but that this investigation would run alongside the proposed workshops and would not jeopardise the Customer Contact Workshops. The object of SWW was to see whether the Customer Contact could be brought back from July 1996 to March 1996 and therefore the completion date for the whole project could be brought back to October 1996.

A meeting took place at ICL's premises at Putney on 9 January 1996 at which ICL attempted to reassure SWW who had lost confidence in ICL. Mr Todd said that he could not give an end date because he needed to investigate further. It is clear that SWW did not regard this as acceptable and Mr Fraser asked Mr Todd as the new Chief Executive of ICL to make a detailed proposal to be underwritten by Mr Todd personally.

Mr Todd was extremely concerned about the position and sent a hand written note to Mrs Gracie asking the ICL in-house lawyer Mr Christou to investigate the legal position and in particular "what happened in the past … can we admit a mistake?"

On 16 January 1996 ICL produced the first draft of options available to ICL and SWW. It concluded that the option of full development using Custima Database was not achievable before the end of 1997. By 18 January 1998 the date for Contact/Workflow only had moved to mid 1996 and full development using Custima Database to the end of 1998. The risk that the system would not fit SWW's currently stated requirements even by that date was described as "high".

In the light of this information it is not surprising that Mr Todd wrote to Mr Fraser on 22 January 1996 suggesting that ICL should implement base Custima in its present form and that it could be delivered by the end of 1996. Alternatively he said that ICL would deliver Billing in a phased manner with a major part delivered by the end of June 1997 and the remainder by the end of 1998. The first phase would deliver approximately 65% of functionality. In response to the question of why ICL was moving away from its original approach to adapt Custima he said that "the architecture of Custima as it is currently written does not allow us to support your existing business practice while delivering acceptable performance."

Mr Todd ended by saying that he was aware that there were discussions continuing between ICL and SWW business teams.

Mr Fraser replied on 26 January 1996 pointing out that the alternative option was in fact what ICL had contracted to supply. He said that Mr Todd had overlooked the fact that SWW had not changed its requirements from those on which ICL made its bid and that SWW was certain that ICL did not have sufficient knowledge of the Custima product and had underestimated the work required. He gave ICL some hope that SWW might be flexible even on the February 1997 billing date provided more than 65% of the billing was delivered by June 1997. He proposed a plan which would allow both parties to evaluate the options and, if possible, agree a suitable solution.

The plan involved ICL producing a detailed programme by 5 February 1996 which would be subject to a formal assessment by SWW by 19 February 1996 and formal approval by 1 March 1996. The preparatory stages were to include a workshop on billing options (17 January), an analysis of the impact of the workshops (22 January), and development of a core billing SRS by 4 March 1996.

Mr Todd replied to Mr Fraser on 2 February 1996. He emphasised that ICL was continuing with the workshops in good faith although no decisions as to the way forward had yet been made. He proposed that the two teams should meet as soon as possible and agree the outline plan which Mr Fraser had attached to his letter. It seems clear from this letter that Mr Todd was acknowledging that ICL was prepared to continue with the workshops without any certainty that the project would ultimately continue.

On 5 February 1996 Mr Fraser wrote to Mr Todd agreeing to the way forward. He also said that he was leaving SWW on 29 February 1996.

At one stage ICL contended that in agreeing to the way forward SWW had waived its right to terminate the November 1995 agreement. This claim was rightly abandoned by ICL in the course of the hearing. It is clear that in agreeing to try to find a way forward SWW was not abandoning any of its existing rights.

The Project Review Board met on 16 February 1996 followed by a meeting of the Implementation Group on 19 February 1996. The note of the meeting of 16 February 1996 made it clear that a detailed programme was scheduled to be issued by ICL on 19 February 1996 to be considered and commented on by SWW on 1 March (a slippage of two weeks on Mr Fraser's timetable of 26 January 1996).

ICL's proposed programme was faxed to SWW on 20 February 1996. Mr Gallienne replied to Mr Bartholomew on 21 February 1996 complaining that the plan did not contain a full risk assessment, functionality and business benefit checks, timescales, resourcing and financial implications. He raised a number of detailed questions and noted that a number of key functions were missing. Mr Gallienne also noted that the SRS workshops were to start one month later than had been originally timetabled. He made it clear that until named ICL resources were allocated to a complete workshop schedule it was not possible for SWW to take a view as to the viability of the proposed plan. He asked for answers as a matter of urgency so that SWW could meet the deadline of providing a response by 1 March 1996.

In view of the continuing inability of ICL to keep to the proposed timetable, it is not surprising that Mr Gallienne wrote on 23 February 1996 in an internal memo that ICL's performance continued to deteriorate. He noted that the plan for acceptance on 4 March 1996 was incomplete and indicated further slippage in the timetable. He said that the timetables for delivery from ICL were completely unacceptable and that SWW's confidence in ICL's ability to deliver the project was extremely low. Mr Gallienne went on to say that in the past there had been no practical alternatives available to be considered but that Severn Trent Systems (STS) had now developed an alternative that would fit SWW's requirements. The note set out his understanding of the contractual position with ICL. He concluded by requesting that since the delivery dates were likely to move out still further and SWW needed a new system in mid 1997-8, the SWW Board should give approval to terminating the ICL contract on 4 March 1996. This recommendation was supported by Mr Douglas.

ICL made an updated Project Plan dated 1 March 1996 which was faxed to Mr Gallienne immediately before 4 March 1996 meeting. It made clear that the dates in the plan were target dates. The assessment of risk for the billing components remained medium/high. There was no longer any date for completion of the project. The new date for the first part of the billing (presumably to give 65% functionality) had moved from June 1997 to 6 December 1997. The Project Plan was still incomplete. Stage 4 had not yet even been planned. The whole question of finance was expressed to be subject to further discussion and ratification by both ICL and SWW. The updated Project Plan fell far short of the detailed project plan promised by ICL in the 28 November 1995 agreement and agreed at the Project Review Board meeting on 16 February 1996.

The meeting of 4 March 1996 was in two parts. The first part was a meeting at which Mr Gallienne, Mr Douglas, Mr Bartholomew, Mrs Gracie, Mr Loughran, and Mr Farbrother, Financial Controller of ICL were present. This was followed by a discussion between Mr Douglas and Mrs Gracie. According to Mrs Gracie's Minute (Page 758/9 of the Core Bundle), at the meeting, as part of the discussion on increased costs to both sides, Mrs Gracie asked whether it would be sensible to proceed beyond Phase 3. Mr Douglas said that if SWW had wanted 65% of functionality for Billing they would have asked for it.

