The Mayor and Burgesses of the London Borough of Southwark v IBM UK Limited

Summary

The High Court has dismissed a £2.5 million claim brought by Southwark Council against IBM. The dispute centred around whether certain third party software IBM supplied to Southwark Council was of satisfactory quality or fit for purpose.

Background

IBM had contracted to provide software and consultancy services to Southwark Council. A large part of the software package agreed upon was a programme called Arcindex, which was manufactured by Orchard, a separate company. Southwark Council claimed that Arcindex was unsatisfactory and not fit for purpose.

IBM was the "conduit" for supplying Arcindex, but IBM had not recommended it, and had given no direct warranties as to its capability. The contract governing the supply of Arcindex to Southwark was an Order, which was itself governed by the terms of a Framework Agreement. The two contracts were to be read together, so that whilst the Framework Agreement stated that Arcindex had to be of satisfactory quality, the requisite level of quality was defined in the Order. Arcindex had, it was judged, satisfied this level of quality.

The Sale of Goods Act 1979 also lists certain conditions that can be used to determine whether goods supplied are of satisfactory quality. However the Court held that these conditions should not be applied in this case. These terms should only be referred to where "appropriate", and in any event would still be subject to the specific terms of agreement reached between the parties.

The Court went on to consider whether the Sale of Goods Act could be applied to the Framework Agreement and Order at all. For this to be possible there would have to be a sale of goods, and IBM would have to transfer the property, or ownership, in those goods to Southwark Council. There was no transfer, the Court held, because the parties had agreed that title to the software remained with Orchard instead of passing to Southwark Council. This was bolstered by the fact that the contract provided that all forms and copies of the software had to be destroyed on termination of the contract, instead of remaining in Southwark Council’s possession.

Even if it had been appropriate to imply terms from the Sale of Goods Act, the Order and the Framework Agreement had excluded such terms, and the Court held that these exclusions were reasonable. This was because the Court considered the parties to be of equal bargaining power, noting that they had both taken legal advice, and had carried out a protracted negotiation process.

What this decision means

This decision suggests that even if there is a general warranty relating to satisfactory quality in a contract for the supply of software services, if there is a reference to a separate warranty defining the specific requirements of satisfactory quality, the supplier will only have to comply with those specific requirements.

It also suggests that the Sale of Goods Act will not apply to the majority of software supply contracts, as a transfer of property, and therefore a sale of goods, will not be deemed to have taken place. Finally, any terms that might be implied by the Sale of Goods Act will be limited by contractual provisions.

This case deals with many issues that frequently arise in IT projects, for example a lack of clarity in initial requirements or changes in personnel dealing with the software implementation.

This decision therefore highlights the importance of drafting comprehensive and clear warranties in software supply agreements, to agree in detail exactly what the requirements of a software system are, and to ensure any changes in these requirements are agreed and fully documented.

Lawyers Janet Tobin