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JILT 1997 (3) - Alison White

Caveat Vendor?

A review of the Court of Appeal decision in St Albans City and District Council v International Computers Limited

Alison White
Solicitor
Shepherd and Wedderburn WS
ajw@btinternet.com

Contents

Abstract
1. Introduction
2. The Facts
3. The Reasoning
4. The Future
References
Cases

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Abstract

Last year, the Court of Appeal [1996 All ER 481] upheld an earlier decision St Albans City and District Council v International Computers Ltd. [Queen's Bench Division 1995] in which substantial damages were awarded in respect of a supply of software which proved unsuitable for the customer's intended use. This article provides a detailed examination of the implications of this decision; in particular, the interpretation of exclusion clauses and the vexed question of the legal status of software

Key words:Liability for Defective Software, Exclusion Clauses, Unfair Contract Terms Act


This is a Refereed Article published on 31 October 1997.

Citation: White A, 'Caveat Vendor? A review of the Court of Appeal decision in St Albans City and District Council v International Computers Limited', 1997 (3) The Journal of Information, Law and Technology (JILT). <http://elj.warwick.ac.uk/jilt/cases/97_3stal/>. New citation as at 1/1/04: <http://www2.warwick.ac.uk/fac/soc/law/elj/jilt/1997_3/white/>


1. Introduction

It would be all too easy to discuss St Albans City and District Council v International Computers Limited (1995, 1996) in the context of well-worn clichés - shock waves running through the industry, computer suppliers running to their lawyers for advice - but that would be to negate the undoubted importance of this case not just for software suppliers but as further evidence of the swing in legal policy from caveat emptor to caveat vendor.

The doctrine of caveat emptor - let the buyer beware - arose in English law from judicial reluctance to intervene in contractual disputes: in particular their unwillingness to imply terms into contracts where there were no express terms. The effect of this doctrine was that the buyer was naturally disadvantaged by a lack of knowledge or expertise about what he was buying. Over time judicial policy changed and judges became more willing to imply terms into certain contracts. Sale of goods is the classic example where judicial policy on implying terms into such contracts became so well established that the law was codified in the Sale of Goods Act 1893 ('the 1893 Act').

1893 Act may be viewed as the first consumer protection legislation, however, the last thirty years have seen a dramatic explosion in consumer protection. From the Misrepresentation Act 1967 to the amendments to the Sale of Goods Act in 1994 [1] and the Unfair Terms in Consumer Contract Regulations 1994, [2] the doctrine of caveat emptor has gradually been weakened and, as far as consumers are concerned, replaced with caveat venditor. As Atiyah has noted 'it is now unrealistic to treat the basic principle of law as caveat emptor rather than caveat venditor.' (Atiyah PS et al;1995, p. 111) Moreover, the European Union has consistently taken a pro-consumer stance and more legislation in this vein is planned. The Times has reported that a Directive on the Sale of Consumer Goods and Associated Guarantees, which would require a standard two year guarantee for all consumer products, is being considered.(Wednesday 5 February 1997)

Although the position as regards sale of goods is relatively settled, the position as regards other types of contract is not so clear. Judges are still reluctant to interfere unless they are satisfied that to imply the term would represent the parties' true intention. The degree of reluctance usually depends on the parties involved. Where both parties are dealing in the course of business judges are less likely to interfere than where one of the parties to the contract is a consumer.

On the whole, judicial policy avoided intervening in contracts where parties were of equal bargaining power. This attitude extended to the question of exclusion and limitation clauses which have, since 1977, been regulated by the Unfair Contract Terms Act 1977 ('UCTA'). UCTA seeks to strike at exclusion and limitation clauses in consumer contracts and contracts concluded on one party's standard terms and conditions. It does not extend to commercial contracts generally and the judiciary respected this distinction. This was highlighted in the case of Photo Productions Limited v Securicor (1980) (pre UCTA but decided after the Act was in force) where the House of Lords held that Securicor were entitled to rely upon a total exclusion clause and escape liability when one of its employees set fire to the property he was guarding.

In finding for Securicor Lord Wilberforce noted 'in commercial matters generally when the parties are not of unequal bargaining power and when risks are normally borne by insurance, not only is the case for judicial intervention undemonstrated but there is everything to be said ... for leaving the parties free to apportion the risks as they think fit and for respecting their decisions' (Photo Productions Limited v Securicor;1980)

Recently, the judges' attitude has begun to change. Initially they began to intervene in situations where they deemed that a business party to a contract was dealing as a consumer in terms of section 12 of UCTA. Section 12 provides that

'(1) A party to a contract 'deals as consumer' in relation to another party if

(a) he neither makes the contract in the course of a business nor holds himself out as doing so; and

(b) the other party does make the contract in the course of a business;....'[3]