Mr Bartholomew made it clear that the risk assessment represented ICL's assessment of its ability to deliver that stage of the project at all not an evaluation of the likelihood of delivering that stage of the project by the stated date. Mrs Gracie records Mr Douglas as ending this part of the meeting by saying (Paragraph 11 of the Note) that "in view of the lack of confidence in the timescale presented, which were already unacceptable, it was the intention of SWW to terminate the contract. This was prefaced by ` without prejudice to the contractual rights' ". This was confirmed by Mr Douglas in writing to ICL in a letter dated 5 March 1996.

Mrs Gracie went on to record her meeting with Mr Douglas alone. She said that SWW was expecting to recover the monies paid to ICL "and for restitution" SWW would return the hardware which ICL had supplied under the agreement.

Mr Douglas' note of the meeting of 4 March 1996 was consistent with Mrs Gracie's but amplified it. He noted under Point 5 that ICL was proposing to deliver Billing by 31 December 1997 but was no more than 70% confident that it would achieve it and refused to agree that the date should be a term of the revised contract. His note went on:

"6. Billing - (1) would deliver 65% of the functionality required by our URS… The remaining 35% functionality would be delivered in Billing (2) and it was obvious that ICL was not minded to work on that work further to deliver that and it would mean them incurring a loss on the project of circa £5m."

At the meeting between Mr Douglas and Mrs Gracie, Mr Douglas said that following ICL's fundamental breach he was expecting that all the monies which SWW had paid amounting to (£2.7m) would be refunded. In addition he said that SWW would expect to recover interest on the £2.7m, the budgeted cost of the savings on the project and the added cost of keeping the CIS team together. Mrs Gracie said she would contact Mr Douglas by 11 March 1996.

On 11 March 1996 Mrs Gracie wrote to SWW saying that ICL did not accept SWW's repudiatory breach of contract and that ICL's project team was presently on standby ready to continue and complete the agreed Customer Contact and Work Flow phases of the amended contract. These terms resulted, she said, from an agreement made by Mr Fraser and Mr Todd in their exchange of letters on 2 and 5 February 1996 which comprised a written amendment to the contract and set out not only the revised phased approach but also the revised timescales for delivery. She said ICL had made significant investments of money, time and effort in reliance on the amended agreement including the recruitment of new skills. The claim that this exchange of letters constituted such an agreement is not pursued by ICL.

Mrs Gracie's letter of 11 March 1996 was replied to on 29 March 1996 by Mr Matthews, Principal Legal Advisor of South West Water. In it he said that SWW had fulfilled its contractual obligations to the letter, and had put themselves out far beyond what the contract required of them to try to help ICL out of its many difficulties. The letter complained in paragraph 12 that the project at ICL's end was consistently under-resourced and that ICL repeatedly failed to deal with the problems caused to it by its initial failure to evaluate the project properly and, in spite of often repeated warnings, its inability to manage its principal sub-contractor. The letter said that there were so many other matters in respect of which ICL had failed in its obligations under the contract that to list them in a letter would serve no purpose.

The letter dated 29 March 1996 was replied to on 10 May 1996 by Mr Lacey, Legal Manager of ICL. In that letter he said that it was agreed as early as August 1995 that there would be a re-baselining of the project as confirmed in the report from Mr Gallienne to the Project Board Meeting of 28 November 1995 and that Mr Todd's letter of 2 February 1996 was part of that process. He said in paragraph 6 that dates were provided in good faith because ICL needed to understand what actions, if any, could be agreed to by South West Water to reduce the time taken in the specification process. The answer given by ICL to paragraph 12 of SWW's letter dated 29 March 1996 was that if there was any initial under-resourcing that would only have been in the initial stages of the project. So far as Custima (the principal subcontractor) was concerned it was suggested that SWW's comments overlooked the fact that initial project resource plans were based on information provided to ICL by South West Water but which subsequently proved to be a significant underestimate of the effort required.

On 28 January 1997 SWW wrote to ICL offering formally to return the hardware listed in the schedule to that letter.

It is clear that CI has been successful in selling its Custima system on a world-wise basis. By 9 June 1998 it was able to provide a client list which included countries as far apart as Australia and Mexico. It is not clear when or even whether Custima, suitably adapted, would have met the requirements of SWW's URS.

I am satisfied that, at the meeting on 4 March 1996, ICL made it clear finally that it was unable to complete the contract within any specified time let alone one that might be acceptable to SWW. SWW felt that it had no choice but to accept the situation and did so at the meeting.

There was the voluminous expert evidence in this case, none of which, in the event, needed to be put before the Court except for two documents setting out issues on which the experts were agreed or were not agreed. The only relevant matters come in the second of the two documents dated 8 January 1999 where the experts concluded:

1. The timescale planned for the selection and implementation of the new CIS project was very demanding.

2. Implementation of the standard CUSTIMA package would only have achieved compliance of the order of 40-45% of the total billing requirements of the URS.

3. The billing components of the new CIS system were considered to be "mission critical."

4. The detail of the URS document was nearly all about billing.

5. The experts were not aware of any package that was available at the time of the procurement of the new CIS that would have met the full requirements of the URS.

The dispute between the parties has resolved itself into the following issues:

1. Did SWW misrepresent to ICL the degree of fit between its requirements for a new system and the Custima software in its base form?

2. Did ICL misrepresent to SWW that its subcontract with CI was a "back to back contract"?.

3. a. Is either party liable for precontractual misrepresentations or is such relief excluded by clause 17.1 of the Turnkey Agreement?.

b. If so, what principles apply to Damages for Misrepresentation?

4. What was the effect of the agreement to "rebaseline" which was concluded on 28 November 1995? In particular, under the contract as varied by that agreement, did the delay which was anticipated in completion of the billing part of the system:

i Entitle SWW to terminate the contract when it did?

ii Amount to a repudiation of the contract by ICL and/or

iii Entitle SWW upon termination of the contract to sue ICL for damages in respect of non-delivery of the system. ICL accepts that any misrepresentations by SWW do not amount to a defence of repudiatory breach.

5. If ICL is liable in damages to SWW are those damages limited by the contract and, if so, to what extent? Does the Unfair Contract Terms Act 1977 apply?

6. Does SWW have a claim in restitution?

ICL makes it clear that its primary case is that any precontractual representations, statements or warranties were overtaken by express contractual provisions which the parties agreed set out conclusively their rights and obligations under the project.

ICL's case in summary is as follows:

SWW's case is that ICL made its own evaluation of fit on which it relied. It was not misled by SWW.

The factual position in relation to fit as known to ICL was as follows:

1. 29 December 1993 Mr Butler of ICL "I think we can provide a very high level of fit".

2. The "quick and dirty" evaluation in January 1994 between SWW, ICL and CCSL showed a fit of 66% and a partial fit of 14% for the whole project. These figures were expressed to be unweighted.

