UK: Software Was Fit For Purpose

Last Updated: 27 April 2011
Article by Mark Alsop

London Borough of Southwark v IBM UK Limited [2011] EWHC 549 (TCC)

The London Borough of Southwark was looking for a "master data management" system which was to act as a central index of data used by Southwark's different computer systems. The idea was to prevent duplication and wrong entry of data. Southwark first had discussions with SAP but it then decided to deal with IBM. MDM was a fairly new area and IBM suggested that the Southwark use a combination of its own products (principally Websphere), its consultancy services and a third party product from Orchard called Arcindex. Southwark took on responsibility of reviewing Arcindex – it was not suggested that IBM had recommended the software. After both Websphere and Arcindex had been delivered and installed, the project petered out and eventually was cancelled by Southwark who brought proceedings for return of monies spent on the grounds that the software was not suitable for its purpose or of satisfactory quality. This meant determining what, if any, express or implied suitability obligations did IBM have with regard to Arcindex: if and to the extent that there were any such obligations, whether there were any breaches of contract. There were further issues, including whether the Sale of Goods Act applied and whether UCTA applied to the exclusion.

The Arcindex software was supplied by IBM to Southwark on terms which stated that Southwark's right to use the software was to be determined solely by a licence granted to Southwark by Orchard and that no title, ownership or copyright was transferred by IBM. The warranty clause provided that "any warranties and indemnities relating to [Arcindex] are the responsibility of [Orchard]. [Orchard] will provide the warranty in [Arcindex] ... in accordance with the licence terms in Appendix A ... there are no additional IBM warranties, and any implied condition or warranty of merchantability or fitness of purpose are excluded." Appendix A contained Orchard's licence grant and also an undertaking that Arcindex would perform in accordance with the specification. Southwark acknowledged that the software had not been prepared to meet its individual requirements. Appendix D, the Specification, identified broadly what Arcindex was to provide in terms of functionality.

The contract took the form of an Order which started: "This Order specifies all the variables necessary for the completion of an ICT Goods and Associated Services contract". Just above signature, it was stated that the Order specified all the information necessary for completion of an ICT Goods and Associated Services contract and that the parties agreed that a contract had been formed "using the terms and conditions in the Model contract, augmented by the information provided in the Order ...".

The High Court (Akenhead J) rejected Southwark's claims in every respect. Some of the points made were as follows:

  • It was clear that in the Order IBM gave no warranties and any implied conditions to merchantability or fitness for purpose were agreed to be excluded.
  • However, the effect of the words above the signatures did mean that the ICT conditions were incorporated – use of the word "augmented" suggested that the terms were increased or supplemented rather than altered. The ICT conditions provided for warranties as to satisfactory quality, performance and specifications and free from errors. However, these three warranties had to be read in conjunction with the Order, so "satisfactory quality" was to be determined by reference to quality which was called for in the Order. (Southwark did not plead that there was non-conformity with specification or that there were errors, so these warranties were not alleged to have been breached).
  • Southwark tried to argue that satisfactory quality had the meaning in a Sale of Goods Act, but this was rejected. Section 14(2)(b) of the SGA makes it clear that the listed aspects of quality (which includes fitness for purpose) are only relevant "in appropriate cases". In this case, one needed to look at the contractual context of the satisfactory quality term to determine to what extent "fitness for purpose" is allowed for – and in any event the SGA definition of satisfactory quality only relates to general or common purposes and not specific purposes.
  • As the ICT terms excluded all other warranties (including fitness for purpose) then one had to look at the contract to see if there was anything express stating that the software would be suitable for Southwark's specified purposes. There was no such term – indeed there was an expression that Arcindex had not been prepared to meet Southwark's individual requirements.
  • There was no room for implying common law terms of reasonable suitability because they would offend against express terms.
  • There would only be statutorily implied terms if the contract was one for the sale of goods. Section 2(1) of the SGA makes it clear that a contract for the sale of goods be for goods and must involve the transfer of property in goods. With regard to whether software was goods, the Judge was of the view (obiter) that in principle software could be goods within the meaning of the SGA. CD's are physical objects that can be goods. A CD impressed with electrons to add functions and values simply gives a CD a particular attribute. So if a customer buys a music CD with an album on it, it must be goods and should, if new, be of satisfactory quality. The same must apply if the CD contains software. However, here there was no transfer of property - the Order made it clear that there was a licence of the software and that there would be no transfer of title. Other clauses backed this up.
  • Even if the SGA did apply, the exclusion of statutorily implied terms in the contract was wholly reasonable within the terms of UCTA. The parties were of broadly equal bargaining strengths, Southwark chose the contractual framework and there were protracted negotiations with lawyers involved.

There are a number of interesting points in the judgment. Note that it worked perfectly well for IBM to contract for the sale of the software, but to take no responsibility. If a customer takes upon itself to evaluate software it should do so with great care to ensure that it is suitable for its needs in every respect.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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