The courts developed the principle that where a business entered into a contract which did not involve an integral part of its business or, if it was incidental, did not occur with sufficient regularity then it was not dealing 'in the course of a business'. Thus the courts could review any limitation and exclusion clauses contained in such contracts on the basis of the reasonableness test (UCTA section 3). Latterly, a new trend has arisen where the courts have intervened and applied the reasonableness test in situations where there is no doubt that both parties were dealing in the course of business. This trend can be seen in Salvage Association v CAP Financial Services Limited (1995) which also involved defective software but is not restricted to contracts involving software.(Lawson R, 1995; p29 cites cases involving a drilling rig and secretarial services) As Richard Lawson has noted 'businesses must now recognise that the reasonableness test is being applied with rigour to their contracts, as it is in consumer cases.' (Lawson R, 1995; p29)In certain cases it can be seen that the courts will go to extremes to show that they are entitled to review the contract (Salvage Association v CAP Financial Services Limited,[1995]). We are now considerably removed from the high point of non-intervention exemplified by Photo Production v Securicor.

St Albans v ICL can be viewed as further evidence of this new judicial attitude. Both Scott Baker J in the High Court and Nourse LJ in the Court of Appeal were keen to find that they were entitled to review the exclusion and limitation clauses, however, the decision in the Court of Appeal goes further and adds a new element to the caveat vendor approach. It addresses one of the most debated questions in relation to computer law. What is the legal status of software - goods or services? Although this part of the judgement of Sir Iain Glidewell is strictly obiter, it at least indicates that the courts are finally willing to admit that the problems raised by the classification of software have to be addressed.(this can also be seen in Lord Penrose's judgement in Beta Computers (Europe) Limited v Adobe Systems (Europe) Limited 1996, ) In the High Court Scott Baker J had remarked that he did not need to decide whether software was goods or services (although he indicated that if forced to make a decision he would hold it to be goods). Sir Iain Glidewell, however, felt the need to give judicial guidance on this point, although as he himself admitted 'in expressing an opinion I am therefore venturing where others have, no doubt wisely, not trodden'(Sir Iain Glidewell at p. 493).

2. The Facts

In 1988, with the implementation of the community charge imminent, St Albans City Council put a tender out for a new computer system which would, amongst other functions, carry out the work involved with implementing the new tax. Having had the benefit of advice from Coopers & Lybrand, the tender of ICL was chosen. After a brief period of negotiation a deal was agreed on 21 October 1988.

On 30 October 1989 the first release of the 'COMCIS' system was delivered and installed. This replaced the previous IRS system which had merely created a register of charge payers. COMCIS was designed to carry out many more functions such as billing. On 2 November the government instructed all councils that they were required to make a return of the relevant population by 8 December. At an important meeting on 29 November, ICL's project manager (who was providing consultancy services to St Albans) assured representatives of the council that the figure to be returned to central government could, apart from the student population, be extracted from the TP (Transaction Processing) screen. At no point between then and 8 December was any indication given that the figures on the TP screen could not be relied upon.

The count was taken over the weekend of 2 December 1989, but the figure extracted later proved to be incorrect: the number of charge payers being overstated by 2,966. ICL contended in court that on Monday 4 December a new release of the COMCIS system was delivered to the Council which would have provided a correct count. however, it was not definitively established that this release was received by St Albans.

In February the level of council tax, based upon the incorrect count, was fixed. By this point the Council had begun to suspect that the count was incorrect but it was too late to establish what the correct figure was. The Council felt they had no alternative but to proceed on the basis of the figure extracted on 2 December. The overstatement of the population resulted in an underpayment of £484,000 from the St Albans chargepayers and an increased precept in the sum of £685,000 being paid by St Albans to Hertfordshire County Council. St Albans sued ICL for these amounts together with interest.

St Albans sued for breach of express terms of the contract as well as terms implied by the Sale of Goods Act 1979 ('SGA'). The Council also alleged negligent misstatement on the part of ICL's employee who gave the assurances regarding the reliability of the count. ICL initially defended the action on three grounds (i) that the Council had not themselves suffered loss as a consequence of any breach of contract or negligence on the part of the defendant; (ii) that any loss suffered was recouped from the 1991/1992 chargepayers and was therefore irrecoverable and (iii) that its liability was limited under contract to £100,000.

ICL's lawyers were so confident about their deferred receipt argument that they lodged £70,000 (compensation for the interest paid until late receipt of the monies) into court before the trial began. It was rather optimistic to say the least, for ScottBaker J awarded £1.3 million to St Albans. ICL appealed, butthe Court of Appeal upheld the judgement against ICL although it reduced the damages awarded to St Albans by £484,000 being the monies recovered from the chargepayers in the year 1991/1992.

3. The Reasoning

One of the first decisions which had to be made by the judge at first instance was to discern which documents comprised the contract. In this case it was held that the contract comprised the Council's invitation to tender, ICL's tender and seven other documents. Despite the plethora of documents making up the contract Scott Baker J decided that ICL had dealt on its standard terms of business.