3. Evaluation by CCSL and ICL in March 1994 showed 72.6% category A (precise fit) and 7.81% category C (requirements met by other means) reduced later to 69.6% category A and 6.3% category C.

4. ICL's tender of 28 March 1994 showed 554 man weeks or 2770 man days would be needed to modify base Custima to conform to SWW's URS. 1065 man days was required to provide what was "necessary and feasible". The conformance matrix was 72.3% total compliance and 5.9% of partial compliance based on ICL's proposed solutions (not SWW's URS).

5. At the meeting between ICL and SWW at Buckerell Lodge on 14 April 1994 ICL said that 4000 man days development to Custima would be required to deliver SWW's URS.

6. 1 June 1994 ICL's Third Revised Proposal referred to "some 2000 days" as being required for Custima enhancements.

7. The covering letter to ICL's Third Revised Proposal dated 3 June 1994 said that "up to 2000 man days are budged for enhancements".

8. 15 June 1994 Mr Thomas wrote that SWW's first assessment of Custima requirements was 73% fit.

9. On 10 July 1994, after a two day review of the URS on 29 and 30 June 1994, Mr Morffew, the recently appointed Project Manager of ICL, reported that 4145 man days would be necessary to satisfy the requirements in SWW's URS in full and that the final requirement was 2389 man days of modifications after meeting some of SWW's requirements using ICL's own product Middleware. After a further review on 15 July 1994 the figure of 4145 man days remained the same but the final total was 2484 man days of which 1543 man days related to Custima, 794 man day related to Middleware and 147 man days to both.

10. At some date around this time I accept Mr Morffews evidence that he had been shown documents by Mr Gallienne which said that fully to comply with the URS would require about 3500 man days of effort in modifying Custima.

11. On 6 February 1995 Mr Kidd of ICL noted that SWW users saw Custima as giving a 50% fit to SWW's requirements.

12. Mr Miller's report for ICL of 9 February 1995, written after he had interviewed all the participants including Mr Gallienne and Mr Thomas, concluded that for competitive reasons ICL took the estimate of 2000 man days which had been arrived at to meet CI's view of SWW's business needs into its bid "but this time to meet the full URS".

13. Mr Collins, in an internal ICL memorandum for a meeting with SWW starting on 11 October 1995, admitted that ICL had taken a risk on the amount of development resource required and did not criticise SWW for misleading ICL either on the level of fit or the amount of man days which would in fact satisfy SWW's requirements.

I conclude that the most likely explanation is the one arrived at by Mr Miller. By the time the contracts were made ICL was well aware that the amount of work to meet SWW's precise requirements corresponded to 3500 man days or more. Although this was not translated into percentage fit in evidence before me, I suspect that this translated into the 50% fit of which Mr Kidd was aware in February 1995 or into a lower percentage. It may be that the 73% fit suggested by ICL would have corresponded to the percentage fit that ICL hoped to persuade SWW was correct for a modified URS along the lines that Custima International was suggesting. ICL, anxious to obtain the business, hoped that it could persuade SWW to accept as satisfying its requirements a level of modification which it hoped that CI was prepared to undertake. I have already indicated that I am not satisfied on the balance of probabilities that the 2000 man days figure came from Mr Gallienne. Even if it had done so, the figure was subject to the independent evaluation by Mr Morffew for ICL in his appraisal on 29/30 June 1994 and 15 July 1994. These reviews concluded that fully to conform with the URS of SWW 4145 man days of work on Custima would have been required.

Having considered the surrounding evidence I accept, on the balance of probabilities, that Mr Gallienne indicated to ICL that the level of fit between Custima and the URS was in the low 40 percentages (D 4/4).

Not only was ICL not mislead but ICL were in fact the experts whose duty it was to evaluate the project and use their skill, with the assistance from Custima International, in making proposals as to how the project was to be carried out. This was accepted by Mr Stocks when he gave evidence (D9/ 66.)

I reject the claim that SWW misrepresented the level of fit between base Custima and SWW's requirements and that ICL relied on the misrepresentation in entering into the contract. I am satisfied that ICL made its own evaluation of fit on which it relied. It was not mislead by SWW.

In its final submissions, ICL says that it intended there to be a "back to back agreement" between itself and CI but that one was not put in place. It was acknowledged by the Miller Report that "ICL failed to establish a back to back agreement which provides protection against some of the key risk areas of the project." Although ICL say that it was not of contractual effect it accepts that the statement in Mr Thomas' letter to SWW of 6 July 1994 was a representation. Mr Thomas said in the letter "CCSL will be ICL's subcontractor for South West Water's Customer Information project, with a fully documented back to back agreement in place between ICL and CCSL."

SWW claims that this amounted to an actionable misrepresentation by ICL on which it relied in entering into the contract. It also claimed that it was specifically referred to in the second schedule of the Turnkey Agreement and amounted to a contractual representation.

ICL claims that the statement and the language of the letter generally expressed sentiments of a general and aspirational kind and was not intended to have contractual effect. ICL says that it did intend to enter into a back to back agreement but failed by inadvertence to do so. Also ICL says that insofar as it reflected an intention it was a future intention. It claims that Mr Thomas was being entirely truthful. He thought at all times that a back to back agreement would be put in place. ICL contends that the reason why there was no back to back agreement was that Mr Stocks, whose primary responsibility it was to ensure that the back to back agreement was in place, was away at the relevant time because of back problems. ICL argues that it was not turned into a contractual term by the fact that it is referred to in the Second Schedule to the Turnkey Agreement because some of the letters referred to are marked "Subject to Contract". ICL further argues that if it had been intended to be a term of the contract one would have expected to have seen a specific term in the Turnkey Agreement or the Project Management Agreement which would have defined the obligation. If it fails in these contentions it argues that the term was not so important as to amount to a condition. Further, it is said that when SWW knew in February/March 1995 that there was no back to back agreement between ICL and CI, the parties sought and found alternative solutions and SWW affirmed the contract. If therefore SWW had had any right to rescind the contract ICL contends that SWW had plainly lost that right. It also argues specifically that any slippages of time after April 1995 were not caused or contributed to by any want of resources on the part of CI or ICL's inability contractually to compel CI to provide more resources.

In addition to Mr Thomas' letter of 6 July 1994 Mr Gallienne, Mr Hill and Mr Fraser all said in their written evidence that, before SWW wrote its letter of intent that ICL should be awarded the contract, SWW had received ICL's specific commitment to arrange a back to back agreement with CI. Mr Fraser said that on 24 June 1994 at the final pre-contract award Meeting with ICL he highlighted the problems which Digital had had with its subcontractor. ICL had informed SWW at the meeting that "as far as SWW was concerned ICL and CI was the same entity." Mr Fraser said in terms that if he had not received at that meeting the assurances which he sought (including that related to the back to back agreement) he would have awarded the contract to Severn Trent Systems despite the fact that STS was a competitor. I believe him.

