The High Court has just ruled on a long running case between Southwark Council and IBM. In 2009 Southwark had sued IBM for £2.5 million claiming that a system designed to clean up and consolidate information on Council databases didn’t deliver the required functionality.

The case considered several points which will be of interest to IT professionals, and particularly technology suppliers:

1. •the scope of a contractual warranty of satisfactory quality;
   

2. •whether the Sale of Goods Act applies to the licence of software; and
   

3. •whether the Unfair Contract Terms Act rendered unenforceable a contractual exclusion of the terms implied by the Sale of Goods Act.
   

The background to the case was that Southwark had approached IBM in 2005 when it was looking for data management software to help harmonise and improve data relating to council properties and citizens.

IBM suggested a combination of IBM’s own products and a third party product called ‘Arcindex’ from a company called Orchard. It was accepted that although IBM had introduced Southwark to Orchard it had never recommended the suitability or desirability of the Arcindex software. Rather, Southwark’s technical team had chosen the product independently having attended demonstrations by Orchard and having reviewed the Arcindex specification prior to agreeing to buy it.

In the event Arcindex had been installed by IBM but Southwark abandoned the project in 2007 claiming problems with the user interface, messaging integration, matching strategy and a lack of reporting capability.

The salient points in the case were:

1. •whether IBM had any express or implied obligations with regard to Arcindex;
   

2. •if so, whether it was in breach of contract as Southwark claimed;
   

3. •whether the Sale of Goods Act 1979 applied; and
   

4. •whether the Unfair Contract Terms Act 1977 applied.
   

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First off the Court had to identify the nature of the contract between the parties. This consisted of an ‘Order’ together with the terms of what was at the time (in 2006) a pan-governmental Treasury Framework Agreement under which the Order had been called off.

The Order stated that:

1. •the council’s right to use Arcindex “shall be determined solely by the License granted by the vendor [i.e. Orchard]”.
   

2. •“No title, ownership, copyright or other intellectual property right is transferred ...”
   

3. •“Any warranties and indemnities relating to [Arcindex] are the responsibility of the vendor. The vendor will provide the warranty ... in accordance with the License terms in Appendix A ... There are no additional IBM warranties, and any implied condition or warranty of merchantability or fitness for purpose are excluded.” (This was Clause 7.2.)
   

The Framework Agreement contained a general warranty of satisfactory quality, and stated that products supplied would be “In conformance with the relevant specifications set out in the Contract, relevant Order and the manufacturer's specifications and documentation.”

The Framework Agreement further provided that except as stated in any order, “all warranties and conditions, whether express or implied by statute, common law or otherwise (including fitness for purpose) are excluded to the extent permitted by law”.

Finally, wording on the last page of the Order stated that the Framework Agreement terms were “augmented by the information provided in the Order”.

...

Applying these terms to the question of whether IBM had any express or implied obligations with regard to Arcindex, it was clear from Clause 7.2 of the Order (quoted above) that IBM had offered “no additional IBM warranties” to those provided from Orchard in its standard licence terms.

As is common in arrangements for the supply of third party software IBM had contracted on the basis that warranties relating to Arcindex were Orchard's responsibility. All IBM had agreed was that Orchard would provide the warranty set out in the licence terms attached at Appendix A. IBM had given no other warranties, and any implied warranties (e.g. as to satisfactory quality or fitness for purpose) were expressly excluded. The Court noted that since Southwark had selected Arcindex without input from IBM there had been nothing to stop it seeking direct warranties from Orchard when negotiating the agreement. It had not done so.

...

In the face of this inescapable interpretation of the Order, Southwark argued that the warranty reference to ‘satisfactory quality’ in the Framework Agreement should be given its Sale of Goods Act meaning, including the requirement for fitness for purpose.  

Readers will be aware that the Sale of Goods Act 1979 applies to contracts by which the seller transfers or agrees to transfer ‘the property’ in goods (s.2(1)), and that s.14 ‘implies’ certain terms into most contracts which fall within this definition. Section 14(2) says there is an implied term that goods sold in the course of a business are of ‘satisfactory quality’ and s.14(2B) goes on to say that ‘quality’ includes the state and condition of goods, including fitness for all the purposes for which they are commonly supplied. It also includes appearance and finish, freedom from minor defects, safety and durability.