It was not denied by ICL that the standard terms made up part of the contract but there were many factors which suggested that it was not correct to say that ICL had contracted on its' standard terms. Obviously Scott Baker J's decision as to whether the parties had dealt on ICL's written standard terms and conditions affected whether he could then review any exclusion and limitation clauses contained in the contract on the basis of the reasonableness test established in UCTA section 3.

Section 3 provides

'(1) This section applies as between contracting parties where one of them deals as consumer or on the other's written standard terms of business

(2) As against that party, the other cannot by reference to any contract term - (a) when himself in breach of contract, exclude or restrict any liability of his in respect of the breach ....except in so far as (in any of the cases mentioned above in this subsection) the contract terms satisfies the requirement of reasonableness' (emphasis added).[4]

Scott Baker J had held that St Albans was not a consumer. He came to this decision reluctantly having indicated that 'at first glance, the plaintiffs fall within the word 'deals as consumer','([1995] FSR 686) but he held it was clear from the definition of 'business' in section 14 that a local authority cannot be considered to be a consumer. It has been suggested by Elizabeth Macdonald that Scott Baker J was incorrect taking this view, (Macdonald E, 1995, p587) that it was open to him to hold that the Council was a consumer by applying the principle that a business can be a consumer where the transaction in question is not part of its normal business. So, for example, a car hire firm buying a water machine would not be dealing in the course of business.

In the case of a council it is more difficult to make such a distinction particularly because a council's responsibilities encompass so many areas of life. Ms Macdonald concedes that the collection of local revenue would be an integral part of the council's business. However, she suggests that acquiring the means to calculate and collect the tax would not. This argument is hard to sustain. Whilst the purchase of the system is a one-off transaction it is more analogous to a car-hire firm buying the cars than the purchase of a water machine. On balance, therefore, Scott Baker J was correct in holding that St Albans was not a consumer.

Even if Scott Baker J had held that St Albans was a consumer within the terms of section 12(1)(a) and (b) they would have been excluded from dealing as a consumer as a result of section 12 (c). This provides that 'in the case of a contract governed by the law of sale of goods or hire purchase, or by section 7 of this Act, the goods passing under or in pursuance of this contract are of a type ordinarily supplied for private use or consumption.'[5]

The applicability of section 12(1)(c) depends upon whether or not the contract was covered by the law of sale of goods or hire purchase. On Scott Baker J's reasoning, if he had had to make a decision about the nature of the software supplied by ICL he would have held it to be goods. Considering the terms of section 12(1)(c) it would be difficult to hold that the goods involved in this case were 'ordinarily supplied for private use or consumption.' St Albans would not, therefore, be dealing as a consumer within the terms of section 12(1). By contrast, Sir Iain Glidewell's dicta on the nature of the software supplied by ICL (discussed below) would suggest that there is no need to consider section 12(1)(c) because the software would not be governed by the law on sale of goods. Clearly the two approaches produce markedly different results.

As a result of the statutory provisions, Scott Baker J felt compelled to find that the Council was not a consumer. It is evident, however, that he was not satisfied with this result. It is suggested that Scott Baker J's obvious reluctance to hold that the Council was not a consumer affected his later arguments, partly in his finding that ICL was dealing on its standard terms and conditions but more clearly in his balancing of the relative bargaining power of both parties (a point which will be returned to below).

The Court of Appeal affirmed Scott Baker J's finding that ICL had dealt on its standard terms. Nourse LJ holding that 'it is clear that in order that one of the contracting parties may deal on the other's written standard terms of business within s. 3(1) it is only necessary for him to enter into the contract on those terms'. (Nourse LJ at p.491) It is, however, submitted that there were other influences at work in the decision. Although ICL's terms were incorporated, there were, as noted above, eight other documents which formed part of the contract. Moreover there had been some time to negotiate of the contract, albeit not as long as might have been recommended in retrospect, but long enough for St Albans to have raised objections about certain clauses (in particular the limitation clauses) with ICL. ICL said at the meeting on 21 October that any changes to the terms and conditions would have to be agreed by their lawyers which would cause delay. Moreover, ICL indicated that if the contract was not signed up within the next week then the hardware which had been reserved for the Council would be allocated elsewhere.

The reports of the case imply that ICL may not have been entirely truthful when they told St Albans they had to sign up on the deal as it was. however, it was not ICL's fault that they were able to put St Albans in that position. St Albans had, to a certain extent, brought the situation upon themselves by failing to deal expeditiously with the procurement and implementation of the new computer system once it became apparent that it would be needed. Although both courts obviously had a great deal of sympathy for the plight of St Albans it is hard to feel quite the same degree of sympathy, particularly in view of their substantial contribution to their weakened position. In reality, a government body has significant bargaining power and in this instance the Council had had the benefit of the advice of Coopers & Lybrand to help them decide which tender to accept. Moreover, the involvement of the Council's legal staff was minimal which appears strange in a contract of this value. This is another indication that the Council's bargaining 'weaknesses' were of their own making. Consequently, it would appear to have been equally open to the courts to decide that this was a contract where there was no need for the courts to intervene, as both parties were of equal bargaining strength. This was not the approach taken.