The statements of ICL contained one present and one future representation. The future representation which ICL intended SWW to rely on, was that ICL would enter into a back to back agreement with CCSL. The present representation was that ICL had reason to believe that CCSL was prepared to enter into a back to back agreement with ICL or that because of ICL's relationship with CCSL it could require CCSL to enter into a back to back agreement with it. ICL had no basis for making this representation. The question had not been discussed with CCSL. All the indications were that CCSL was not prepared to enter into such a contract and ICL could not require it to do so. In his written evidence Mr Thomas said that the issue was discussed with Mr Capal at a meeting in April 1994. Even at that stage, before the extent of the commitment was known to CCSL, there was reluctance by CCSL to enter into such a contract. Mr Capal had written on 18 April 1994 to Mr Stocks to emphasise that it was imperative that ICL should not enter into any commitment with SWW without prior approval from CCS. The representation was a continuing one. It was not mere inadvertence on the part of ICL that the back to back agreement was not put in place. The lack of will or ability of ICL to put a back to back agreement in place, so evident from the documents, was confirmed by Mr Capal (D12/30/1).

ICL signed the contracts with SWW on 15 September 1994 despite the fact that CCSL wrote to ICL on 9 September 1994, a few days before the contract was signed, to say that in its view that the project was heading in the wrong direction. This was followed up by the letter of 12 September 1994 from Mr Capal saying that even the reduced figure of 1400 man days was not possible within the timescales specified in the contract. It must have been obvious to ICL by the time that it signed the contract with SWW that there was no prospect of CCSL signing a back to back agreement. ICL would have known that if CCSL had read the contract between itself and SWW and been presented with a back to back agreement on the same terms it would have responded that it was impossible for it to commit resources to that volume of work and certainly not in the timescale that was being proposed. I am also satisfied that Mr Cater would have exposed the discrepancy between the number of man days needed to carry out the URS and the number of man days of modifications needed to achieve a reasonable level of functionality (which is all that CCSL was ever prepared to provide). I bear in mind also that the contractual arrangement which was put in place between ICL and CCSL at the time of ICL's original tender for CCSL, was on a time and materials basis to deliver enhancements to Custima at the rate of £285 per man day of effort but did not oblige CCSL to deliver any fixed level of resources within any fixed timetable to an overall fixed price. If CCSL had been asked to agree to such an agreement themselves, they would have refused (as Mr Capal confirmed in evidence D 12/31).

It is clear that SWW relied on the misrepresentation. Mr Fraser said (D 8/30), "I want a seamless relationship between you and Custima" and at D 8/59 where he said "It was a major issue in terms of progressing the proposed system that we had such a back to back contract. I think had we not had that assurance then it would have raised some concern about how the contract would have proceeded so it was very important to us." The SWW Board delegated to Mr Fraser the final decision on which party should be awarded the contract. Mr Fraser made it clear that before awarding the contract to ICL (against the opinion of senior colleagues) he wanted assurances that there was a seamless relationship between CCSL and ICL. Mr Hill said in oral evidence (D 8/57) that he obtained assurances from Mr Douglas and Mr Gallienne that in the final negotiation it had been confirmed by ICL that a back to back agreement was in place.

The representation that ICL would enter into a back to back agreement with CI was a statement of fact and intention rather than hope and aspiration. I accept SWW's evidence that it was a representation on which SWW relied and that it was crucial to ICL's obtaining the contract. Without the back to back agreement that SWW thought ICL was entering into, SWW was wholly unprotected in relation to the progress of the contract since CI, as ICL's subcontractor, was responsible for making the substantial changes to base Custima which were required for the URS. In the event, the failure of ICL to enter into a back to back agreement was a fundamental reason for the failure of the project.

At one stage ICL sought to argue that there was no misrepresentation because ICL intended to enter into a back to back agreement with CI but in the event failed to do so. I am not satisfied in any event that ICL did fail to enter into a back to back agreement with CI through inadvertence. Even if it did, that is not a sufficient answer since Mr Thomas made his representation on behalf of his employers, ICL, and it was a continuing representation which in the event ICL failed to carry out.

It is said by ICL that Mr Gallienne knew by February/March 1995 that there was no back to back agreement and, in agreeing to new arrangements for the completion of the contract he waived any breach. I am satisfied that Mr Gallienne, and therefore SWW, knew at the latest at the meeting between SWW, ICL and CI on 15 March 1995 that there was no back to back agreement between ICL and CI.

The new plan involving a move to API (Application Program Interfaces) still required according to Mr Collins of ICL's note of 4 May 1995, about 1000 man hours of CI's time. The change was a matter of necessity to keep alive the hope that the project could be completed on time. Both Mr Capal and Mr Cater wrote letters to ICL on 21 June 1995 and 30 August 1995 saying that the timescale was unrealistic. I have already found that SWW was being misled by ICL in its assurances that the project could still be completed on time. By 21 June 1995 CI had only been given 142 days of work. Even on the basis of the man days that CI had been able to offer for 1995, the October 1996 completion date would have been in jeopardy.

There is no suggestion that the plans which were being revised after 1st September 1995 would have eliminated or reduced further the need to modify base Custima and would therefore have reduced or eliminated the need for participation of CI reinforced by a back to back agreement. Furthermore in relation to Billing, which was the crucial part of the project from SWW's point of view, there was no guarantee that the project could ever have been completed successfully. There was a moderate to high risk that it would never be completed.

In these circumstances I reject the claim by ICL that any slippages of time after April 1995 were not caused or contributed to by lack of availability of resources from CI supported by an enforceable back to back agreement.

In any event it is plain that SWW would not have entered into the contracts with ICL if it had not thought that ICL and CI had a back to back agreement. It was also a contractual representation referred to in the second schedule of the Turnkey Agreement. I reject ICL's submission that this was not the case. Subject to any enforceable contractual limitation of liability the consequences flow from that event. The change from a requirement of 3500 man days from CI to around 1000 man days (or perhaps had the project gone ahead to completion substantially more) was not sufficient to break the chain of causation since, on the balance of probabilities, CI would have been unable to achieve the necessary modifications of base Custima within the timescale of what actually happened to bring the revised project to successful completion by October/December 1996.

I am satisfied that ICL did make the representation that it would enter into a back to back agreement with CI. It did so recklessly without any basis for believing that either, at the time or subsequently, it would be in a position to do so. It was a continuing representation. ICL failed to enter into a back to back agreement with CSSL. SWW relied on such representation as a contractual term. Without such assurances SWW would never have entered into the contracts with ICL.

