Information and Communications Technology: Must Computer Programs be fit for their Purpose? Some Reflections on St. Albans v ICL

Richard Cole

June 1997
This article first appeared on the Lancaster Buildings website

Until now there has been little authority as to whether the supply of computer software was a sale or supply of goods or a supply of services.  The question of the legal status of software has now been considered by the Court of Appeal in a judgment delivered on 26th July 1996 in St Albans City and District Council v. International Computers Limited [1997] FSR 251.  Sir Iain Glidewell observed that during the hearing the word "software" had been used to include both the tangible disk on to which the program had been encoded and the intangible program itself.  The disk was clearly within the definition of "goods" in section 62 of the Sale of Goods Act 1979 ("the 1979 Act") and section 18 of the Supply of Goods and Services Act 1982 ("the 1982 Act").  The program, of itself, equally clearly was not.  He considered whether, if a disk carrying a program was sold or hired, and the program was defective so that it would not enable the computer to achieve the intended purpose, that was a defect in the disk.  Would the seller or hirer be in breach of the terms as to quality and fitness for purpose implied by section 14 of the 1979 Act and section 9 of the 1982 Act?  There was no English authority.  He drew an analogy with a maintenance manual for a car whose instructions if followed would cause serious damage to the engine.  The manual including the instructions, whether in a book or a video cassette, would be goods, and the defective instructions would result in a breach of the implied terms in section 14.  If that was correct, there was no logical reason why it should not also be correct in relation to a computer disk on to which a program designed to achieve particular functions had been encoded.

Sir Iain Glidewell's Reasoning

In the present case the defective program had not been sold or hired on a disk.  The evidence had been that an ICL employee had gone to the Council's premises and installed the various releases of the program.  There were no statutory implied terms and the answer to whether there were any implied terms had to found in the Common Law.  The statutory terms had originally been evolved by the Courts of Common Law and had since by analogy been implied by the courts into other types of contract. He considered a House of Lords authority on the circumstances in which a term could be implied, and held that a contract for the transfer into a computer of a program intended by both parties to achieve specified functions was a contract into which a term of fitness for purpose would be implied, and had in this case been breached.  Nourse LJ and Hirst LJ both agreed with Sir Iain Glidewell as an alternative to their unanimous finding that there were express terms which had been breached

Why it matters whether Software are Goods

In the absence of any decisions by the courts, it has been a widely held view that off the shelf software is goods within the meaning of the 1979 and Part I of the 1982 Acts, and that the writing of bespoke software is a supply of services within Part II of the 1982 Act. It makes a considerable difference to the contractual obligations of the supplier. Under section 13 of the 1982 Act there is an implied term that the supplier of a service in the course of a business will carry it out with reasonable skill and care. It is generally recognised in engineering contracts that a requirement of fitness for purpose is much more onerous than an obligation to use reasonable skill and care. If the contract of an architect or supervising engineer has an express or implied term of fitness for purpose he may be liable for defects outside his control. His insurance premium, if he can obtain insurance at all, will be much higher than if he is only required to use reasonable skill and care.

Software Development is arguably a Service

It seems extraordinary that it does not appear to have been argued that the writing of the software was a supply of services. At first instance, reported in [1995] FSR 686, Scott Baker J at 698 observed that the 1979 and 1982 Acts had identical implied conditions of reasonable fitness, merchantable quality and conformity with description. In the absence of relevant express terms one or other Act applied unless, as contended by the defendant, the supply fell outside both of them. He concluded at 699 that if the supply of software was not a supply of goods, it was difficult to see what it could be other than something to which no statutory rules applied, thus leaving the recipient unprotected in the absence of express agreement. His conclusion was that it was a supply of goods. The Judge does not appear to have been taken to Part II of the 1982 Act, or asked to consider whether it was a supply of services.

Previous Decisions

In Saphena Computing Ltd v. Allied Collection Agencies Ltd [1995] FSR 616, another case concerning the writing of bespoke software, Staughton LJ states at 652, "It was, we are told, common ground that the law governing these contracts was precisely the same whether they were contracts for the sale of goods or for the supply of services.  It is therefore unnecessary to consider into which category they might come."  Again it would appear that it was not argued that a contract for the does not appear to have been argued that the supply of bespoke software was subject only to an implied obligation to use reasonable skill and care.  In The Salvage Association v. CAP Financial Services Ltd [1995] FSR 654, a decision at first instance of the Official Referee, HHJ Thayne Forbes, it was held at 664 that there was an implied duty to use reasonable skill and care when writing bespoke software.  Salvage Association was cited to Scott Baker J on the question of limitation of liability, but apparently not on this point.  It was the unanimous view of the Court of Appeal in the St Alban's case that there had been breach of an express term of the contract.  The statements about implied terms are therefore obiter and not a binding authority.

Limitation of Liability

Another aspect of the judgment of the Court of Appeal in St Alban's which has attracted comment in the computer press concerns the clause limiting ICL's liability to £100,000 or the price of the program if less.  At first instance Scott Baker J considered at 706 whether the clause had to satisfy the test of reasonableness of the Unfair Contract Terms Act 1977 ("UCTA").  At first glance the Council dealt as consumer, but for the wide definition of "business".  He went on to consider whether the plaintiff had dealt on the defendant's written standard terms of business, and held that it had.  He considered in turn each of the matters set out in section 11(4) and Schedule 2 of UCTA, and referred to authorities on the test of reasonableness.  He considered that the determining factors were that the parties were of unequal bargaining power, that the defendant had not justified the figure of £100,000 which was small both in relation to the potential risk and the actual loss, that the defendant was insured for £50 million worldwide, and the practical consequences.  If the loss were to fall on the Council it would ultimately be borne by the local population.  He did not think it unreasonable that he who stood to make the profit (ICL), who had been well able to insure and in this case was insured, should carry the risk.  Nourse LJ held that he was not satisfied that the Judge's decision had proceeded upon some erroneous principle or been plainly and obviously wrong, and the Court of Appeal should not interfere.  He believed he would have given the same answer himself. In one article in the computer press it was suggested that for future contracts limitation of liability clauses might be rendered effective by standard conditions which provided for a limit of £100,000, and negotiating a limit of £100,001 in an individual contract.  Such advice is in my view misguided.  At first instance it was argued that since ICL's 1985 conditions had been incorporated in the contract at a time when its standard conditions were its 1988 conditions (which provided for a limit of liability of £125,000) the plaintiff had not dealt on the defendant's written standard terms.  Scott Baker J rejected that argument at 705.  In the Court of Appeal it was argued that a party could not be said to deal on another's standard terms of business if he negotiated with him over those terms before entering into the contract.  The argument was rejected.

A Solution

In my view a better solution would be to offer the purchaser a choice of contract prices and limitations of liability.  If the differences prices are based on the premiums charged by the supplier's insurer for covering the different levels of liability offered so much the better.  If the purchaser is effectively given the choice of paying the additional insurance premium and elects to bear the risk itself by choosing a lower level of limitation of liability, that is in my view a factor which would weigh heavily with the court in applying the test of reasonableness and upholding the limitation.

 

 

 

 

 

 

Jane Lambert

Computer Systems

 

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