Scott Baker J found (and the Court of Appeal agreed) that ICL were dealing on their standard terms. Consequently any limitation and exclusion clauses in the contract would be subject to the reasonableness test of UCTA Section 3. Scott Baker J referred to the case of The Flamar Pride (1990) where the judge had also considered section 3 UCTA and had concluded that where a number of alterations were made to the standard terms and conditions this took the contract outwith the application of section 3. Scott Baker J held that in order for section 3 to apply not 'all the terms have to be fixed in advance by the supplier. In many contracts there may be negotiations as to, for example, quality or price but not as to the crucial exempting terms.'([1995] FSR 686) ICL argued that the contract had been negotiated, albeit that no changes to the terms and conditions were ultimately made, and as a result it was not dealing on its standard terms. Both Scott Baker J and the Court of Appeal, however, dismissed this argument.

It is easy to feel that the judges were determined that they would be able to review the terms of this contract. It would have been open to them to hold that the dicta in The Flamar Pride was applicable and that section 3(1) of UCTA did not apply. However, they had resolved that they would intervene. It is not clear whether this sympathy was extended as part of a general policy or was particular to the case. Certainly the fact that it was 'the public' (or a public authority) which had suffered the loss may have had a bearing on the matter, as might the fact that the loss had been caused by a computer failure. Whatever the reason the courts felt inclined to intervene.

Having decided that this was a contract incorporating the standard terms and conditions of one party it was obvious that the reasonableness test in UCTA could then be applied. Before applying the test, however, it was necessary to establish that there had been a breach of contract and in this respect the two courts took differing approaches.

It was not disputed between ICL and the Council that the COMCIS system did not work correctly when the population count was taken on the 2nd December 1989. The difference of opinion lay in whether or not this amounted to a breach of contract. Breach of contract could be a breach of an express term of the contract or a breach of a term implied by statute (e.g. under the SGA or the Sale and Supply of Goods Act 1982('SGSA')). In order to rely upon there having been a breach of a term implied by one of these Acts it must be established that the subject matter of the contract, i.e. the software, can be classed as either goods or services. In relation to software the question of whether software can be classed as goods or services is one which has never been totally resolved.

In the definition of the SGA '"Goods" includes all personal chattels, other than things in action and money, and in Scotland all corporeal moveables except money...' (Section 61(1)). and there is a similar definition in section 18 of the SGSA (although this Act does not apply in Scotland). Clearly, software does not come within this definition because it is intangible. On the other hand, where there is a tangible element accompanying the software (such as a disk or CD-ROM) or the software is sold with hardware, then it is generally accepted that the software could be 'goods'. Moreover where software is made to order (bespoke) then the general view is that this is a supply of services which would come within the SGSA. These classifications do not cover all circumstances, for example, where software is sold over the internet or (as in St Albans v ICL) it is installed directly into the purchaser's hardware. It is, however, a rough and ready guide on which lawyers can base their contracts.

The courts seemed generally reluctant to give judicial weight to this unofficial distinction, usually preferring to indicate that a decision on the goods/services question was unnecessary and that whatever the answer they would have come to the same decision in the case in question. Strictly speaking, this should not be the case because strict liability flows from the implied terms of conformity with description, satisfactory quality and fitness for purpose (sections 13, 14(2) and 14(3) SGA) which are more stringent than the test in the SGSA which only requires that the services be carried out with reasonable skill and care. Scott Baker J avoided addressing the goods/services issue by finding that there was an express term of the contract to the effect that the software provided would be fit for the defendants purpose of maintaining and operating a reliable register thus 'rendering reliance on the Sale of Goods Act unnecessary.'([1995] FSR 686) He did say, obiter, that if called upon to decide he would probably hold that software was goods on the basis that if software was not goods he could not 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.'([1995] FSR 686)

Although the Court of Appeal agreed that there had been breach of an express term, Sir Iain Glidewell also addressed the question of the nature of software. He held that 'if [a] disk is sold or hired by the computer manufacturer, but the program is defective, in my opinion there would prima facie be a breach of the terms as to quality and fitness for purpose implied by the 1979 Act' ([1996] All ER 481 at 493). Although not part of the ratio decidendi of the case, his comments are a useful confirmation of the generally accepted position outlined above. However, Sir Iain did not stop there. In a case, such as the one in question, where there was no tangible element such as a disk he held that the transfer of the program did not constitute a transfer of goods. This required him to consider whether the contract would contain any implied terms. Sir Iain Glidewell held that in such circumstances it would be necessary to rely upon the pre-existing common law. Relying upon the dicta of Lord Pearson in Trollope and Colls Limited v North West Metropolitan Regional Hospital Board (1973), he concluded that the contract would be subject to an implied term, similar to that in the SGA, that the program would be fit for its purpose.