On the basis of my findings, this issue only applies to the "Back to Back Agreement".

Section 2.1 of the Misrepresentation Act 1967 provides as follows:

"where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the representation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently unless he proves that he had reasonable grounds to believe and did believe up to the time when the contract was made that the facts represented were true."

In Chitty on Contracts 27th Edition at page 6-013 it says that "with regard to a statement of intention this may be looked upon as a misrepresentation of existing fact if at the time when it was made there was not the will or the ability to put the intention into effect."

The issue must be considered together with the issue that the provisions of the Act were excluded by Clause 17 of the Turnkey Agreement which provided as follows: "this agreement and any documents expressly incorporated hereby constitute the sole and entire binding contract and supersede all other proposals, agreements, statements, representations or warranties made by or between the parties relating to the subject matter hereof."

The validity of any exclusion clauses is governed by Section 3 of the Misrepresentation Act 1967 which provides that "if a contract contains a term which would exclude or restrict –

The Section was considered by Jacob J in Thomas Witter v. TBP Industries [1996] 2 All ER 576. At page 598 he said:

"The 1967 Act calls for consideration of the term as such. And it refers to "any liability" and "any misrepresentation". It does not call for consideration of the term so far as it applies to the misrepresentation in question or the kind of misrepresentation in question. The term is not severable: it is either reasonable as a whole or it is not. So one must consider its every potential effect. The clause does not distinguish between fraudulent, negligent or innocent misrepresentation. If it excludes liability for one kind of misrepresentation it excludes liability for all. I cannot think that it is reasonable to exclude liability for fraudulent misrepresentation – indeed Mr Kaye accepted that it would not work in the case of fraud. It may well be, with a different clause, reasonable to exclude liability for innocent misrepresentation or even negligent misrepresentation. But since the width of this clause is too great I would have held that it failed the requirement of reasonableness and so was of no effect."

I bear in mind that the Section 1 of the UCTA 1977 requires those claiming that the terms satisfy the requirement of reasonableness to show that it does. I accept Mr Tomlinson's submission that Clause 17 has to be considered as a whole and that it purports to exclude liability for fraudulent misrepresentations made prior to contract and therefore was not a fair and reasonable clause to be included in the contract having regard to the circumstances which were or ought reasonably to have been known to the parties or to have been in their contemplation when the contract was concluded. I conclude therefore that ICL has failed to satisfy the requirements of reasonableness for similar reasons to those given by Jacob J in Thomas Witter v. TBP Industries. I should in any event have regarded the clause on its own wording as failing the test of reasonableness in excluding liability for a misrepresentation by ICL of a fundamental matter solely within ICL's knowledge which induced SWW to enter into the contracts.

The relevant principles are summarised in the speech of Lord Browne-Wilkinson in Smiths New Court v. Vickers [ [1997] AC 254 at 263; [1996] for All ER 769 at 778].

1. The defendant is bound to make reparation for all the damage directly flowing from the transaction.

2. Although such damage need not have been foreseeable it must have been directly caused by the transaction.

3. In assessing such damage the plaintiff is entitled to recover by way of damages the full price paid by him but he must give credit for any benefit which he has received as a result of the transaction.

4. In addition the plaintiff is entitled to recover for consequential losses caused by the transaction.

5. The plaintiff must take all reasonable steps to mitigate the loss once he has discovered the fraud.

These are matters to be considered when the hearing is resumed to deal with damages.

The correct test to apply in order to decide whether delay in fulfilling obligations under a contract is so serious as to entitle the aggrieved party to rescind is whether the delay was such as to frustrate the commercial purpose of the venture - see Universal Cargo Carriers Corporation v. Citati [1957] 2QB401.

Devlin J said at page 430 "when the delay becomes so prolonged that the breach assumes a character so grave as to go to the root of the contract, the aggrieved party is entitled to rescind. What is the yardstick by which this length of delay is to be measured? Those considered in the arbitration can be reduced to two: first the conception of a reasonable time, and secondly such delay as would frustrate the charter party. The arbitrator it is clear, preferred the first. But in my opinion the second has been settled as the correct one by a long line of authorities." ICL say that what is required is a clear and absolute refusal to perform - see The Hermosa [1982] 1. Lloyds Rep 570, 572 and in order to amount to a repudiation which entitles the other party to terminate the contract before the due date for performance, the threatened non-performance must have the effect of depriving the other party of "substantially the whole benefit which it was the intention of the parties that he should obtain from the primary obligation of the parties under the contract then remaining to be performed" - see The Afovos [1983] 1 WLR155, 203 (HL).

In this case I have found as a fact that the completion of the contract in time for the 1997 billing season remained a term of the revised November 1995 agreement. I have also found that after the workshop starting on 30 November 1995, it was clear to ICL that the first viable completion date was April to August 1997. Thereafter the parties looked for means of bringing the completion date of the project back to October 1996. By 18 January 1996 ICL understood that the realistic date for full development of the system had moved back to the end of 1998 and that there was a high risk that the system could not be developed to meet SWW's requirements even by that date.

ICL agreed to develop a plan which would be subject to a formal assessment by 19 February 1996 and a formal approval by 1 March 1996. The proposal which was faxed to SWW on 20 February 1996 did not contain a full risk assessment, benefit checks, timescales, resourcing and financial implications. A number of key functions were missing. The final ICL plan faxed through for the meeting on 4 March 1996 was incomplete and made it clear that the dates which were included were no more than target dates and that there was no date for the completion of the project.

I am satisfied that the delay had assumed a character which was so grave as to go to the root of the contract which entitled SWW to rescind when they did. I am also clear that there was on the part of ICL an absolute refusal to perform the contract within any reasonable time consistent with SWWs known objectives for billing because ICL were unable to do so. I am also satisfied that SWW had been deprived of substantially the whole benefit which it was the intention of the parties that they would obtain from the contract.

The defendants contend that the dates for delivery of the two parts of the system on 10 March 1996 and 6 October 1996 represented initial estimates (of a very provisional kind) of when two milestones in the project (the delivery of the customer contact/workflow part of the system at the end of Cycle 4 and of the billing part of the system at the end of Cycle 9) would occur and secondly these dates should be regarded as target dates. The only commitment ICL say that they had was to follow the methodology in the plan. At paragraph 109 of its final submission ICL said:

"ICL accepts that on a proper interpretation of the November agreement if at one of the check point reviews the metrics derived from the experience of the previous cycles when fed into the timetables caused one or both of the estimated delivery dates to move out to an extent that was unacceptable to SWW, then SWW could refuse to ratify the revised project schedule and - if no alternative way forward could be agreed - could elect instead not to ratify the project". ICL goes on to contend that although SWW was entitled to terminate the project in December 1995 it did not do so until 4 March 1996 and therefore lost its right to do so because ICL incurred expense in the belief that SWW had waived its right to termination.