In the case of Arcindex this meant that the Sale of Goods Act meaning of satisfactory quality could only apply if IBM’s contract was for a ‘sale’ of that product within s.2(1) of the Act. The Court decided there had been no transfer of the property in the Arcindex software: it was licensed; Orchard had expressly retained “title, copyright and all other proprietary rights”; all copies had to be returned or destroyed on termination; and although the licence was perpetual there were restrictions on who could use it and a prohibition on modification.

Accordingly, the Sale of Goods Act did not apply and the Framework Agreement reference to satisfactory quality had to be read solely in the context of the contractual documents governing the relationship. As noted above, the Framework Agreements stated that products would be “In conformance with the relevant specifications set out in the ... relevant Order and the manufacturer's specifications and documentation.” The judge ruled that the use of the word “augmented” on the last page of the Order meant that its terms increased or supplemented the standard Framework terms but didn’t alter them. Therefore, ‘satisfactory quality’ had to be determined solely by reference to the quality called for in the Order. This was conformity with Orchard’s own specification (in Appendix D) but nothing more. Conformity with specification was not at issue in the case.

The judge commented that “If parties to a contract such as this have spelt out what the software must do or be, it will be satisfactory if it achieves what the contract dictates it should.”

A joint experts’ report had confirmed that Arcindex did indeed function as described in its User Manual.

...

Southwark’s claims were further undermined because there had been clear evidence that its team had carried out a detailed investigation into Arcindex. This included receiving a user guide and white paper and attending at least two detailed demonstrations.

The judge summed up Southwark’s position thus: “As was said colloquially at one stage during the trial, Arcindex does ‘what it says on the box’. An analogy is the potential car purchaser who might want an off-road vehicle but, having looked at the brochure for an on-road vehicle, says to the salesman ‘that's what I want’ and buys that vehicle. There will be no cause of action against the garage that the car is no good off the road. The salesman will reply, with justification: ‘you got exactly what you asked for’. That is essentially what has happened in Southwark's case.”

He added: “In my judgement, Southwark got by way of Arcindex exactly what its then team knew that they were getting and what it decided that it wanted and needed within its budgetary constraints. It follows from my findings that ... Arcindex ... was of satisfactory quality and suitable not only generally but also for the specific purposes which Southwark’s personnel had identified to IBM and Orchard as their requirements.”

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There was a secondary claim by Southwark that exclusion of all implied terms (by Clause 7.2 of the Order) was unenforceable. The Unfair Contract Terms Act 1977 states that terms which exclude or limit the implied terms in the Sale of Goods Act are only enforceable to the extent that they’re reasonable.

The Court rejected this argument as well. The parties were broadly of equal bargaining power; Southwark had had the opportunity to contract direct with Orchard but had chosen instead to use the standard Framework Agreement so it couldn’t argue that it didn’t know of the exclusion of implied terms set out in that document; it had gone through a protracted negotiation process and had taken advice from lawyers; and it was accepted that Orchard had enhanced Arcindex to reflect what Southwark had said it wanted.

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So what conclusions can we draw from the case?

For suppliers the judgment is particularly interesting because it suggests that the customer practice of obtaining an express warranty of satisfactory quality as well as of compliance with specification may not increase the supplier’s obligations. Unless the contract is for the sale of goods (within the definition in the Sale of Goods Act), then software and services will be ‘satisfactory’ provided they meet the contract specification.

The other point of note is that the case confirms that the Sale of Goods Act will not apply to most software supply arrangements because the ‘sale’ will be by way of licence which doesn’t involve a transfer of property.

For customers, the lessons of the judgment are clear: be sure to identify what your requirements are and document them carefully; and if you’re buying third party software as part of a broader solution, be sure you’re satisfied that it does what you want. If you’re not confident on this second point, make sure you negotiate robust terms by reference to outcomes or outputs rather than simply signing up to standard licence terms.