The current SGA still reflects the attitude of its predecessor - the 1893 Act - and focuses on moveables -- thereby ignoring the value of intangible rights and property. It is unfortunate that the terms implied into the sale of software should have to depend on being 'attached' to a corporeal element. However this is the distinction made by the definition in the SGA. Thus, Sir Iain Glidewell had to return to the common law to determine the position in relation to software. The whole purpose of the 1893 Act was to codify the law in this area and, whilst it is admitted that computers and software could not have been foreseen in 1893, it is regrettable that it should be necessary one hundred years later to return to the common law in order to discern what terms should be implied into the contract. As the pre-existing law was largely codified by the 1893 Act it was relatively straightforward for him to imply the same terms. If this had been a Scottish case, however, the position would not have been so clear. Although the 1893 Act did apply to Scotland it was based entirely on English law and made no attempt to reflect the Scottish common law position.

It is generally agreed that it is difficult to discern just what the Scottish common law position was before 1893. Certainly there was an implied warranty that the goods were priceworthy, but fitness for purpose and merchantable quality (now satisfactory quality) were not Scots concepts and therefore there can be no guarantee that a court in Scotland would feel that it could imply the same terms in a Scottish contract as those implied by Sir Iain Glidewell.[6] As most software and hardware producers in the United Kingdom are likely to contract under the laws of England this might not be such a problem, however, it is known that at least one software house (Adobe) applies the laws of Scotland to their standard terms and conditions.

Even if it is held that the software must be fit for its purpose, how can this standard be judged in relation to software? It is widely accepted that computers and software are inherently unstable and this view received judicial confirmation in Eurodynamic Systems v General Automation (1988) where Steyn J stated that 'the expert evidence convincingly showed that it is regarded as acceptable practice to supply computer programmes [sic] (including system software) that contain errors and bugs.' In Saphena Computing Ltd v Allied Collection Agencies Ltd (1995) this view received further confirmation when Staughton J held 'software is not necessarily a commodity which is handed over or delivered once and for all at one time. It may well have to be tested and modified as necessary.'

Nevertheless, in St Albans v ICL both courts found that ICL were strictly liable for their failure to deliver a system without any defects. Again it is submitted that the courts could easily have found for ICL's favour by taking the approach that the system was under development and that later releases corrected the problem. Instead the courts focused on the need for the software to carry out the count and the fact that a bug-free version was delivered two days later seems to have been ignored. It is unfortunate for ICL that St Albans were able to bring forward the evidence that ICL's project manager had, without requisite knowledge, given assurances that the figures on the TP screen could be relied upon. Although there is some dispute as to whether St Albans received the next release of the software which would have made the count correctly before December 8th it was accepted that the fault had been remedied in later releases which St Albans did receive. Moreover it was open to the judges to find that St Albans should have put in place some form of back up procedure or some method of verifying the count but this was not explored in either court.

It is accepted that software will contain bugs, therefore is it feasible to apply the strict liability of the implied terms under the SGA or the implied terms of fitness for purpose under the common law? Is it possible to apply the same standards to software that you would to a kettle or a machine? On the view taken in Eurodynamic Systems and Saphena Computing software is treated as having a totally different nature from 'goods'. In these cases the developmental nature of software and appreciated that it takes time to produce a perfect product. Neither of the cases dealt with the type of software likely to be bought by a consumer such as a word processing package or a game. Given the trend towards more and more consumer protection it is inconceivable that a court would, or could, hold that such a product could be sold whilst in development.

The opposing view holds that strict standards can be applied, both to consumer and non-consumer software and that any defect in the software could allow it to be rejected. This is particularly clear from the new section 14(2B) of the SGA which holds that 'satisfactory' quality includes, amongst other factors, freedom from minor defects. Any bug in a program would be considered a defect and would allow rejection of the goods. It is easy to feel sympathy for this view. After all, there is no reason why a consumer should not receive the same protections from faulty software as it does for faulty goods. The consumer is certainly in no stronger a bargaining position with a software supplier than it is with the supplier of goods. In that situation the consumer is unable to assess the risks involved and is unlikely to consider the availability of insurance. However, in a commercial context the parties are notionally free to discuss the question of risk and liability and apportion each as they see fit (although as St Albans v ICL proves it does not mean that the courts will refrain from interfering).

