Sale of Goods Act and implied terms not applicable to software supply contract
LONDON BOROUGH OF SOUTHWARK v IBM UK [2011]
LBS was unsuccessful in its claim that I had breached a contract to supply third party software because the software was, allegedly, of unsatisfactory quality and/or was unfit for purpose. The decision looks at several specific issues: the construction of an express warranty as to satisfactory quality in the light of other contractual terms, whether the Sale of Goods Act 1979 (“SGA”) applied to a software licence and whether the Unfair Contract Terms Act 1977 (“UCTA”) applied to the exclusion of implied terms.
facts:
- LBS approached I regarding the purchase of some data management software. I suggested that LBS use a combination of I's own products and services and ‘Arcindex’, a third party software product. LBS accepted that I had at no time recommended Arcindex. Its technical team had carried out a detailed investigation of the software including receiving a user guide from the supplier, Orchard, and attending a number of software demonstrations.
- Despite the fact that I had not recommended Arcindex, it contracted for its supply to LBS. The contract consisted of an Order governed by the terms of a Framework Agreement. The Order stated: "In respect of the Orchard software ... the following will apply:
- Your right to use the software shall be determined solely by the License granted by the vendor [Orchard] to you."
- "No title, ownership, copyright or other intellectual property right is transferred by this Transaction Document."
- "Any warranties and indemnities relating to the [Orchard Arcindex software] are the responsibility of the vendor. The vendor will provide the warranty in accordance with the License terms in Appendix A of this Order. There are no additional I warranties, and any implied condition or warranty of merchantability or fitness for purpose is excluded."
- The Framework Agreement contained a warranty that the Arcindex products were:
- "of satisfactory quality"; and
- " in conformance with the relevant specifications set out in the Contract, relevant Order and the manufacturer's specifications and documentation."
- Another provision of the Framework Agreement provided that all warranties and conditions, whether express or implied by statute, common law or otherwise (including fitness for purpose) were excluded to the extent permitted by law, except as expressly stated in the contract.
- Although installation of both the IBM and the Arcindex software took place, LBS stopped using the software and the project was cancelled.
- Following this LBS claimed for over £700,000 in compensation, alleging that Arcindex did not comply with the Framework Agreement's warranty of satisfactory quality or the terms as to quality and fitness for purpose implied by the SGA.
decision:
LBS's claim was dismissed. The Court’s views on the various issues raised were as follows:
- Satisfactory quality
- I was treated as having given an express warranty as to the satisfactory quality of Arcindex.
- The Framework Agreement warranty, crucially, had to be read alongside the Order, so that satisfactory quality was determined solely by reference to conformity with the relevant express Orchard specifications. LBS did not claim that there was any non-conformity with the express specification. Indeed LBS seemed to agree that it did comply. Arcindex was therefore found to be of satisfactory quality and suitable not only generally but also for the specific purposes which LBS’s personnel had identified to I and Orchard as their requirements. It did ‘what it said on the box’.
- LBS's argument that ‘satisfactory quality’ should be given its SGA meaning (including the requirement of fitness for purpose) was rejected. In addition, it was not possible to imply a term of ‘reasonable suitability’ at common law because it would contradict the express terms of the contract.
- Did the SGA apply?
- For the SGA to apply, the agreement would, amongst other things, have to be one under which there was a sale of goods where the seller transferred property in the goods to the buyer. Here, the SGA did not apply as there was found to be no transfer of property in the software because:
- the software was licensed;
- Orchard expressly retained title, copyright and other proprietary rights in the software, indicating strongly that ownership rights were intended to be retained;
- all copies of the software had to be returned or destroyed on termination; and
- although the licence was stated to be perpetual it was subject to various restrictions, including that the software could not be modified without Orchard’s consent.
- As to whether software could in principle be treated as ‘goods’ in certain circumstances, there was no binding decision on this point but the Court said that CDs impressed with software could in some cases be classified as such.
- For the SGA to apply, the agreement would, amongst other things, have to be one under which there was a sale of goods where the seller transferred property in the goods to the buyer. Here, the SGA did not apply as there was found to be no transfer of property in the software because:
- Were the exclusions reasonable under UCTA?
- Even if the terms implied by the SGA had applied, their exclusion would pass the reasonableness test under UCTA because:
- the parties were of broadly equal bargaining power;
- LBS had the opportunity to contract with Orchard but chose the benefit of the standard Framework Agreement terms. There could be no suggestion that LBS did not know, or could not reasonably have known, of the exclusion of the implied terms;
- LBS went through a protracted negotiation process and involved lawyers; and
- it was accepted that Orchard enhanced Arcindex to reflect what LBS said that it wanted.
- The Court said that the reality was that the Arcindex contract was not, when objectively viewed, an unfair or unreasonable one. LBS was to get exactly what its staff wanted. If there were material defaults which were not remedied within specified times then, under the Framework Agreement, LBS would have been in a position to have all breaches remedied, to recover damages and to terminate.
- Even if the terms implied by the SGA had applied, their exclusion would pass the reasonableness test under UCTA because:
points to note:
- This decision, as is typically the case, turns on its facts. One of the primary reasons the claim failed was that LBS was unable to prove that it had sufficiently articulated any additional, specific requirements for the software to I. LBS’s IT team was also viewed as a sophisticated purchaser who understood perfectly well what functionality the software could and could not provide. There was also significant evidence that at least some of LBS’s IT team seemed to think I had done a good job and should have been allowed more time. The Judge was satisfied that the defect which LBS claimed “was [not] a requirement which either Southwark or IBM expected, anticipated or required IBM to satisfy”.
- On the face of it, the case is of great comfort to suppliers and seems to limit the scope of a satisfactory quality term quite significantly. However, in our view the case is not quite so dramatic as may at first appear, at least in this respect. This case concerned an express ‘satisfactory quality’ warranty, (something which suppliers are generally very loathe to give), given alongside a warranty of compliance with an express specification. The case did not concern the statutory implied condition.
- The outcome might perhaps have been different had:
- the customer been viewed as more heavily reliant upon the recommendation of the supplier; and
- LBS been complaining about features/functionality which although not expressly mentioned in the specification, could or should reasonably have been anticipated as being present in the software. Here LBS did seem to have been given exactly what it asked for.
- The case highlights the importance of customers being clear what they are requesting..
- This is an example of an exclusion of the statutory implied conditions being found reasonable for the purposes of UCTA. That will not always be the case – see the 2010 Kingsway v Red Sky case for an example.
- Noting the provisions which the Judge considered when determining that no transfer of property in the software had been made, the SGA will not apply to most contracts for the supply of software as they are usually licences with an express reservation of proprietary rights by the licensor. Even where software is supplied physically on a CD, it is almost always licensed and many suppliers make it clear that they are not transferring title to the media for this specific reason.