Information and Communications Technology: Computer Contracts - Merchantable Quality in Hardware Contracts - Amstrad plc v. Seagate Technology

Richard Cole

Oct 1997
This article first appeared on the Lancaster Buildings website

In Amstrad plc v. Seagate Technology Inc. (Unreported 9 May 1997) before the Official Referee, HH Judge Humphrey Lloyd QC, the parties accepted that it was an implied term of the contract that the disk drives supplied would comply with the specification set out in Seagate's Product Manual.  The Judge held that regard should be had to the terms of the Product Manual in determining whether the drives were of merchantable quality.  Even if it had not been agreed that there was such an implied term, the Judge would have held that there was.  In Wormell v. R.H.M. Agriculture (East) Ltd [1987] 1 W.L.R. 1901 the instructions on the packaging were to be regarded as part of the goods in ascertaining fitness for purpose.  Amstrad had submitted that if instructions were to be taken into account in determining whether goods were fit for their purpose, they ought also to be taken into account in determining merchantable quality.  Seagate in turn sought to show that Amstrad had been operating the drives outside the permitted operating temperature range.  In the Judge's view these were two sides of the same coin.  It was immaterial that the Product Manual was not physically a set of instructions on the packaging or even sold with the drives or was an evolving specification.
The History
Amstrad developed its 2000 series of personal computers as a successor to its highly successful 1512 and 1640 computers. The 2386 was to be the top of the range. Amstrad wanted a large hard disc to use in it and price was critical. Seagate's salesman approached Amstrad and offered the ST277R. This was a hard disc drive which used an open loop (no feedback) stepper motor to position the heads. The heads were attached to the stepper motor by two bands which translated the rotational movement of the motor to linear movement of the heads. When the heads were positioned over the outer tracks of the disc the bands could become unequally stressed and this could be aggravated with changes in temperature. The stresses in the two bands could be equalised by carrying out a "shoe-shine" operation in which the heads were moved to the inner tracks of the disc and back again, but  this was not known at the time.

The absence of any feedback of the position of the heads meant that accuracy of positioning was entirely dependent on the stepper motor and the bands attached to it. When the disc was initialised, a procedure known as low level formatting, sector addresses were written at the start of each sector on each track. The computer operating system was therefore able to verify that the correct sector had been read. If the heads were subsequently positioned to the side of the required track, or even over an adjacent track, either nothing or the wrong sector would be read and the operating system would display a "sector not found" message. These error messages were being displayed by the Amstrad 2386 computers about an hour after they had been switched on if they had been left idle during that time or if disk activity had been confined to the outer tracks, which would be the case if the disk were only partially full, or if all that had been done within that time was to load the operating system.
Seagate repeatedly insisted that there was no problem with the ST277R disk drive.

Rather than buy in a proprietary disk controller, Amstrad had commissioned Flare Technology Limited to design a controller.  It was suggested that the Flare controller was at fault.  At great expense Amstrad bought a large quantity of proprietary controllers from Western Digital, recalled all the machines that had been sold, and replaced the controllers.