Having established that there was a breach the courts turned to look at the limitation and exclusion clauses contained in the contract. It is this part of the judgement which most clearly displays the emphasis of the court towards caveat venditor. Scott Baker J found the limitation clause restricting ICL's liability to £100,000 (clause 9 of ICL's standard terms) to be unreasonable. The Court of Appeal on considering the decision noted the dictum in George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd (1983) that 'there will sometimes be room for a legitimate difference of judicial opinion as to what the answer [to the requirement of reasonableness] should be, where it will be impossible to say that one view is demonstrably wrong and the other demonstrably right. It must follow, in my view, that when asked to review such a decision on appeal, the appellate court should treat the original decision with the utmost respect and refrain from interference with it unless satisfied that it proceeded on some erroneous principle or was plainly and obviously wrong.' On this basis, Nourse J was unwilling to overrule the findings of Scott Baker J as to the requirement of reasonableness although he did point out that he would probably have come to the same decision. As the above quotation shows there is sufficient scope for judicial intervention on the basis that a lower court decision was 'plainly and obviously wrong', however the Court of Appeal in St Albans v ICL were obviously not disposed to interfere. Scott Baker J plainly favoured St Albans in weighing up the factors of the case and the Court of Appeal concurred.

UCTA s 11(4)[7] and Schedule 2 lay out a number of factors to be taken into consideration when weighing up the reasonableness of a clause. These include the resources of the parties, the availability of insurance, the parties' bargaining positions, whether any inducements were offered and whether the other party knew of the limitation. Scott Baker J also referred to the dicta in Smith v Bush (1989) with approval holding that 'the ultimately determining factors are:

(1) the parties were of unequal bargaining power;

(2) the defendants have not justified the figure of £100,000, which was small, both in relation to the potential risk and the actual loss;

(3) the defendants were insured;

(4) the practical consequences.' ([1995] FSR 686.)

The Court of Appeal, referring to the dicta set out above, accepted Scott Baker J's finding. As noted by Michael Chissick, it is 'unfortunate for practitioners that the Court of Appeal did not take the opportunity to discuss the issue of reasonableness in more detail' (Chissick M, 1996) and instead have left considerable doubt as to how to make a limitation clause reasonable.

ICL were very unlucky that, owing to what seems to have been an oversight, an out of date version of their terms and conditions was incorporated into the contract. The increase in the limitation of liability from £100,000 to £125,000 in the 1988 (as opposed to 1985) version is, however, largely irrelevant. In Salvage Association v CAP Financial Services Ltd, which also turned on the reasonableness of a software supplier's terms and conditions, CAP had to show that the limitation of £25,000 was reasonable. As at the time the contract was entered into the limitation had been increased to £1 million it is submitted that it would have been impossible for CAP to justify the original limitation of £25,000. On the other hand there is not such a difference between £100,000 and £125,000. It is obvious from the judgements that it was considered that ICL had put forward no basis for justifying either figure but the non-justification of these figures was outweighed by other factors. Moreover, as noted above St Albans had contributed to the weakness of their bargaining position and were aware that liability under the contract was limited to £100,000 because they had tried to have it changed. As Scott Baker J ultimately put it: 'I do not think it unreasonable that he who stands to make the profit (ICL) should carry the risk. These factors outweigh the fact that bodies such as computer companies and local authorities should be free to make their own bargain, that the plaintiffs contracted with their eyes open, that limitations of this kind are commonplace in the computer industry and that COMCIS was an area of developing technology.'[1995] FSR 686.

This clearly sets out a number of factors which could have tipped the balance in favour of ICL, or could have allowed the Court of Appeal to overturn the High Court decision in favour of ICL, yet all of these were outweighed in the most part because ICL had insurance cover of £50 million world-wide. Without suggesting that software suppliers should receive too much sympathy, it has to be said that the insurance factor influenced the court without the court considering whether or not there might have been an excess on the policy or that the loss might have been excluded from cover. The judges were only concerned with the fact that in their eyes ICL could afford the loss and the Council could not. 'On whom is it better that a loss of this size should fall, a local authority or an international computer company?'[1995] FSR 686. This was what Scott Baker J referred to as the 'practical consequences' of the case, but no consideration was given to the practical consequences of ICL being held liable such as higher prices to future customers future because of increased insurance premiums.

Nabarro Nathanson have, following the High Court decisions in Salvage Association v CAP and St Albans v ICL, carried out a review of product liability insurance policies of software suppliers and users. Their findings were that 'none of the product liability policies which we reviewed provided cover for pure financial loss unaccompanied by physical injury or damage.'(Golding P, 1995) Yet the existence of insurance was undoubtedly a major influence on the judges in both Salvage Association and St Albans.

The only point on which the Court of Appeal overturned the original decision was on the amount of damages. The Court of Appeal considered a number of cases which had not been brought to the attention of Scott Baker J and held that St Albans could only recover interest on the £484,000 as it had recovered the principal sum from its chargepayers the following year. This at least shows one area where the Court of Appeal was willing to take a more reasonable approach to the case. Although ICL were perhaps too optimistic about the prospects of success of their deferred receipt argument in relation to the increased payment to Hertfordshire County Council, it is submitted that allowing St Albans to recover the £484,000 twice as Scott Baker J effectively did was not analogous to the established principles whereby one party (B) can recover from A a loss already made good by C.

