Information and Communications Technology:  Formation of Contracts

Jane Lambert

5 July 1999
This case note first appeared on the Lancaster Building website

Among the phenomena of computer law that Colin Tapper and many other authors have noticed is that transactions are entered for the supply of computer systems and services of enormous value and complexity without entering a formal written contract. One of the reasons for that is that even nowadays relatively few lawyers really understand or care for computers and relatively few techies understand or care for the law. Sometimes that can work to the advantage of the supplier as in Comyn Ching Ltd and others v Radius Plc (Court Service website) (unreported, His Honour Judge Bowsher QC 17 March 1997) and sometimes, as in Jonathan Wren & Co. Ltd and another v. Microdec Plc [1999] EWHC Technology 218, to the advantage of the customer.

The Facts in Wren's Case

The claimants were members of the ADECCO group of companies which carry on business as recruitment consultants. The second claimant was a subsidiary of the first. The first claimant (Jonathan Wren & Co. Ltd.), which had a substantial business in recruiting financial services personnel, decided to set up the second claimant (Jonathan Wren Executive Limited) to recruit executives for other industries. The new company required a computer system able to operate on a Novell network with PC clients which would assist its employees to match candidates to job vacancies quickly. It had tried a program that another member of the ADECCO had supplied but found it unsatisfactory. The defendant, Microdec Plc, was a small software house specializing in recruitment software. It had developed a software package called "Profile" various versions of which ran on different platforms. It had tendered unsuccessfully to supply a version of "Profile" to the first claimant some years earlier, but its sales and marketing director, Fitzgerald, had remained in contact with one Steare, the first claimant's chairman and chief-executive and the prospective chairman and chief-executive of the new company. Just about the time Mr. Steare had decided to discard the ADECCO software he received a letter from the defendant with information about a network version of "Profile" and offering a demonstration. Mr. Steare called Mr. Fitzgerald. Meetings took place where Mr. Steare explained the new company's requirements and saw a demonstration of the new package. He and his office manager were impressed by what they saw and sought a quotation. Such a quotation was supplied headed with the words

"ERRORS & OMISSIONS ARE EXCEPTED AND THIS QUOTATION IS SUBJECT TO THE MICRODEC STANDARD TERMS AND CONDITIONS OF SALE."

No such conditions were enclosed or requested. Mr. Steare signed the quotation, faxed it back with a coversheet of the first claimant but posted it with a cheque for 10% of the purchase price by way of deposit drawn on the bank account of the new company. The software was delivered but did not satisfy the second claimant who contended that it was defective and blamed it for causing it to cease trading.
The Issues
It was common ground that some sort of agreement had been made between the second claimant and the defendant but the defendant argued that that agreement had incorporated its standard terms and conditions of sale. Those conditions contained various provisions that excluded liability for loss of profits, limited the defendant's liability for other loss or damage to the contract price and deemed it to be ignorant of any loss that might arise from any malfunction, ineffectiveness or failure of the products delivered. So draconian were those conditions that his lordship observed that, had those conditions formed part of any agreement between the parties, the defendant would have been in difficulty in proving that the terms relied on were reasonable under the Unfair Contract Terms Act 1977. Upon the application for directions, His Honour Judge Newman ordered a number of preliminary issues to be tried including whether the defendant's standard terms had been incorporated into its agreement with the second claimant and, if not, what were the terms of the agreement, and whether there was any collateral agreement between the first claimant and the defendant.
Judgment
Judge Bowsher QC found that a contract came into being between the second claimant and the defendant when Mr. Steare signed and returned the defendant's quotation with the deposit cheque and that it did not incorporate the defendant's standard terms and conditions. Clause 1 of those terms provided:

"the CUSTOMER's offer to purchase shall remain irrevocably open for acceptance by MICRODEC for a period of 21 days from the date of signature of this agreement by an authorised representative of the CUSTOMER. This agreement shall only become binding on MICRODEC upon its acceptance and signature by a Director of MICRODEC and such acceptance shall be binding on the CUSTOMER provided that it is communicated to the CUSTOMER within 14 days thereafter."

The judge said that if the defendant wished to rely on such stringent terms it should at least have complied with its own requirements as to the making of a contract on those terms. Clause 1 provided for the agreement to be signed by authorized representatives of both parties and that had not been done. Clause 19.4 was an acknowledgement that the customer had read, understood and agreed to be bound by those conditions which was clearly impossible if none of its managers or staff had ever seen them. No doubt with Brogden v Metropolitan Railway Company (1872) 2 App. Cas. 666, in mind, his lordship continued:

"Unlike some forms of agreement with spaces for signatures, which are nonetheless specifically adopted as the terms of agreement without signature, this document specified that it was only to become binding on signature. None of the requirements of clause 1 were (sic) fulfilled. There was no signature of the document by either party and the document was never sent to the claimants. Therefore, in accordance with the terms of the document itself, there was no agreement in the terms of that document."

Relying on s. 14 of the Supply of Goods and Services Act 1982 the judge held that it was an implied term that the defendant should perform its service within a reasonable time and that a reasonable time was the date on which the second claimant had intended to open for business. He found implied terms that the software would fully computerize the second claimant's recruitment business and increase its productivity but not that it should maximize its turnover and profitability on the ground that such term would have been too vague and imprecise. He also found that the software would be of satisfactory quality and reasonably fit for its purposes which included full compatibility with the claimant's existing network. All associated services such as installation would be carried out with reasonable skill and care.

The significance of whether there was a collateral contract between the first claimant and the defendant was that the first claimant claimed damages equivalent to its investment in setting up the second claimant. The evidence in support of such a contract was that Mr. Steare was a director of both companies, that he had returned his acceptance on the first claimant's stationery and that the first claimant was bankrolling the second. In his lordship's view that was not enough. On the premise that a collateral contract (like any other) required an intention to enter legal relations as well as unqualified acceptance of an offer and consideration the judge found that the argument failed at the first hurdle. Nothing was said, written or done by the defendant from which an intention to be bound could be inferred. He concluded that it was the parties' intention that the defendant should contract with one company only and that was the second claimant.
Comparison with Comyn Ching
This situation has to be contrasted with the one that came before the same judge in Comyn Ching where the absence of a formal written agreement allowed the supplier to sell and deliver each component of a system piecemeal without reference to whether it would function satisfactorily as a whole. It also has to be contrasted with the Court of Appeal's decision in Prudential Holborn Ltd. v Fraser Williams (unreported, CA: Dillon and Kennedy LJJ and Sir Roger Parker, 14 May 1993) where no agreement could be discerned even though the supplier had begun to deliver services and the customer to pay its fee because the terms that they had agreed were "subject to contract". All these cases highlight the need in every major transaction for a formal written agreement for the protection of both sides.
 

 

 

 

 

 

 

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