It is not correct on the facts to say that ICL incurred expense in the belief that SWW had waived its right to terminate the project in December 1995. Once it became clear to both sides by 15 December 1995 that the project was in serious difficulties, the parties agreed to look at alternatives to salvage the project including the possibility that the completion dates of March and October 1996 could be retained. It was agreed that the workshops would continue while those investigations were being carried out. It was increasingly clear to both sides that it would not be possible to achieve these dates. It was for this reason that both sides consulted its lawyers. ICL investigated the possibility of stopping the project at the end of stage 3. This would have avoided ICLs substantial projected losses in developing the final stage of the billing. This step was proposed by Mrs Gracie at the meeting on 4 March 1996. ICL's final plan, faxed through to SWW immediately before the meeting, was as I have already found, incomplete and carried with it a high risk that the billing component would not be achieved in full on time or at all. Although ICL promised to do so, it never did provide a firm Project Plan (or any Project Plan for the Second Billing Phase). For its part, SWW found for the first time in early 1996 that there was an alternative to ICL which would satisfy its requirements. It is not surprising that SWW accepted ICL's repudiation. It was entitled to do so. Between 28 November 1995 and early March 1996 (and indeed in the earlier period from September 1995 to 28 November 1995) both ICL and SWW were well aware of the bass on which their work on the project was continuing. There was no question that SWW was waiving its rights. It is of some significance that no such suggestion was made by Mrs Gracie at the meeting on 4 March 1996.

Although detailed questions of quantum have been adjourned to a later hearing, I am asked to deal with issues of limitation of liability arising out of the two contracts.

ICL submits:

1. The Unfair Contract Terms Act 1977 has no application to the Contracts as SWW did not contract with ICL on ICL's written standard terms of business within the meaning of Section 3 (1) of the Act.

2. ICL's liability is limited to £250,000 since this case does not fall within Clause 4.3.1.1 of the Turnkey Agreement or clause 8.1.1 of the Project Management Agreement which permits the larger limit.

3. Alternatively, if (contrary to 2 above) the higher limit of liability is applicable, the maximum amount that SWW can recover is the total of the sums which it has paid for the system and services and not any other costs which SWW they may have incurred in connection with the project.

4. In those circumstances SWW is not entitled to recover lost profits or anticipated savings. Such claims are specifically excluded by Clauses 4.3.2 of the Turnkey Agreement and Clause 8.2 of the Project Management Agreement.

On the other hand SWW submits:

1. The Unfair Contract Terms Act 1977 applies since the terms purporting to exclude liability are ICL's written standard terms and are unreasonable. SWW says that ICL's discovery of documents has been lamentable and that ICL should not be allowed to profit from its own default.

2. Clause 4.3.1.3 (the £250,000 limit) is ineffective as a consequence of Section 3 of the Unfair Contract Terms Act 1977 since the exclusion clause is part of ICL's standard terms of business and ICL has failed to discharge the burden of showing that such a term is reasonable.

3. The clauses limiting liability are clearly ICL's clauses and should be construed against ICL. It cannot have been intended that SWW would be in a worse position where ICL did nothing of value than it would have been if the system had failed to achieve final acceptance. Clause 4.3.1.1 should be applied by analogy since SWW gave ICL every opportunity between December 1995 and March 1996 to modify the system. SWW is therefore entitled to recover the monies paid to ICL and its own internal costs.

4. SWW contends that if its damages are confined to the £250,000 limitation there are two contracts so the limit is £500,000 not £250,000.

The Project Management and Training Agreement dated 15 September 1994 provides in Recital B that the company (ICL) has agreed to provide the management services to ensure the orderly and efficient delivery of the computer system in accordance with the Project timetable. Under Clause 2 (headed "Project Management") ICL undertakes:

"To provide such management, organisational and co-ordinating services as maybe required to ensure the orderly implementation of the Project set out in the Project Initiation Document attached hereto on or before the Completion Date in accordance with the work statement set out in the Fourth Schedule."

Clause 6 (headed "Late Completion") provides that if ICL fails to achieve completion by the day after the completion date, the customer shall be entitled to terminate this Agreement forthwith without notice. In its opening ICL acknowledged that the delivery date under the contracts (i.e. before any agreed modification) was 31 October 1995.

Under Clause 7 ICL warrants that it will perform the services with reasonable care and skill and that

"7.3 the company's obligations under the above warranty shall be its only liability under the terms of this Agreement and the company shall have no liability whatsoever whether in contract, tort, or otherwise including but not limited to fitness for purpose and all other representations, conditions, warranties and terms whether express or implied, statutory or otherwise shall be deemed to be excluded."

Clause 8 sees to limit ICL's liability "under the agreement or for the supply of the services or any part thereof or for any claim for loss or damage whether in contract, tort, negligence or otherwise."

The limitation of liability Clauses 8.1.1, 8.1.2, 8.1.3, 8.2 and 8.3, including Sub-Clauses 1 to 4, mirror exactly Clauses 4.3.1.1, 4.3.1.2, 4.3.1.3, 4.3.2 and 4.3 of The Turnkey Agreement including Sub-Clauses 1 to 4 of paragraph 4.3.3.

The intended effect under Clause 8.1.1 of the Project Management and Training Agreement is that if the customer, being legally entitled to do so, rejects the entire services or any part thereof, ICL's liability is limited to the sum of all monies paid by the customer for the services. Services is defined in the contract as the Project Management and Training Services provided pursuant to Clause 2 (Project Management) and clause 5 (Training).

Under Clause 8.1.2, if ICL caused damaged to or loss of any physical property of the customer, other than the services, ICL's liability was limited to £1,000,000 sterling in respect of any one event or series of connected events.

Under Clause 8.1.3, in all other cases, damages is limited to £250,000 sterling provided always that in the case of death or personal injury caused by the negligence of the company, such limitation shall apply only insofar as it is permitted by law. I note that the project/risk management fee set out in the Contract Payment Profile dated 3 August 1994 amounts in total to £250,000 and is expressed to be related to the Billing Package and not to the other services.

In an attempt to reinforce the limitation in Clause 8.1.1, Clause 8.2 expressly excludes any liability for indirect or consequential loss or damage or any loss of data, profit, business, revenue etc. and Clause 8.3 excludes any liability in contract, tort, negligence or otherwise for any delay, failure, breakdown, damage, loss or injury caused by any equipment or parts, programs and services supplied by the customer or any third party (in both cases other than via the company (8.3.1)).