There are many areas of the decision in St Albans v ICL which can be criticised and it is easy to identify facts which could have led a differently minded court to the opposite conclusion on the question of ICL's liability. There is no denying that ICL were slapdash in their handling of this contract (the confusion over which releases of the software were delivered, the assurances being given by an employee not qualified to give them, failure to warn St Albans that some problems with the software had been identified, using an out of date set of standard terms) but their greatest misfortune seems to have been in allowing the case to come to court. The decision has obviously had considerable impact in the computer industry but to a certain extent it only confirmed what a lot of people in the industry previously thought: that the standard terms and conditions of most software companies - limitation and exclusion clauses in particular - would not hold up to judicial scrutiny. A number of practitioners have commented that most cases of this nature had settled out of court because although winning would not prevent someone else seeking to challenge the terms and conditions at a later date losing would result in a dangerous precedent being set. (Beecham C, 1995b)

4. The Future

Whilst the decisions of the High Court and, more importantly, of the Court of Appeal in this case have provided answers to some of the questions raised over the legal status of software and software contracts they have left many unanswered and indeed have raised many more. Although the reasoning behind the decision can be criticised on many fronts the decision is to be welcomed if only for the reason that the Court of Appeal, particularly Sir Iain Glidewell, has sought to tackle important issues in relation to software rather than sweeping them aside.

The main reaction of the computer industry to this case has been a rush by suppliers to review their terms and conditions, particularly the limitation and exclusion clauses. This is understandable, for if the courts are imposing a strict interpretation of 'fitness for purpose' then ensuring limitation and exclusion clauses are effective will be ever more important. The generally accepted view amongst the industry and IT practitioners seems to be that in order for the limitation of liability to be reasonable it should be tied into the contract price. (In fact the ICL limitation of liability had been tied into the contract price or £100,000, whichever was the lower, which in the case of St Albans was £100,000.) Tying limitation of liability into the value of the contract is a commonly used method in share sale agreements. However, in that situation it is rare to hear of a claim being made. It is virtually unheard of for the liability of the purchaser to extend beyond that which he paid for the company. This is not the case with computers. One of the particular problems with computers and software is that the possibilities for a computer to cause damage are limitless, the knock-on effects are likely to be quite substantial and the contract price is likely to bear little or no resemblance to the loss involved [8]. As a result, tying limitation of liability to the contract price seems no more reasonable than picking an arbitrary figure. The only positive element in making reference to the contract price is that no fixed limit of liability is stated in the standard terms and thus gives the impression of flexibility. This does not, however, render such a clause inherently reasonable. I do not consider that using contract price as the limitation of liability will prove to be effective in the long run. This is also the view of Professor Roger Brownsword who notes that

'there is not a case where the proportionality argument has stood up which springs to mind.'(Quoted by Beecham C, 1995a) Another commentator has dismissed the proportionality argument as 'too crude.'(Beecham C, 1995a quoting Professor Hugh Collins)

It is interesting to note that a case involving a limitation clause based upon the contract price was to have come to court last year.(Dun & Bradstreet v Excel)

Unfortunately the case settled and therefore the clause was not tested in court but it indicates the reluctance of suppliers to test limitation clauses or any of their standard terms.

One of the factors outlined in UCTA, which is to be taken into account in determining reasonableness is whether the party received any inducement. It may be that computer suppliers will in future give more serious consideration to offering such inducements as a way of ensuring that the courts would hold any limitation clause to be reasonableness.

Following St Albans v ICL a group of local government IT managers has drawn up a set of standard elements to be included in contracts with IT suppliers (Computer Weekly 1996). These elements include setting out the period during which the supplier will maintain the system and provision of a list of IT equipment that is compatible with the new system.

Other consequences for the computer industry of the decision in St Albans v ICL will be the effects of the case in any litigation relating to the millennium bug. Although the practical view for the moment is to concentrate on getting the problem fixed prior to the year 2000 (Y2K) it is inevitable that there will be litigation over the costs involved in the repair process. Moreover, Sir Iain Glidewell's dicta on the nature of software will have substantial impact where the software falls into the category of neither goods or services. The terms of quality and fitness for purpose impose strict liability. In this regard it has been held that a supplier will be liable even if he has done all he can within the state of knowledge at the relevant time (Ashington Piggeries Limited v Christopher Hill Limited,1973).

This obviously has implications for all software but particularly for Y2K cases. It will not be open to suppliers to rely on the defence that it was industry convention to include a bug which meant that the program was inherently defective. The terms of an exclusion or limitation clause will therefore be of the utmost importance. If the judges continue the trend indicated in Salvage Association v CAP and St Albans v ICL they will have no difficulties in reviewing the terms of these clauses notwithstanding that the contracts were made between parties of equal bargaining power. Therefore it is to be hoped that at some point in the near future the Court of Appeal or House of Lords is given the opportunity of clarifying just what will be considered reasonable in relation to such limitation and exclusion clauses.

