Background

Southwark required a master data management system (System) to harmonise, improve and reduce duplication of its data.  It contracted with IBM but could not afford IBM's complete system.  Eventually, it contracted with IBM for three limited IBM "Websphere" tools, which could be used with other software as part of a System, and for Arcindex, a third party software product marketed by Orchard, for use with those tools. 

IBM had introduced Orchard to Southwark, but following that initial introduction, Orchard had demonstrated Arcindex to Southwark without IBM's involvement.  Southwark intended to contract directly with Orchard for Arcindex and related services to be provided by Orchard, but ultimately entered into this contract with IBM as a re-seller, to avoid a public procurement exercise.  This was on the terms of an ICT Goods and Associated Services contract, often used for by the government for procurement. Southwark brought in a new technical team part of the way through the implementation project who concluded that the functionality of Arcindex was deficient in some key respects.  Southwark then terminated the contract and sued IBM for around £2.5million, claiming breach of the Arcindex contract.

Key contract terms

The contract was made up of an order, together with the standard ICT terms. The order provided that: (a) all warranties and indemnities relating to the software were the responsibility of "the vendor", which was in this context accepted by Southwark as referring to Orchard rather than IBM; (b) IBM provided no additional warranties; and (c) any implied term of merchantability or fitness for purpose was excluded.  The order appended Orchard's licence terms which warranted performance of the software in accordance with its specification but included a customer acknowledgement that it had not been prepared to meet its individual requirements.

The ICT terms contained warranties that the Orchard software was of satisfactory quality and conformed with the relevant specifications set out in the contract and the manufacturer's specifications and was free from material defects in design.  It went on to exclude all implied warranties and conditions.Southwark alleged that the Arcindex software did not comply with the warranty of satisfactory quality or the terms as to quality and fitness for purpose implied by the Sale of Goods Act 1979.The main issue was whether IBM had any obligations regarding the suitability of the Orchard software and, if so, did the lack of certain functionality put it in breach.  Of more general legal interest were the questions of whether the Sales of Goods Act 1979 applied and the effect of the Unfair Contract Terms Act 1977.

The Court rejected the idea that the contract left any room for an interpretation that IBM had warranted that the software would be suitable for Southwark's purposes.  He also found that there was no room for implying a term of reasonable suitability for purpose at common law, because this contradicted the express terms of the contract.

Regarding the argument that the Sale of Goods Act applied to imply further terms relating to quality and fitness for purpose, the Court concluded that the contract was clearly expressed as a licence of software only without any transfer of property in the software.  There was therefore no "sale" and the Sale of Goods Act did not apply.  Separately, the judge felt that software might be regarded as "goods", since it had been provided on CD, but this was not relevant to the decision.  The judge went on to conclude that even if the Sale of Goods Act had applied, the exclusion of its implied terms would have been reasonable and therefore not affected by the Unfair Contract Terms Act 1977.  This was based on the equality of the bargaining power of the parties, Southwark's knowledge of the term and the fact that the ICT terms, under which IBM expressly warranted satisfactory quality, gave Southwark an adequate remedy.

The software was not badly manufactured and complied with its specifications as described.  Southwark's only complaint was that it was not fit for its purpose because it lacked certain functions.  However, the judge found that the Southwark procurement team fully understood what the Arcindex software would provide and were satisfied that it met Southwark's requirements until the change in team. In summary, Southwark had received software that was not only of satisfactory quality but suitable both for general purposes and for the specific purposes that Southwark had identified as its requirements.  The judge therefore ruled that there were no material breaches of contract and found in favour of IBM on all counts.

Food for thought

The case shows the need for internal communication within customer organisations and the dangers of changing teams during the course of a project, since it appeared that with better understanding by the ultimate management team, this software would have achieved Southwark's purpose. From a legal perspective, this case accentuates the difference between "satisfactory quality" and fitness for a customer's requirements and highlights the importance for customers of clearly setting out their specific requirements at the outset of an IT project. Even where software is considered "goods", customers should not seek to rely on the Sale of Goods Act to imply terms of quality, since in nearly every case the software will be licensed to them and not subject to a "sale".