Clause 11 sets out the termination provisions other than those in Clause 6. Clause 11.2 provides that "any termination of this agreement pursuant to Clause 11 or Clause 6 above shall be without prejudice to any other rights or remedies a party may be entitled to hereunder or at law and shall not affect any accrued rights or liabilities of either party nor the coming into continuance and force of any provision hereof which expressly or by implication is intended to come into or continue in force on or after such termination."

Attached to the Project Management and Training Agreement are ICL's Standard General Conditions of Contract for the Supply of Equipment, Programs and Services (January 1990, Sale of Equipment (January 1990), Equipment Service, January 1990), Program Licence (July 1991) and Professional Service (October 1991).

The Turnkey Agreement also dated 15 September 1994 was described by ICL in opening as "principal contract which governs the supply of the computer system". Clause 6 provides that, in the event of any conflict between the Project Management Agreement and the Turnkey Agreement, the Turnkey Agreement shall prevail. It is clearly suited for those contracts where ICL supply a ready-made system which requires minor modification to satisfy the needs of the customer and where the only question is whether the system to be installed will or will not pass the acceptance test procedure. It does not address specifically the circumstances where ICL was unable to provide a system which was even capable of being acceptance tested.

The scheme of the Turnkey Agreement is that under Clause 3, ICL will supply a system which from a period of ninety days from acceptance will conform in all material respects to the statement of requirements (the System Warranty). Under Clause 4 the contract provides remedies for breach of system warranty. The main remedy is that it shall procure or provide free of charge such upgrades and add-ons to the hardware and such other modifications to the system as shall in the circumstances be necessary to remedy the defect (Clause 4.1). In default ICL is required to indemnify the customer in respect of all costs, expenses and damages directly incurred as a result of the breach.

Clause 4.3, also under the broad heading of Remedies for System Warranty is concerned with limiting SWW's remedies where SWW has rejected the system or any part thereof. Clause 4.3.1 provides that "if the customer (being legally entitled to do so) rejects the entire system or any part thereof, after having given the company reasonable opportunity to modify the system or relevant part thereof and resubmit the same for Acceptance be limited to the sum of all monies paid by the customer for the system." This does not address directly the circumstance where ICL has not provided a system for the customer to accept or reject.

The Unfair Contract Terms Act 1977 (UCTA) provides in Section 3(i) as follows:

"3(i) This Section applies as between contracting parties where one of them deals as consumer on the other's written standard terms of business.

SWW asked ICL for its written standard terms and conditions, noting the passage from Chitty 27th edition (1994) at paragraph 14-056 "if it is alleged that an ostensibly "one-off" contract is in fact the other's written standard terms of business, extensive discovery may be involved to determine the terms on which contracts have been concluded with others."

Masons, ICL's solicitors, promised in a facsimile dated 26 February 1999 to disclose contracts concluded with others by ICL during 1994 but in the event none was disclosed. At lunch time on Day 16 at the very end of the hearing, ICL disclosed a draft System Supply Agreement for a computer system that is dated 28 September 1993.

Clauses 4.1.1 to 4.3.4 inclusive of the draft System Supply Agreement under the heading ICL's Liability are identical to Clauses 4.3.1.1 to 4.3.3.4 of the Turnkey Agreement and Clauses 8.1.1 to 8.3.4 of the Project Management and Training Agreement. Clause 18.1 is similar to but not identical to Clause 8.1 of the Project Management and Training Agreement. As I said during the hearing, this draft agreement clearly ought to have been disclosed earlier by ICL. It was clearly relevant and it would have been very unfortunate if I had had to decide this case without it. I note that in a letter to me ICL's solicitors explain that it was not their fault that the document was not disclosed earlier.

In oral evidence at Day 13, Mr Sellars was questioned about the process by which the agreement was arrived at. He said that the effective first draft (there had been a previous draft of SWW's conditions which ICL had rejected) was a previous contract with Haul Waste, a part of the SWW group. Following that, ICL considered an annotated version which reflected changes in the conditions which SWW wanted. Mr Sellars agreed with Mr Tomlinson (D 13/66) that the limitation clauses were taken from a standard form Systems Supply Agreement in use within ICL. This is confirmed by the draft which was eventually produced.

Chitty on Contracts 27th Edition at 14-056, in the passage immediately before that which I have cited, said "since, in any event, no two contracts are likely to be completely identical, but will at least differ as to subject-matter and price the question arises whether variations or omissions from or additions to standard terms thereby render them "non-standard" and if they do not whether all the terms become standard terms." Then comes the passage about extensive discovery cited above.

In The Flamar Pride [1990] 1 Lloyds Rep 434 at 438 Potter J held that the agreement whose form had been negotiated between the parties was outside the terms of the Unfair Contract Terms Act even though it was based on the standard form of management agreement which the defendants possessed at the time. In that case the standard form was subject to a number of alterations to fit the circumstances of the plaintiff's case before its terms were finalised between the parties.

In St Albans City Council v. International Computers Ltd [1995] FSR 686 Mr Justice Scott-Baker distinguished the Flamar Pride in holding that, where negotiations had left the defendant's general conditions effectively untouched, the parties had contracted on the defendant's written standard terms.

The case went to the Court of Appeal. As the judgement of Nourse LJ makes clear [1996] 4 All ER 481 at 487, ICL promised to supply a system including software which would maintain a reliable database of the names entered on the community charge register to be fully operative by the end of February 1990. Scott-Baker J's conclusion that the defendants general conditions remained effectively untouched in the negotiations was upheld (page 491).

The same position applies here. I conclude that although SWW originally offered its own terms and conditions, in the event ICL did effectively deal with SWW on its standard terms and conditions. It is interesting to note that, unless one puts a strained construction on the agreement, the very obvious circumstance of what happens if the project does not reach the stage where there is a system in being capable of being tested is not covered by the terms of the contract. If the parties had sat down and considered the matter, this situation would have been covered explicitly in the contract. The reason why it was not covered is because the partes used a standard ICL contract which was only slightly adapted. These standard ICL terms were not appropriate where substantial development work was required to adapt the basic system, as in this case.

I turn now to the question of reasonableness and note that I must take into account Section 11(1) of the Unfair Contract Terms Act which requires that the term shall be a fair and reasonable one to be included having regard to the circumstances which were or ought reasonably to have been known to or in contemplation of the parties when the contract was made and Section 11(4) in relation to restriction to a specified sum of money where regard must be had in particular to a.) the resources which ICL could expect to be available to it for the purpose of meeting the liability should it arise and

b.) how far it was open to ICL to cover the sum by insurance.