On the other hand every doctrine has its limits and the courts usually manage to stop themselves going too far. In a recent House of Lords case (unconnected with software) (Slater and others v Finning Ltd,1996) it was held that a seller could not be responsible for the failure of their product due to some pre-existing idiosyncrasy of the buyer. If the House of Lords had decided this case differently (and it is certainly not suggested that it should have) it could have had interesting results for computers and the interaction of software products. As it is, software suppliers cannot be held liable for any failure of software due to its incompatibility with existing programs and hardware on the basis of the sale of goods legislation. In giving judgement the House of Lords noted that 'outside the field of private sales the shift from caveat emptor to caveat venditor in relation to the implied condition of fitness for purpose has been a notable feature of the development of our commercial law. But to uphold the present claim would be to allow caveat venditor to run riot'( per Lord Steyn at 410).

St Albans v ICL can be cautiously welcomed if as has been discussed above it is the start of a judicial trend where judges are willing to tackle computer law issues. If nothing else the scale of the Y2K problem will result in cases coming to court which, hopefully, will allow judges to develop Sir Iain Glidewell's obiter dicta. It may be that the only way in which the software as 'goods' issue can be resolved is for there to be legislation, perhaps an amendment to the SGA. At the moment the fate of ICL will certainly discourage suppliers from putting their faith in the justice of the courts. Nevertheless the general judicial, and indeed legislative, trend is towards a policy of caveat vendor and the software suppliers should not feel that they are being singled out.

References

Atiyah P S and Adams J N (1995) The Sale of Goods (9th Ed.) 1995 (London: Pitman) p. 111.

Beecham C, 'Contract Price - A Fair Limit on Liability?' The Commercial Lawyer, October 1995b, p. 33.

Beecham C, 'Insurance as a Guide to Liability' The Commercial Lawyer, October 1995a, p. 30.

Chissick M (1996), 'Software Contracts After St Albans' (1996) 1 Communications Law, 190 at 191.

Lawson R, (1995) 'Business Contracts - the UCTA Test' The Commercial Lawyer, October 1995 p. 29, cites cases involving a drilling rig and secretarial services.

Golding P, 'Insurance Solutions for IT Suppliers' (1995) Corporate Briefing Vol. 9 issue10 p. 9.

'Government IT Managers Call for Contract Standards' Computer Weekly 28 November 1996.

Macdonald E (1995), 'The Council the Computer and the Unfair Contract Terms Act 1977' (1995) 58 Modern Law Review 585 at 587

Cases

Ashington Piggeries Limited v Christopher Hill Limited [1973] AC 441. Slater and others v Finning Ltd [1996] 3 All ER 398, [1996] 3 WLR 190, 15 Tr L 458.

Beta Computers (Europe) Limited v Adobe Systems (Europe) Limited, 1996 SLT 604.

Dun & Bradstreet v Excel, unreported.

Eurodynamic Systems v General Automation Queens Bench Division (6 September 1988, unreported).

Flamar Interocean Ltd v Denmac Ltd (formerly Denholm Maclay Co Ltd), The Flamar Pride [1990] 1 Lloyd's Rep 434

George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd [1983] 2 All ER 737 at 743, [1983] 2 AC 803 at 816.

Photo Productions Limited v Securicor [1980] AC 827; [1980] 1 All ER 556

St Albans City and District Council v International Computers Limited Queen's Bench Division [1995] FSR 686, Court of Appeal [1996] 4 All ER 481.

Salvage Association v CAP Financial Services Limited [1995]FSR 654

Saphena Computing Ltd v Allied Collection Agencies Ltd [1995] FSR 616.

Slater and others v. Finning Ltd [1996] 3 All ER 398, [1996] 3WLR 190, 15 Tr L 458

Trollope and Colls Limited v North West Metropolitan Regional Hospital Board [1973] 2 All ER 260

Smith v Eric S Bush (a firm), Harris v Wyre Forest DC [1989] 2 All ER 514, [1990] 1 AC 831, HL.

Footnotes

[1] Sale and Supply of Goods Act 1994 and the Sale of Goods (Amendment) Act 1994.

[2] S.I 1994/3159.

[3] Section 25 (1) provides a definition of 'consumer contract' for Scotland. This states:'consumer contract' means a contract ... in which (a) one party to the contract deals, and the other party to the contract ('the consumer') does not deal or hold himself out as dealing, in the course of a business, ...'

[4] The equivalent section for Scotland is section 17.

[5] This restriction is also contained within the Scottish definition of 'consumer contract' in section 25(1).

[6] It is interesting to contrast the decision reached in Beta v Adobe (cited at n. 15) which was based on the principle of jus quaesitum tertio, a peculiarly Scottish doctrine. The decision is therefore deprived of wider significance.

[7] Section 24(3) in Scotland.

[8] This is not restricted to software cases - c.f. George Mitchell (Chesterhall) Ltd v Finney Lock Seeds Ltd (cited above at n. 32).

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