Seagate installed sample drives in IBM, AST and Compaq machines, and the problem did not occur.  However IBM, AST and Compaq had not ordered the ST277R for the models used, which were designed to take a physically larger disk drive dissipating more heat. Temperature measurements showed that the disk drives were running hotter in the 2386 than in the IBM, AST and Compaq machines.  The technical specification gave the operating ambient temperature range of the ST277R as 15°C to 45°C with a maximum rate of change of temperature of 10°C per hour. Temperature measurements were made at a number of points around the case of the drive.  At some measurement points the temperature was found to rise by more than 10°C during the hour after switching on. Eventually Seagate discovered that the problem could be overcome by carrying out a "shoe-shine" operation to move the heads to the inner tracks and back before retrying a failed read operation.  There was then a discussion as to whether this function would be better incorporated in the disk controller or the computer's basic input/output system ("BIOS"). By this time Amstrad had incurred the expense of buying Western Digital controllers and the recall.  More importantly the reputation of the 2386 had been tarnished and sales had suffered
Merchantable Quality
The principal issue was whether the ST277R disk drives, for which Amstrad had become Seagate's largest customer, had been of merchantable quality within the meaning of the Sale of Goods Act 1979. The judge comprehensively considered the authorities on merchantable quality.  He recognised that pre-1979 authorities were not necessarily still applicable, although they cast a long shadow.  Seagate referred to Cammell Laird & Co Ltd v. The Manganese Bronze and Brass Co Ltd [1934] AC 402 and Henry Kendall & Sons v. William Lillico & Sons Ltd [1969] 2 AC 31 in which Lord Reid had explained and qualified Lord Wright's dictum in Cammell Laird that goods were unmerchantable if they were of no use for any purpose for which such goods would normally be used.  Lord Reid modified this phrase to "no use for any purpose for which goods which complied with the description under which these goods were sold would normally be used". Seagate had argued that the drives were not unmerchantable because they worked in the IBM, AST and Compaq machines it had tried, although there was some evidence that Atari and Research Machines who had also purchased the ST277R had problems.  The Judge rejected that argument.  There had been argument as to where the temperature should be measured.  The Judge held that in the absence of any more precise specification in the Product Manual it was appropriate to use a normalised measurement.  If that were done none of the measurements on the 2386 fell outside the quoted operating temperature parameters.  The inference to be drawn was that the ST277R was not capable of operating over the entirety of the operating temperature range claimed in the Product Manual, and was therefore unmerchantable. There was further argument as to causation.  Seagate argued that Amstrad had exacerbated its loss by withholding the 2386 from the market until a "shoe-shine" function could be added, when there were simpler solutions which would have been equally effective.  The Judge held that Seagate's repeated denials that there was a problem with the ST277R entitled Amstrad to act as it did.
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.
Documentary Evidence
It also became apparent from documents disclosed on discovery that the internal view within Seagate was that the ST277R was not a good product.  As materials improved capacities of disk drives could be increased by increasing recording densities.  There were several parameters which could be changed to reach different models in a range.  In some cases one parameter would have been stretched too far, and the ST277R was such a case.  Seagate's salesman had either been unaware of the internal view or had disregarded it.  He had been motivated by the need to conclude a sale by a particular date to enhance his year-end bonus.
The Parties
Another issue was the identity of the company within the Seagate group which had contracted with Amstrad.  Amstrad's case was that it had contracted with the first defendant Seagate Technology Inc. ("Seagate") which had its headquarters and research department ("STSV") in America and a place of business ("STUK") at Marlow in the UK.  Alternatively it had contracted with the second defendant, Seagate Technology Singapore Pte Ltd. ("STS") which was a wholly owned subsidiary of the first defendant.  The defendants required the identity to be determined.  The second defendant was in voluntary liquidation following a financial reorganisation and the first defendant had guaranteed its liabilities.  The Judge held that the contract was with Seagate.  The correspondence had been with STUK.  If the salesman was not acting for STUK he was acting for Seagate.  Seagate was a worldwide organisation with factories in a number of countries.  Amstrad would not necessarily have known from being asked to send its order to Seagate Singapore and to make payment in US dollars in Singapore that it was contracting with a separate company, STS.
Comment
The case provides a number of lessons for those drafting computer supply contracts and those supplying goods under the contract.

1. If design limitations are set out in a document which could be construed as being incorporated in the contract, product testing should establish that the product, allowing for manufacturing variations, will operate satisfactorily over the whole of the quoted range.  If testing shows that this cannot be achieved the range must be revised.  The document must also specify with sufficient precision where and how a measurement is to be taken.

2. Denying that there is a problem may ultimately lead to having to pay higher damages if the customer incurs additional costs in reliance on the denial.

3. If it is contractually important that a contract is with a subsidiary other than one which has conducted negotiations this must be expressly stated in contract documentation.

4. Failure to keep sales staff informed of a company's views and policy relating to a product may have damaging consequences if documents which have to be disclosed during litigation reveal a lack of candour.

 

 

 

 

 

 

John Lambert

Computer Systems

 

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