The extent to which a party has had discussions and has freely entered into the contract on the other party's standard terms may be relevant as an important circumstance in considering whether those terms are reasonable. In this case ICL does not seek to argue directly that the terms are reasonable but does argue that the terms should be accepted as reasonable because they were the subject of arms length discussion and agreement. I have in mind the passage in the speech of Lord Wilberforce in Ailsa Craig Fishing Co Ltd v. Malvern Craig Fishing Co Ltd [1983] 1 Weekly Law Reports 964 at 966 "one must not strive to create ambiguities by strained construction ... the relevant words must be given, if possible, their natural, plain meaning. Clauses of limitation are not regarded by the Courts with the same hostility as clauses of exclusion: this is because they must be related to other commercial terms, in particular to the risk to which the defending parties may be exposed, the remuneration which he receives and possibly also the opportunity of the other party to insure."

There was no evidence that in fact there was an arm's length discussion and agreement, except to the extent that ICL rejected SWW's draft contract and substituted its own which was said to be based on a previous contract between ICL and a subsidiary of SWW (about which there was no evidence). There is no evidence that it was subject to detailed discussion. In this case I am not striving to create ambiguities by strained construction because the particular circumstance i.e. failure to deliver a system capable of being tested, is not explicitly covered by the contract. I regard ICL's interpretation of the clause in the Turnkey Agreement, namely that if the system fails after the acceptance test, SWW is entitled to its money back but if ICL does not reach the stage of acceptance testing, it is entitled to keep the money that SWW has paid except that it maybe liable to return £250,000 as manifestly unfair and unreasonable. In some cases such a clause might be reasonable to reflect the balance of risk in a developing project, but there is no evidence that this is the case here. Absent such special circumstances the clause is manifestly unreasonable. Further this was clearly not the basis on which SWW would have been prepared to contract with ICL. These limitation clauses are all linked and if one of them falls they all fall. Accordingly I hold that Clauses 4.3.1.1 to 4.3.3.4 of the Turnkey Agreement and the equivalent limitation clauses in the Project Management and Training Agreement, are unreasonable and unenforceable.

SWW submits that since it has received no benefit from the contracts despite the fact that it has paid ICL a considerable sum of money, there has been a total failure of consideration and SWW is entitled to claim in restitution to be restored to the position it would have been in if it had not entered into the contracts with ICL. It claims that it is irrelevant that it received the hardware/software during the project because it was unable to use it. It also claims that ICL's work on the project was of no value to it in terms of the Management and Training Agreement.

ICL argues to the contrary that a claim in restitution is unsustainable because it received software and hardware from ICL and also management services from ICL which involved a very considerable cost to ICL in time and expense over 1 1/2 years.

I adopt the description of a computer system by Scott-Baker J in St. Albans City Council v. International Computers Ltd [1995] FSR 686, 698 cited with approval by Sir Iain Glidwell in the Court of Appeal: "By itself hardware can do nothing. The really important part of the system is the software. Programs are the instructions or commands that tell the hardware what to do. The program itself is an algorithm or formula. It is, of necessity, contained in a physical medium. A program in machine readable form must be contained on a machine readable medium such as paper cards, magnetic cards, magnetic tapes, discs drums or magnetic bubbles."

I am satisfied that the fact that ICL delivered hardware which could not be used without the software (even if there was nothing wrong with the hardware) was of no significant value to SWW. The same consideration also applies to such base CUSTIMA and other packaged software as was delivered to SWW. I accept that SWW did not receive any of the benefit for which it contracted under the Turnkey Agreement. In relation to the Project Management and Training Agreement, the management services related primarily to ICL's services in relation to billing and specifically that ICL would manage the project which would deliver the Billing Packages in accordance with SWW's URS. It was clear by 4 March 1996 that ICL was unwilling and/or incapable of delivering the Billing packages as agreed either within the timescale or at all.

In The Fibrosa [1943] AC 32 at 65, Lord Wright confirmed the then existing law that when money has been received by one person which in justice and equity belongs to another, under circumstances which render the receipt of it by the defendant to the use of the plaintiff the latter may recover as for money had and received to its use. Lord Wright added these important words "the principle extends to cases where the money has been paid for a consideration which has failed."

In Salvage Association v. CAP [1995] FSR 654 at 681, His Honour Judge Thayne Forbes QC said that Goff and Jones Law of Restitution Third Edition at page 450 set out the test as follows:

"Money paid under a contract thereafter frustrated was recoverable, although only if the consideration for the payment had wholly failed." His Honour Judge Thayne Forbes QC went on to hold that "the total failure of consideration occurs where the payer had not enjoyed the benefit of any part of what he bargained for." The judgement of the Court of Appeal in Rowland v. Divall [1923] 2 KB 500 was not cited to His Honour Judge Thayne Forbes QC. The test of Atkin LJ at page 56 in relation to restitution is "did the buyer get any part of that for which he paid the purchase money?" Insofar as there is any difference between the test set out by His Honour Judge Thayne Forbes QC and that of the Court of Appeal in Rowland v. Divall (and I am not sure that there is a significant difference) I follow that of Atkin LJ. In my view the hardware did not have any significant value to SWW in itself (except for a minimal second hand value). Equally I am satisfied that the customer contact and workflow SRS did not have any intrinsic value to SWW which would prevent SWW claiming in restitution. In my view SWW did not get any part of that for which they paid the purchase money. They paid the purchase money for ICL to devise and install a computer system to conform to SWW's URS. They did not receive any part of the Computer System. SWW did not contract in a vacuum to receive management know-how. They contracted to receive management services to enable the computer system to be delivered not as an end in itself. The Project Management and Training Agreement was expressed to be subordinate to the Turnkey Agreement. The buyer did not get any part of that for which they paid the purchase money. I am satisfied that, as was acknowledged by Mr Bartholomew and Mr Toland, SWW had no benefit from the planning which ICL carried out to September 1995 which was regarded by them as worthless. The work which was carried on after that date was contingent on ICL providing a detailed proposal which ICL hoped to be able to make on 1 March 1996 but was unable to do so, a proposal which, before it could be implemented, required SWW to agree to it.

In its final submissions ICL abandoned its counter claim for SWW's alleged breach of contract on the grounds that SWW was in repudiatory breach. I have already rejected ICL's claim that it was induced to enter into the agreements by SWW's misrepresentation of the fit of base Custima to SWW's URS.

It is agreed that the total amount actually paid by SWW (allowing for the refund of £500,000 made by ICL) was £2,196,992. This sum can be recovered. The sum of £235,000 which ICL say was payable for services was in respect of a consideration that wholly failed and is included in the sum which is recoverable. I will adjourn SWW's other claims for further argument. ICL's counterclaims are dismissed.